When it comes to buying a home from a financially-distressed homeowner, many people conjure up the image of vultures swooping in on their helpless prey. And, sadly, there are more than a few unscrupulous opportunists looking to take advantage of homeowners who find themselves in foreclosure. In these situations, the homeowner often loses everything, while the homebuyer reaps a windfall.
But thanks to services like RealtyTrac, there’s an opportunity for a much more positive transaction — one in which everyone wins.
Buying a pre-foreclosure property from a homeowner in default can be a very attractive option because it has the potential to create a win-win scenario for everyone involved. In an ideal transaction, the seller is able to get out from under a defaulted mortgage without destroying his or her credit rating, the lender is saved the time and expense of foreclosing on the property, and the buyer gets a below-market price on a home.
A property enters pre-foreclosure when the lender files a default notice against the owner. You can find default notices at the local recorder’s office or through online services like RealtyTrac, which maintains the nation’s largest database of pre-foreclosure properties — updated daily.
Pre-foreclosure properties can often be purchased for prices well below market value because the owner is very motivated to sell and has a limited timeframe in which to sell.
When a property is in the pre-foreclosure period, the owner still has an opportunity to pay off what is owed or to sell the property, thereby stopping the foreclosures process. If the owner doesn’t stop the foreclosure process, the property will be sold at public auction.
The sensitivity associated with these sales is important to note when making offers on properties in pre-foreclosure. More so than with any other real estate sale, it’s important to present an offer that benefits all parties. Read on to find out how you can create positive outcomes all around and still score yourself a deal.
Before you attempt to contact the owner directly, call the lender’s trustee to confirm whether the property is still destined for a foreclosure sale. The trustee will have the most current information on the property, including whether the owner has sold or reinstated the loan on the property. However, any specific questions about the property must be addressed to the owner directly.
Contacting owners in default can be uncomfortable, since they may feel a bit vulnerable, like the vultures are hovering. They are probably being contacted by a host of people including credit repair services, bill collectors and creditors.
So as not to overwhelm the homeowner, it’s best to make your initial contact via the mail and explain your intentions as a private buyer who is interested in the property. If a letter or postcard doesn’t work, you can attempt to make contact via phone or in person. Keep in mind, however, that these more direct interactions may not be the most pleasant because you’re confronting a person with the prospect of losing his or her home.
Regardless of the mode of contact, always be respectful of owners, especially if their wishes are to not be disturbed. If this is the case, it may be an indication to wait until the property goes up for sale via public auction or to look into other pre-foreclosure purchase opportunities in the area.
Time your offer and price it accordingly
Timing your offer can be tricky. Since the pre-foreclosure period can last several months, you need to be patient when attempting to contact an owner in default. Conversely, last-minute transactions can require quick action, since there is pressure on the owner to complete a sale before the property goes to auction. It’s best to make contact as early in the process as possible and continue to do so regularly in order to gauge interest as the clock continues to tick. Make sure you stay on the seller’s radar throughout the process. Chances are that an offer that wasn’t of interest early in the process may sound quite attractive when the seller is facing an imminent foreclosure auction.
Before pricing an offer on any property, it’s wise to obtain up-to-date information on ownership of the property and the loan amount, as well as any outstanding debt or lien information. You should also assess the condition of the property by enlisting the services of a professional property inspector. Don’t rely on your own knowledge and inspection; only a professional can fully assess the condition of a home and identify repairs that will be needed. Once you purchase a property, you assume responsibility for any additional repairs that weren’t discovered before the sale, so the cost of hiring an inspector is worth every penny.
Offers on pre-foreclosures often resemble those for any other real estate purchase, stating that the offer is contingent upon a title search and full inspection of the property. Educate yourself on how much is owed on the property and investigate what its market value is by looking at comparable sales in the area. You can estimate the gross equity in the property by subtracting the amount in default (which is publicly available and listed on RealtyTrac) and the outstanding loan balance from the approximate market value. As long as there is some calculated equity, purchasing the property can provide you with a profit of some amount. Of course, how much profit you earn will depend on your ability to negotiate your price with the homeowner.
As a rule of thumb, you should present an offer that is below total market value of the property but above the total amount of outstanding loans, liens and necessary repair costs. This enables you to purchase the property at a substantial savings, while keeping the owner, lender and any other parties satisfied.
In negotiations, be sensitive but hold your ground
Negotiations between the buyer and seller of a pre-foreclosure can be difficult, especially since the seller would typically prefer not to sell the property in the first place. Remember that you are, in essence, doing both the lender and the owner a favor by purchasing the property early in the foreclosure process, saving the lender money and time, and potentially even allowing the owner to make a profit if you pay more than they owe.
Avoid mentioning the foreclosure situation in any written communication to the owner that might be seen by others, but once you meet with the owner in person, it is completely appropriate for you to express an understanding of the situation and indicate your willingness to help stop the foreclosure process and alleviate some financial concerns. Most importantly, treat the owner with the respect and dignity they deserve.
That said, it’s just as important to stand firm on what you plan to spend, especially if you want a sale price below market value. After all, saving money is the main reason people entertain the idea of a pre-foreclosure purchase in the first place! In this market, it’s imperative to be patient and understanding of the circumstances, but ultimately diligent about getting what you really want. You may have to work a bit to motivate the homeowner to make a sale, but a bit of extra effort is completely worthwhile if it wins you the property at a savings to you.
Following these suggestions should help you identify opportunities to make the pre-foreclosure process work for you as a buyer. For more information about pre-foreclosure and foreclosure or to locate properties for sale, check out resources available online at www.realtytrac.com.