There are few markets as interesting and worth investing in as real estate markets. However, for beginners, certain pertinent terminology may sound like Greek and Latin. For instance, the phrase ‘pre foreclosure’ might come across as a tricky term, but it is not as difficult to understand as it seems.
What is a Pre-Foreclosure?
- Among a variety of real estate concepts, a pre-foreclosure refers to an early stage in the process of the repossession of a property, most likely due to the inability of its proprietor to pay off the outstanding mortgage obligation on the same.
- A pre-foreclosure initiates when a lender files a legal notice against the defaulting borrower on the property in question.
- The said notice serves as a warning to the property owner about the imminent legal action that may be executed by the lender, in case the debt is not cleared within a certain time frame.
- It is at this point, that the property owner can grab the opportunity to either clear the outstanding liability or market the property prior to its foreclosure.
How Should a Property Owner Ideally Act In the Pre-Foreclosure Phase?
- According to Jeff Adams, the most ideal step would be to pay off the outstanding borrowed amount in order to avoid any further legal action. However, in most cases this alternative is far from possible due the borrower’s unfavorable financial condition.
- The most viable alternative is selling off the property at slightly lower than the current market rate. The owner must remember that avoiding a foreclosure must be their primary goal; because the lender might sell it for an even lower price if the property goes under foreclosure.
Does a Buyer or Seller Benefit Monetarily from a Pre-foreclosure Sale Closing?
- No. Neither the buyer, nor the seller, receives any cash at the end of such a proceeding.
- The seller, in some cases, may be eligible to receive a Seller incentive. This, however, is reflected in the HUD-1 form as a credit to the selling party, rather than as cash.
What is the Minimum Net Sales figure requirement for a Pre-foreclosure?
- The property owner must actively market the owned property for a minimum duration of three months.
- For the initial 30 days, lenders can opt to approve offers resulting in Net Sales Proceeds of at least 88% of the then Fair Market Value (FMV) of the property.
- For the next 30 days, minimum 86% of FMV may be approved by the lender.
- For the remaining time period, lenders may consent selling off the property at no less than 84% of the actual appraised FMV.
All in all, a Pre-foreclosure provides a defaulting borrower an opportunity to pay off the liability on their owned property by selling it off prior to the foreclosure. A successful pre-foreclosure usually is the best step in the borrower’s interest, with a potential to avoid a damaged credit record.
