Approaching Distressed Homeowners Ethically in Pre-Foreclosure

A homeowner in pre-foreclosure may be dealing with job loss, illness, divorce, a death in the family or a payment that rose beyond their means. Many are also receiving a flood of letters and calls from buyers, lenders and, too often, scammers. Your first contact lands in the middle of that.

Buying a home from an owner in foreclosure can be good for both sides. A sale can let the owner keep their remaining equity, avoid a foreclosure sale and move on with less damage to their credit than a completed foreclosure. But the deal is only fair if the owner understands it, chooses it freely and gets fair value.

Keep three principles in mind throughout:

• Honesty. Say who you are, what you want and what your numbers are.
• Respect for the owner's choices. Selling to you is one option among several, and often not the best one for them.
• Compliance. State and federal rules on distressed-property purchases and marketing apply to you, whether you buy one home or hundreds.

Owners who feel respected are also more likely to engage, so ethical conduct is not in tension with doing deals.

Before deciding to sell, an owner in default may be able to keep the home or reduce the damage in several ways:

• Reinstatement: paying the past-due amount, fees and costs to bring the loan current.
• Loan modification: a permanent change to the loan terms, such as a longer term or lower rate.
• Forbearance or a repayment plan: temporary relief, with the arrears paid back over time.
• Refinancing, if the owner has equity and qualifies.
• Selling on the open market with a real estate agent, which may produce a higher price than an investor offer.
• A short sale or deed in lieu, if the home is worth less than the debt.
• Bankruptcy, which an owner should discuss with a bankruptcy attorney.

Owners can get free or low-cost help weighing these options from a HUD-approved housing counselor. You can find one through HUD's website or the Consumer Financial Protection Bureau's housing counselor search.

Telling the owner about these options costs you nothing, it is the honest thing to do and it shows you are not trying to rush them.

Misleading an owner, even by implication, is unethical and can be illegal. Follow these rules in every letter, call and conversation:

• Identify yourself by name and say you are a buyer or investor interested in purchasing the home.
• Do not use names, logos or wording that suggest you are the lender, a government agency, a court or a nonprofit.
• Do not imply that you can stop or delay the foreclosure. You cannot; only the lender, the trustee or a court can.
• Explain how you found them: the foreclosure filing is a public record.
• State that the owner is under no obligation and is free to choose another option or another buyer.
• Put any offer in writing, with the price and the key terms in plain language.
• Encourage the owner to have an attorney, a housing counselor or their own real estate agent review your offer.

If you are a licensed real estate agent, your license law and your duties to clients also apply. If you are not licensed, be careful not to act as an agent for the owner or to give them legal or financial advice.

Foreclosure rescue scams cost homeowners their homes and their equity. Regulators look closely at anyone who contacts owners in foreclosure, so you must avoid even the appearance of these patterns:

• Upfront fees for help. Federal rules generally prohibit companies that offer mortgage relief from collecting fees before delivering results. A buyer should never charge an owner anything.
• Taking the deed to "save" the home. Scammers ask owners to sign over the deed, often with a quitclaim deed, and promise they can stay and buy it back later. The owner loses the home and the equity.
• Lease-back and buy-back arrangements with terms the owner realistically cannot meet. Several states restrict or regulate these deals.
• Telling owners to stop paying the lender or to stop talking to their lender or counselor.
• Guarantees to stop the foreclosure or to obtain a loan modification.
• Pressure and secrecy, such as same-day deadlines, discouraging the owner from getting advice or asking them to sign documents they have not read.

A legitimate purchase looks different: a clear price, a written contract, a closing through a title company or attorney, and the owner receiving any equity at closing.

Rules for buying homes from owners in foreclosure vary by state. Depending on where the property is, they may:

• Require specific language, notices or formatting in purchase contracts with owners in foreclosure.
• Give the owner a period to cancel the contract after signing.
• Restrict when you can record a deed or pay the owner, or prohibit certain lease-back and buy-back terms.
• Regulate anyone who offers to help an owner avoid foreclosure as a foreclosure consultant.
• Require a real estate license for certain activities.

Marketing rules also apply. Federal and state telemarketing and do-not-call rules govern phone calls and texts, and fair housing laws prohibit targeting or treating owners differently based on protected characteristics. If the sale is a short sale, you must be truthful with the lender about the price and any agreements with the owner.

Because these rules change and differ so much, build your process with a local real estate attorney and have them review your letters and contracts before you use them.

How you reach out matters as much as what you say. Good practice includes:

• Lead with a letter. Mail gives the owner time to think and to show it to an advisor. Keep it factual and calm.
• Include the right information: who you are, how you found them, that you may be interested in buying, that they have other options including free HUD-approved counseling, that there is no obligation and how to reach you.
• Limit follow-ups. A small number of contacts is reasonable. Repeated calls, texts and visits are not.
• Respect a no immediately, and honor any request not to be contacted again.
• Do not show up uninvited repeatedly, enter the property or approach neighbors about the owner's situation.
• Avoid alarming language such as "final notice" or countdowns that mimic official documents.
• Protect the owner's privacy. Treat the financial information they share as confidential.

Avoid scripts designed to overcome objections or create urgency. If an owner is hesitant, that is a reason to give them more time and information, not more pressure.

A fair offer is one the owner understands and could defend to a trusted friend or advisor. To get there:

• Show how you arrived at your price, including comparable sales, repair estimates and your costs. How to evaluate a pre-foreclosure deal covers building those numbers.
• Show the owner what they are likely to receive at closing after the loan and other liens are paid off.
• Give the owner time to review the offer and get advice.
• Use a written contract that complies with state law, and close through a title company or closing attorney.
• Make sure the owner receives their equity at closing, not through a promise of a future payment.
• Put move-out dates and any relocation assistance in writing.

If the owner would clearly do better with a listing agent, a short sale or by keeping the home through a modification, it is fine to say so. Your reputation is a long-term asset, and fair deals are the ones that close and hold up.

For the mechanics of the purchase itself, see how to buy a pre-foreclosure, and for how state rules affect timing at closing, see closing a pre-foreclosure before the foreclosure sale date.