Pre-foreclosure refers to a stage pertaining to an agreement between a lender and borrower. In simpler terms, when a loan is drawn, the borrower holds an asset called ‘collateral’ against this loan. There is an agreement between the two parties that in the event of the borrower’s inability to repay the loan, this collateral can be ‘repossessed’ by the lender.
Stages of the Pre-Foreclosure and Foreclosure Process:
- The borrower is unable to repay the amount drawn.
- The lender files a notice. This is where the pre-foreclosure stage begins.
- The borrower gets a chance to either clear the debt or go in for a ‘short sale’. In the words of real estate guru Jeff Adams, the borrower tries to ‘salvage his credibility’ at this stage.
- If nothing works out, the lender lays claim over the property and it gets foreclosed.
- A foreclosed property is then auctioned and sold off to the highest bidder – one who can pay an amount that covers the debt.
- If the property does not find interested bidders, it becomes an REO or a real estate owned property. Thereafter, it gets listed as a non-performing asset.
Having understood pre-foreclosure and the stages that follow, one may consider investing in a pre-foreclosed property. Jeff Adams has been strongly advocating such an investment. In fact, pre-foreclosed properties yield a number of advantages such as lower price, overtax benefits and many more. However, before taking the final call, it’s important to understand the prerequisites and procedures involved in such as investment.
Prerequisites of a Pre-Foreclosure Investment
Research is the key to successful investment in pre-foreclosed properties. Take a look at the following list of prerequisites of a pre-foreclosure investment.
- Start hunting: You need to check with local newspapers, reliable agents / brokers or online posts, ads, street flyers, signs, etc.
- Check the property: Once you come across the desired pre-foreclosed property, drive by and check it personally.
- Get an update: Make sure that the chosen property is still in the pre-foreclosure stage. Get some help from a good pre-foreclosure agent to keep you updated.
- Evaluate: Keep track of the property to understand the quantum of debt and the foreclosure estimate (the approximated price that the property could be sold for).
- Calculate: Deduct the costs involved such as insurance or loan balance from the foreclosure estimate. This value will help you during negotiations to quote a break-even price.
- Reach the right person: Once the research is in place, contact the property owner. Take a tour of the property. Get an idea of structural and maintenance issues.
- Negotiate: If you have your break-even price in mind, negotiations become easy and factual. Be considerate to the property owner especially if you plan to put up the place for rent.
- Put in writing: This is the golden rule. You may trust the other party; however, every deal must be legally binding.
Procedure of Investment
If all the prerequisites mentioned above are in place, the actual procedure of investment would not seem too difficult. Firstly, get a good pre-foreclosure agent to hand hold you all along. Arrange for buying the property directly from the owner. This will help him clear the debt faster. Once the deal is sealed, get an escrow company to manage the transfer of money and property. This company can make sure that the title of ownership and other legal documentation is in place.
