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Pre-foreclosures: What Goes On Before the Auction Sale
There are many steps to a foreclosure, be it a bank or taxing entity that’s seizing the property. There can be a fairly long span of time that the mortgage (and property) is tied up in a pre-foreclosure phase (the length will vary from state to state).
This is after all remedies have been exhausted with the bank, such as workouts or loan modifications, a sale like this can work out well for the seller and buyer both, by getting the homeowner out of a bad situation without destroying his/her credit.
There are certain conditions that go along with buying and selling pre-foreclosure homes, though.
Before Pre-Foreclosure Listings Go on the Market
- The pre-foreclosure property must be owner-occupied and not a rental property, unless the bank recognizes other mitigating factors like job loss or transfer.
- The mortgagee must have the pre-foreclosure property appraised by an FHA-certified appraiser, with “as-is” and “repaired” values noted. This could be a problem for the appraiser, depending on the local real estate market.
- The mortgagee must pay for a title search and apply for Approval to Participate, then arrange to delay the foreclosure long enough to sell. A non-marketable title for a pre-foreclosure home can knock everything off the table.
Other Conditions for Pre-Foreclosure Homes
The pre-foreclosure home has to appraise “as-is” at a minimum of 62% of the market value, and it will also need to sell at a minimum of 82% of the appraised value. Obviously these conditions could be a problem in a depressed real estate market or a less-desirable area.
The mortgagee will also need to keep up the property before the sale, list the pre-foreclosure property with a real estate agent and show all good faith in marketing and selling the property.
As with other scenarios, scan your local preforeclosure listings. Subscribe to a service that will give you regular updates on pre-foreclosure listings in your area.
Bear in mind that dealing with the seller may be difficult; the homeowner is probably going to be in fairly dire straits and will be dealing with calls from multiple creditors and collectors. Some homeowners may even be without a phone or electricity by this point. Use your better judgment and some sensitivity in buying a pre-foreclosure property.