It is quite understood that when one plans to spend his/her hard earned fortune on investment then proper thinking is required. And you would also like to refer to past experiences of your colleagues and elders. Hence, questions are bound to surge in your mind. To ease out your worries, Jeff Adams answers some of the frequently asked questions about pre-foreclosures.
What is pre-foreclosure?
Sometimes when a person buys a house, it may happen that circumstances are not working in his/ her favour and he/ she might not be able to pay the mortgages. Such a situation can arise due to many reasons like sudden medical expenses or if one loses money due to crashing of market.
In such cases if your salary is not able to pay your mortgages along with your monthly expenses then you will miss paying mortgages to the lender. Usually the lender of money is always a bank. And if you miss paying mortgages for up to 3 months then the lender will issue a notice of default (NOD). It means that if you are not able to pay mortgage now, then your property will be confiscated by the lender. This stage before foreclosure ie confiscation is called Pre-foreclosure.
If your property is confiscated by lender that means you are no longer the owner of that property. The property will be sold to a potential buyer through public auction.
What is a short sale?
When the home owner foresees that his/ her property will face foreclosure or after issuance of Notice of Default he /she can think of selling the house to a third party to gather enough money to pay mortgages. This process is called a short sale.
By doing so the owner will be able to save his property from credit damage as well as get rid of the stressful situation of facing a foreclosure. The owner can then focus on taking care of his finances.
Which one is better? To buy a house in pre-foreclosure or foreclosure?
Usually a person can sell his/ her distressed property in three stages.
- Pre-foreclosure:
- Foreclosure(Public Auction)
- REO stage (Real estate owned stage)
Pre-foreclosure stage
As mentioned earlier when the house is in pre-foreclosure stage, the rate of the house is very low. Although all the activities in pre-foreclosure are lender approved, the rate of the house for short sale is decided by the home owner.
It is until foreclosure the ownership of the home remains with the concerned distressed owner only. And in such cases the property will be available at a considerably lower value than the market value because the owner wants to sell the house in any case and pay the remaining mortgages. Moreover he may consider to make the house a bit appealing to increase the chances of a successful short sale which is ultimately an advantage to the buyer.
The disadvantage of indulging in pre-foreclosure deals is that at any point in the middle of the deal if the lender finds that he / she will get a better profit if the property is sold in foreclosure then he has every right to cancel the deal. And you will have to suffer disappointment and waste of time.
Even if the lender does not cancel the deal, but the sheer long time that the whole process takes drives the potential buyer away from the deal.
The advantage of pre-foreclosure deals is that money matters can quickly get over and you can become the owner of a house before you come to know.
Foreclosure stage
If in the pre-foreclosure stage the home owner is not able to sell his property successfully or is not able to pay the remaining mortgages, then the lender will foreclose the property and arrange for a public auction to sell it and get back the money lent.
The highest bidder in the auction will be able to buy the house. But to do so you need to have hefty sum of cash in your pocket while bidding. And the bidding too is done blindly because the property is to be sold in ‘as-is’ condition. Potential buyers are not legally allowed to have a look at the interiors of the property unless it is well publicized before auction. So you should be ready to spend extra money to make any repairs or renovations if required.
REO stage
If in the public auction the house is not successfully sold then the lender will own the property until it is sold. This stage is called real estate owned stage. In this case the lender (usually bank) will make some necessary improvements in the condition of the house and make it appealing before they put it up for sale. Banks are not realty agents.
Their interest is not in possessing the property. Their interest is in selling the property and collecting their money. So they will keep a rate which is way below the market rate and clear it off its books as soon as possible. Also they are not very good at bargaining. So grab the opportunity to own a home at lowest prices.
