Steps To Buy A Home In Pre-Foreclosure
If you are in the market for a new home, but you are interested in saving quite a bit of money, you may want to consider purchasing a pre-foreclosure. Purchasing a pre-foreclosure is not easy, but if you manage to complete the purchasing process, you could walk away with a new home and more money in your pocket.
What is a Pre-Foreclosure?
A pre-foreclosure home is a type of distressed property that has not yet been taken back by a bank and auctioned. The majority of pre-foreclosure properties are still occupied by their owners, who have not made mortgage payments for several months (typically at least six). These occupants have received a default notice, but they may still be in the process of making arrangements with the bank to avoid foreclosure. In other words, it is possible for a home to be in the pre-foreclosure but not for sale.
Finding Pre-Foreclosures
There are many real estate websites that will allow you to view short-sale or pre-foreclosure properties. You may also be able to search public real estate records in your county or city. Public websites allow you to view public default records and if you see a home you are interested in, you may be able to contact the owner and ask if it is for sale. If you choose to approach an owner directly, you should remain respectful and avoid harassing or pressuring them in any way. It is important to note, however, that depending on the laws in your county or state, you may not be allowed to approach owners of distressed properties directly.
Buying a Pre-Foreclosure
Buying a pre-foreclosure home is slightly different from buying a non-distressed home. Firstly, you typically don’t need to make a down payment or arrange a mortgage since you will only be responsible for covering what the current owner owes. Simply put, you will be financially responsible for the remaining loan balance, liens, and unpaid mortgage insurance. You will pay this amount directly to the seller and assume ownership of the property. The process tends to be significantly easier if you are able to make a cash offer.
However, if you elect to purchase a similar type of distressed property that isn’t technically a pre-foreclosure, you will have to go about the process slightly differently. Generally, you won’t be accountable for any unpaid mortgage expenses, but you must make an offer directly to the bank or through an auction. If your offer is accepted, you will close on the property.
Types of Pre-Foreclosures
There are different types of pre-foreclosures, including the following:
Short Sales: These homes are often considered to be “underwater.” In other words, they are worth less than what is owed to the lender. A property is typically deemed a short sale once the owner/borrower goes into default or experiences a financial hardship that will cause them to eventually default.
Bank-Owned Property – If a property was auctioned by a bank and was not sold, the ownership of the property will revert to the bank. Working with a bank can be slow, but they are typically willing to accept an offer lower than the property’s actual value.
Government-Owned Property – These properties are similar to bank-owned properties, except the owner of the property is a government entity, usually the U.S. Department of Housing and Urban Development. The government will often take ownership of a house if the owner received a government loan and was unable to repay it.
Sheriff’s Auction – These properties are auctioned off on a city or town’s courthouse steps. The auction process typically starts when a borrower defaults on a property and does not attempt to resolve the issue with the bank or government.
Pre-Foreclosure – When an owner defaults on their mortgage, they are notified by the bank. The pre-foreclosure stage is the notification stage, which occurs before the property is auctioned.
Negotiating an Offer
If you are like most people, you will want your buying costs to stay below the actual value of the home. When calculating how much you have to spend, you should keep in mind that you will be responsible for any repairs, which can add up if a property if the property you buy has not been well cared for. If you are allowed to directly approach the homeowner and make an offer, remember to do so respectfully.
Once you make your offer, the homeowner will probably attempt to negotiate a higher price. When making an offer, remember to incorporate contingencies that allow you to walk away from the purchase if there is a problem with the title or a home inspection uncovers a serious issue. Depending on the state or county you reside in, the seller may have the right to back out of the sale at any moment, even after you reach a deal.
Risks
Buying a pre-foreclosure may seem like a good deal, but there are some risks you must be willing to take. Many of these risks can result in you having to spend more money than you initially wanted to, and not all pre-foreclosures are priced extremely low. Some of the biggest risks include:
Competition: Since pre-foreclosure homes tend to be cheaper, you will probably have to face competition from other buyers who want to save money too.
Slow Process: Banks have a lot on their plate, and it may take them a while to approve your offer since they typically aren’t in a hurry.
Unexpected Costs: There could be back taxes or liens on a property that will need to be paid before it can be sold. These unexpected expenses can drastically increase how much you have to pay.
Structural Issues: Many properties are damaged or trashed by previous owners, and often, this damage remains unrepaired for a significant amount of time. You will be solely responsible for repairing this damage if you assume ownership of the property.
Before you purchase a pre-foreclosure home, you should take all of the risks listed above into consideration.
Learn More
As you can see, there are quite a few steps to buying a home in pre-foreclosure, but if you manage to complete them all, the payoff can be enormous. Contact FHA Insider today to learn more about the pre-foreclosure buying process.