Buying Pre-Foreclosure Properties

[THU NGUYEN]

Hello BP members,

I know of a few pre-foreclosure houses in my subdivision where I live and where I have properties for rent.  Is there a check list of all the due diligence steps I should do (doing my homework) before approaching the owner?  I got the name, the address, tax records, 1st mortgage info...but how do I find out of owners owe back tax, second lien, third lien...etc.

Thank you much in advance.  There is so much to learn, so little time...:)

[Matt Huber]

Absolutely there is due diligence you can and should do.  Pre-foreclose can be a good phase to purchase as 1) you can inspect for repairs before you buy, and 2) you can buy through a title company to make sure there are no unexpected bad surprises.  The title company ends up doing much of your due diligence for you.

The are several local websites to start your due diligence: the county recorders office, the county appraisal district office, the flood plain map, the county tax assessor-collector's office. You can find the liens at the county recorders office. There may also be unrecorded bills still owed, such as to the home owners association. Typically you'll never find those out unless you're going through a title company to purchase as I believe that is private information between the owner and the HOA, at least until they sue, win the suit, then file a judgment lien. When speaking with the owner, ask about any unpaid bills such as taxes, HOA. The seller may lie to you, but you can typically find the taxes yourself unless they are in a lawsuit with the county. In some respects these financial obligations are irrelevant as you, as a buyer, are going to insist they be paid at closing. On the other hand they give you an idea of how much is required to get the house since the party being foreclosed typically doesn't have the funds to pay the back taxes and HOA so the deal needs to have enough equity where it is worthwhile to buy AND pay for those expenses. Knowing those numbers in advance may change your mind from buying at all OR changing the conversation to being a short sale, however you need a cooperative realtor to work with you on a short sale. Another strategy may be taking over payments if there is not enough equity but there is or can be cash flow.

Not only do you need the due diligence, you need to educate yourself on strategies to make the deal work.  Cash does not solve every problem.