Develop a system to
keep track of properties that interest you. A good tracking system is important
since most pre-foreclosure buyers pursue many properties sometimes over a
period of several months.
After you find a
property online, it's a good idea to drive by the property to get a better idea
of the property's condition and the type of neighborhood. For some buyers and
investors, driving by the property facilitate a casual meeting with the owner
or yields a wealth of unexpected information from a talkative neighbor.
When a property enters
pre-foreclosure, the owner usually has at least 2-3 months to reinstate the
property by paying off the amount in default. The reinstatement stops the
foreclosure process, so it's important to find out if a property has been
reinstated before proceeding. The best way to check if the property has been
reinstated is to call the trustee or attorney assigned to the foreclosure. The
trustee cannot typically answer questions about the property; they can just let
you know if the property is still in foreclosure or not.
the potential bargain
Find out as much as
you can about the estimated market value of the property, how much is owed on
the property and if the owner has any other liens against the property. This is
all public information and you can research on your own with the county
recorder. This process should not take more than a day or two, because you
don't want to delay long before contacting the owner in default.
the owner in default
You or your real
estate agent should initiate contact with the owner to express your interest in
the property. Before you expend the time and effort to contact the owner, make
sure you're fully prepared to buy.
If the owner has
decided to list the property for sale, you can simply contact the listing
agent. Once the property is listed with an agent there may not be as much
bargain potential, but you can still negotiate a good deal because you know the
owner has a limited amount of time to sell before the bank repossess the
property or sells the property at public auction.
In most cases, the
owner has not listed the property for sale, so you will need to pro-actively
contact them. In this case, contacting the owner can be tough, but the
potential bargain is greater because you'll be cutting out the listing agent's
Contact the owner by
mail to start. The basic message to communicate to the owner is that you're
interested in buying the property and you want to work out a purchase agreement
that benefits both parties.
Don't be surprised if
the owner does not respond to the mail immediately. In most states, the owner
has several months between the initial foreclosure notice and the public
auction. During this time the owner will consider all the options available,
including refinancing or selling. An owner's first reaction is usually not to
sell. But if no other options work out, selling is a better option than losing
the property at public auction.
pre-foreclosure buyers and investors send quite a few postcards to properties
in their area before they find an owner who is interested. It's not uncommon to
send out several postcards to the same owner during the foreclosure process.
The owner may be more interested to sell as the auction date looms closer. If
the owner doesn't respond to postcards, some buyers and investors will try to reach
the owner by phone or in person. If you do this, be prepared for a possible
rude response as these methods of contact are more inherently confrontational.
And always keep in mind that the owner in default retains ownership rights to
the property during the pre-foreclosure period. If they are not interested in
talking with you, it's time to leave.
If the owner rejects
all of your contact attempts, you may still have a chance to purchase the
property at public auction, which occurs if the owner doesn't sell or pay off
the amount owed during the pre-foreclosure period. You could also call the
trustee periodically to check if an auction has been scheduled.
a purchase agreement
Once you have made
contact with the owner, you should meet with them for further discussion about
the property. As part of this meeting, or a later one, you should arrange to
walk through the property to make sure it meets your criteria as a buyer.
Because owners in
foreclosure may not have the money to make repairs to their property, you might
be willing to buy the property "as is." But you still want to keep a
tab of estimated repair costs and subtract them from your purchase offer. Your
willingness to put some "sweat equity" in the property after you purchase
it will increase the chances of realizing a good bargain.
If you and the owner
both agree to proceed, you need to negotiate the terms of a purchase. These
negotiations will involve you, the owner and the foreclosing lender. A real
estate agent can be a valuable resource during the negotiating process.
If the loan in default
is assumable, you may be able to pay off the amount in default and take over
payments under the current terms of that loan. If not, you will need to pay off
the full amount owed on the loan. If the property has other liens placed on it,
you'll need to make sure those are cleared out as part of the purchase
agreement. If the owner has equity in the property above and beyond the liens,
then you can offer to split the equity with them, allowing them to walk away
with cash and you to acquire a property below market value.
Owners might be more
willing to work with you if you are flexible to help them out in creative ways
that address their situation. You could offer to let them stay in the house for
a certain amount of time (possibly paying rent) until they find a new place to
stay. You could offer to pay their housing costs for the first month or more
after they leave the property. If you're purchasing the property as an
investment, you may let them stay and pay rent until you decide to resell the
house. There are myriad ways to work out an agreement that benefits both
parties. Remember, just selling the property during pre-foreclosure allows
owners to avoid a foreclosure-marred credit history, making it easier for them
to find a new place to live.
While negotiating the
purchase agreement with the owner, you should also contact the foreclosing
lender and any other lien holders. You want them to know you plan to purchase
the property and satisfy any liens against the property. You also may be able
to negotiate a lower payoff amount to satisfy the debts owed. Since you're
saving them the trouble of pursuing and collecting the debt owed them, some
foreclosing lenders and lien holders will clear liens on a property for less
than 100 percent of the amount owed. This is another way to realize a bargain
The goal for you as a
buyer is to purchase a property at least 20 percent below full market value,
although better deals are often possible. When determining the final purchase
offer, you should also take into account the rate of real estate appreciation
in the area and the potential for increasing the house's value by making
repairs and improvements.
Once you've arrived at
an agreement with the owner in default, the foreclosing lender and any other
lien holders, you can put the agreement in writing. If you're not familiar with
how to draw up a purchase agreement, you should have a local real estate agent
or real estate attorney help.
Any purchase agreement
should make closing the deal contingent on a full title search conducted by a
title company or attorney. The purchase agreement should also allow for a
professional inspection of the property before closing the deal.
An escrow company, who
acts as a third party, can manage the transfer of money and property ownership.
Assuming that you have your financing secured, this should be a fairly smooth