Closing Last-Minute Pre-Foreclosure Deals
Tips for quickly purchasing before auction
If you're interested in investing in pre-foreclosure property, you should know that owners in
default may not agree to sell until the last minute - sometimes only a few days before the public foreclosure
auction. You'll need to act quickly and may even need to take a few steps to postpone the auction if you
want to realize a good bargain on these properties.
"I like to have the deal worked out with the homeowner at least 10 days prior to the auction. This
allows enough time to settle on the pre-foreclosure without worrying if the foreclosing bank will postpone
the auction and allow me enough time to settle," said Lance Young, a real estate investor and author of
several real estate investing eBooks.
Depending on
state foreclosure laws, the
pre-foreclosure period can last less than one month or more than one year. Owners in default often are more
motivated to sell the closer it gets to the date of the public auction. So even if you’ve contacted owners
early in the pre-foreclosure period, you shouldn’t be surprised if they wait until the last minute to sell
the property.
Once the owners indicate they wish to sell, you’ll need to spring into action immediately to make sure
that you are able to negotiate a price that’s acceptable to both parties, sign a sales contract and close
the deal before the date of the public auction. Young recommends the following steps to get all this
accomplished in as few as 10 days.
1. Pinpoint the amount owed
You should already have an estimate of the amount owed on the property based on your research of the notice
of default or notice of sale and any
liens and loans on the property.
Once you’re ready to put an offer in writing, you need to determine the exact amount needed to satisfy the
foreclosing bank and any other lien holders — including missed payments, late fees and foreclosure attorney
fees and the loan balance — by having the homeowner sign a disclosure authorization.
"This is as simple as having the homeowner write down his or her name, address and loan number on a
short note that states the bank has permission to release this information to you," Young said, noting a
disclosure authorization should be obtained for first and second loans. For other liens, such as a mechanics
lien for work done on the property, you can usually just contact the lien holders and ask for the payoff
amount.
"Be aware that many junior lien holders will sell their liens at a huge discount prior to the
auction – especially when you inform them that the house is in foreclosure and their junior lien stands a
good chance of getting wiped out at the auction," he said.
2. Negotiate and sign a sales contract
When you have the exact numbers to work with, you can negotiate the final purchase price and other terms of
the sale with the owner. If your homework shows the property has a solid amount of equity, you’ll be able
to make a pre-foreclosure offer that benefits you, the owner and the foreclosing lender. You purchase the
property below market value, the owner walks away without a foreclosure marring his or her credit history
and some cash for a fresh start, and the lender recovers the amount owed without the expense of continuing
the foreclosure process.
Put your purchase agreement in writing in a standard sales contract, which you can obtain from a local
real estate agent or escrow company. Young recommends including a clause in the contract that releases you
of any legal or personal obligation if the sale doesn’t close before the public auction.
"If you cannot settle on the house prior to the auction, you lose the deal. If you do not clearly
write into the contract that it is null and void if you cannot settle in time, you might get sued by the
former owner," he said.
3. Open escrow and close the deal
Take your signed purchase agreement to a local escrow company and open a case for the transaction. The
escrow company acts as a third party, making sure all the terms of the transaction are properly enforced.
"In addition to disbursing all of the funds properly and transferring the title, escrow companies
ensure that all documents are correctly filled out and signed."Young said. "You should also
obtain title insurance through the escrow company. Obtaining title insurance from the escrow company is
very important because it insures you against any defects on the title."
If you’ve got your financing in place and the escrow company doesn’t have a lot of other cases in front
of you, escrow could close in as little as one week, according to Young. It’s best to have your
financing secured before you even contact
owners in default so that you’re prepared to act quickly to make a purchase.
4. Request an auction postponement if necessary
Sometimes you won’t have enough time to close the deal before the auction, even if the owner has agreed
to sell. In this case, you can ask the lender to postpone the auction date so that you have time to
complete the purchase transaction.
"The best way to get the bank to postpone the foreclosure auction is to present the lender with
a signed sales contract, along with a loan qualification letter from your bank," Young said.
"The sales price must cover all of the money owed to the foreclosing lender, including the principal
balance and the reinstatement amount. Bear in mind that the lender is not required by law to stop the
foreclosure, although most of them will if you have both a loan qualification letter and a signed sales
contract.
"If the homeowner has waited until the day before the auction to sell, you still have a good
chance at getting the auction postponed by showing the lender your loan qualification letter and a signed
sales contract."
