Real estate has historically been an attractive asset class to investors. It’s easy to understand why. Investors who commit to learning about the industry and how to identify a good deal can flourish, regardless of their level of experience or education.
One of the major challenges for investors is to find a desirable property and beat out any competing offers while still maintaining a healthy profit. In order to sidestep a bidding war, savvy real estate investors look for off market properties. One of the best types of off market properties for investors are pre foreclosure listings. There’s an art to finding a pre foreclosure, and it will require you to veer from the ways you would look for properties on the MLS.
What is a pre foreclosure?
When a property owner can no longer make their monthly payments and falls at least three months behind, they receive a notice of default from their lender and enter pre foreclosure. The pre foreclosure stage is one of the first steps in repossessing property and recovering the cost of a loan in default for lenders. It’s designed to give property owners the chance to catch up on their mortgage payments, save their credit score, and maintain ownership of their house.
If they can’t catch up on their payments, the pre foreclosure period also gives the homeowner the chance to sell the property and pay off their mortgage. Many homeowners in pre foreclosure are open to offers that might be too low for an on market listing. Even if the sale only covers the loan costs, that can still help a homeowner reverse an underwater financial situation and avoid the repercussions of foreclosure.
Once a property is in pre foreclosure, the homeowners’ best options are to sell the property or pursue what is called a deed in lieu of foreclosure. In this scenario, the homeowner will simply surrender the property to the lending institution in exchange for forgiveness of the debt.
Where can I find pre foreclosure listings?
Pre foreclosure announcements are public notices, so every county clerk’s office maintains a public list of pre-foreclosure properties that you can check. This is a great way to find pre foreclosure listings for free. Of course, if you want to speed up your search or expand it to more than one county, you need an alternative.
The best alternative is to use real estate lead generation software. The right platform will give you access to public record data like pre-foreclosure listings and skip tracing data so you can contact their owners. You’ll also get access to nationwide record searches, marketing tools, and list management features that will help you capitalize on opportunities once you locate pre foreclosures.
Pre foreclosure vs. foreclosure
There is a big difference between shopping the pre-foreclosure list and buying a foreclosed property. When real estate enters the foreclosure process, the lender is preparing to repossess the house. At this point, the homeowner is evicted and can no longer sell the property.
As an investor, it’s better to buy a pre foreclosure than a foreclosed property. Once the property is in foreclosure, the lender will typically sell the home at a property auction. In an auction setting, investors are competing with many other potential buyers, so the investor loses the competitive advantage of a pre foreclosure. The other drawback is that in an auction setting, the buyer typically bids on the property without the benefit of an inspection or even stepping foot on the property.
The good news for investors and homeowners is that federal legislation prohibits lenders from initiating foreclosure and repossession until a homeowner is more than 120 days behind on their payments. This means that if you’re working to buy a home from someone in pre foreclosure, you have a clearly established deadline to make the deal work.
Benefits of investing in pre foreclosure homes
Apart from investors shopping for off-market properties that do not appear on the Multiple Listings Service (MLS), what are the benefits of buying pre-foreclosure?
- Fast negotiating process
Motivated sellers need to close fast, so there won’t be a lot of back-and-forth negotiating. The nearer the homeowner is to the end of the 120-day pre foreclosure period, the faster they will want to complete the sale of the property.
- Buying below market value
Due to the seller’s situation, there’s a greater potential to buy the property for below market value. The key to remember is that this is an emotional situation for the seller, so don’t make a lowball offer because that could backfire. If you make a reasonable offer that the homeowner thinks is too low, you can show them that your offer is based on calculating the property’s after repair value. This will demonstrate to the homeowner that you’re operating fairly and they will be much more likely to accept your offer.
- Limited competition
While there can be multiple interested parties on a pre foreclosure, you’ll be competing with far fewer buyers – if any – when you make an offer on a pre foreclosure. This will make it much easier to turn a profit on your investment.
- Negotiate directly with the homeowner
These properties are off-market, so you can communicate directly with the seller versus working with a real estate agent.
When you consider all of these benefits, investing in pre foreclosures is an excellent strategy for your real estate business.
Steps to invest in pre foreclosures
Closing on a pre foreclosure sale is not complicated, but it does take a certain finesse to open negotiations. Here’s how the process works:
- Sign up with a lead generation and management service like BatchLeads and use map and lead generation tools to find pre foreclosures.
- Add promising properties to your lists and skip trace their owners.
- Launch a marketing campaign. This can be a combination of cold calling, and direct mail.
- Make an offer that works for all involved parties, and be ready to negotiate to get the right price.
Just remember that these deals usually start with a cold call. While cold calling is a staple of real estate investing, calling a seller in financial distress is a delicate situation. Remember to be tactful and present a solution that works for everyone involved.
Conclusion
Finding pre foreclosure listings is a great strategy whether you’re a wholesaler or a fix and flipper. They’re fairly easy to find and owners are usually motivated to sell, so securing them for the right price is a relatively straightforward process.
The most important thing to remember with pre foreclosure listings is that homeowners aren’t selling because they want to. They’re experiencing some level of financial distress, so be understanding and remember that you’re negotiating about buying someone’s home.
The quickest way to lose a pre foreclosure deal is to lose sight of what this process means for the seller. Keep in mind that you’re actually offering them a solution to a difficult situation. By finding a way to meet their needs and secure the home at the right price, you can create a win-win situation for everyone.
