3 Ways Preforeclosure Homes Bring Profits for Real Estate Investors

Preforeclosure homes are a great way for real estate investors to find new properties to purchase. Plus, many homeowners facing preforeclosure find both financial and emotional stress relief when they can sell their home quickly for cash. The homeowner avoids the harsh credit consequences of having a foreclosure on their credit report and reaches a deal that works best for them.

The real estate market remains strong in much of the U.S., but as more families face economy hardship, now is a good time to look for preforeclosure properties. Follow the current regulations and guidelines for foreclosures to determine the best markets to search for homes.

What are Preforeclosure Properties?

Preforeclosure properties are properties where the lender has filed a default notice but has not held a public auction. This is the timeframe in between when the property is still available for purchase by the homeowner. During this timeframe, there is less competition from other investors than during a public auction.

Once the public auction takes place, the deal is no longer a preforeclosure and the benefits for the property owner and investor change. When you reach out to a homeowner during the preforeclosure period, it’s essential to communicate the benefits of selling prior to the auction.

How Does a Preforeclosure Differ from a Foreclosure?

A foreclosure is a legal process where a lienholder has the right to act on an unpaid lien. The laws and timelines vary for each state, which means it’s important to understand the process for the state you operate in.

The foreclosure process allows lenders to foreclose on liens or encumbrances and become the legal owner of record for the property. The lender can then auction the property to recover the outstanding loan balance.

In a foreclosure the debtor no longer has a right to the property and must vacate the home. This is disruptive for the homeowner and their family. Plus, it negatively impacts their credit report. In most states, the lender can begin the foreclosure process after three months of missed payments.

Three Main Ways to Profit with a Pre-Foreclosure Investment

Before you invest in a preforeclosure property, consider whether the deal will be profitable for you. Create an offer that positions you to make money on the deal based on the specifics of the property. For example, if the amount owned from all liens is too great, it might not make a good deal for purchase.

1 – Purchase the Property at a Discount

Preforeclosure properties offer the opportunity to purchase the property below market value. The lender does not need to participate in the process. You purchase the property from the seller and they must settle past due and lien amounts with the lender or other lienholders.

Look creative ways to close the deal quicker.

2 – Investor Takes Over the Loan

To avoid going through the financing process, the investor may take over the current loan from the homeowner. The investor pays the bank the past due amount to make the loan current and stop the foreclosure process. Ensure the contract includes the specifics of the deal and who has rights to the deed.

3 – Short Sale with Lender

A short sale benefits the seller, lender and investor. With a short sale, the lender discounts the loan to an agreed upon amount that is less than the owed amount. This avoids the foreclosure process. The investor negotiates with the lender to determine the sale price. The investor takes ownership of the property.

How to Invest in a Preforeclosure

The key with a preforeclossure deal is to act fast! Depending on the specific state, the timeframe can move quickly. If you connect with the property owner quickly, you’re more likely to have time to close the deal before it moves to foreclosure.

Each county lists preforeclosures publicly, either online or in the county records. Today, most records are listed online making it easy to find preforeclosures remotely. This is great for virtual real estate investing.

When you find a property that meets your criteria for location and price range, reach out to the owner by phone or email. Remember, the timeframe is tight. You need to share the benefits of selling before the auction with the owner.

Once the owner is onboard, you close the deal using one of the strategies above. Preforeclosures present a way to make a profit and grow your real estate investing portfolio.