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Buying a Pre-Foreclosure - Working with the Owner

Buying Pre-Foreclosure Homes -- A Tricky Proposition

For the real estate investor, the prospect of buying pre-foreclosure homes is fraught with all kinds of problems.  Some don’t see it as a good deal, others see a moral quandary in pre-foreclosures.  Neither the lender nor the homeowner wants to see the foreclosure go through, but by this point all other options are presumably exhausted.  Is the investor helping the homeowner out of a bad situation, or taking advantage of his misfortune?

Regardless of moral implications, buying pre-foreclosure homes usually takes a certain process: 

  • Locate loans in default.  Scan public listings for lis pendens,  the legal document that announces that a loan is in default.  If a lis pendens is in the works, then a pre-foreclosure letter to owner has already been drafted and sent.
  • Evaluate choices.  Compare the payoff amount and compare it to the fair market value for the house.  This will represent the equity spread and your potential profit.
  • Contact the homeowner.  This may be tough; the homeowner has already been served a pre-foreclosure letter to owner and is undoubtedly stressed-out and swamped with other collection attempts.  Try mailings and phone calls, and use some sensitivity, empathy and common sense.  Do a drive-by, but NEVER get out and start snooping around the property.
  • Meet with the homeowner.  Again, use your gut feeling on how to deal with him or her.  Find out what he needs, what his prospects are for a loan modification or bailout, discuss the property and the situation, but make no promises at this point.
  • Prepare your offer.  Calculate the equity spread, and don’t forget to figure in closing costs (and a second set of closing costs if you decide to flip the property.  You may want to include an itemized list of repairs that will be needed, and figure that into your offer.
  • Draw up a purchase contract.  Consult with a real estate attorney who specializes in pre-foreclosure homes for specifics on this contract.  
  • Close the deal.  Notify your attorney that you’ll need representation at closing time, and a Release of Lien.  Arrange financing, survey and inspections; if you are assuming the note, make sure that the lender has stopped the foreclosure process before you take over the loan.

A Note To The Buyer

These are difficult economic times for many, many Americans.  The very phrase “pre-foreclosure letter to owner” is enough to send an already-distressed person into a tailspin, and it’s happening all over the place. You might meet with confusion or outright hostility from a homeowner who feels cornered already.  Be sure to use some discretion and best judgment when thinking about buying pre-foreclosure homes.