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Buying Pre-Foreclosure Real Estate

Updated on March 29, 2013
Image courtesy of sattva.
Image courtesy of sattva. | Source

What Are Pre-Foreclosures?

Pre-foreclosures are homes or other real estate that are in danger of being foreclosed by the bank. The payments are late, but the property has not yet gone through the foreclosure process. The owner still has hope of avoiding foreclosure, but time is running out. This is a great time for you, the investor, to approach the owner with a deal that will solve his problem while making you a tidy profit.

Consider the True Property Value

Although you can often buy pre-foreclosures at bargain prices, you need to be careful to make sure you have a good idea of the value of the property before you make an offer. This is especially true in today's economy. With real estate prices falling, you need to make sure you have a realistic idea of how much the house will sell for before you buy. If you pay too much, you may end up losing money on the deal.

A Real Estate Investor Talks about Pre-Foreclosures

How to Buy Pre-Foreclosures

Why It's Difficult to Finance a Pre-Foreclosure with a Mortgage

Sometimes you can get a bank loan to buy pre-foreclosure real estate just as you would with any other piece of property, but that is not always the case. One reason you might not be able to get a loan is a matter of timing. The seller has a deadline. If you can't get the deal closed in time, the house will go into foreclosure and it will be too late to deal directly with the owner.

Another reason that it may be harder to get a loan to finance the deal is simply because you are buying the property as an investment. Although there are lenders that finance investment properties, you need to be able to show that you can handle the payments on both properties. Many lenders will allow you to use a portion (often 75%) of the expected rent as income to qualify for the loan, but since you can't claim all of the rental income, most people aren't able to get loans for many investment properties. They simply don't have enough income to convince the bank to loan them money.

Seller Financing

Because it is difficult to get a loan to finance an investment property, most investors prefer to work directly with the seller and obtain some sort of owner financing. This usually means buying the property on a land contract or rent-to-own type of arrangement. It can also mean purchasing the property 'subject to' the existing financing. Basically what that means is the investor is agreeing to catch up the seller's loan and keep up with the payments in exchange for the seller signing over the deed to the property.

Cash Sale

Of course, the investor can make a cash offer if he has the funds available. The best deals are usually made by investors who have the ability to pay in cash and close quickly. However, if you are just getting started investing in pre-foreclosure real estate and don't have thousands of dollars sitting around, an owner-financed deal can still be very profitable.

Short Sale

The video below gives a quick overview of the short sale process. This technique involves convincing the lender to take less than the amount owed on the home as a full payoff. It is difficult to pull off, but it's usually the only way to make a profit on a property that is "underwater."

Finding Pre-Foreclosures

So how do you find pre-foreclosure real estate deals? The best way is to advertise. Many desperate owners are already looking for a way out of their situation. When they see your "I Buy Houses" sign, they'll give you a call. If you can offer them a solution that keeps them from having a foreclosure on their credit report, you've got a shot at working out a deal with them, and you're on your way to becoming a full-time pre-foreclosure real estate investor.

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