The steps in buying a pre-foreclosure house are largely the same as buying a home in foreclosure. There are a few differences, and pre-foreclosures are often offered in auctions. However, these auctions are surprisingly not the most common way for a pre-foreclosure to sell, in part because the lender may not accept the offer due to it being too low. Remember, in pre- and foreclosure sales, the lender (usually a bank) is trying to recoup as much money as possible, as quickly as possible, to offset the loan. Let’s dive in and look at how you can buy a pre-foreclosure house.
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What Is a Pre-Foreclosure Auction?
A pre-foreclosure auction is simply the auction of a house before it officially becomes foreclosed, and thus bank-owned. It’s still an attempt to pay as much of the loan back as possible, but it’s largely to the benefit of the previous owner instead of the bank. It can, however, be initiated by either the owner or the lender. It’s an attempt to sell off the house before it becomes a problem for the lender to solve. The fewer assets the lender has to sell off itself, the better.
How Do Foreclosure Auctions Work?
Before the Auction
There are a few steps to take before the auction starts. You will need to register with the auction company, usually using a credit card to reserve your spot. The company will also likely take some money from the account and hold it in escrow. This is so that, if you do bid and win but back out, they will still have some money. Think of it as a penalty for bidding but not closing the deal. If you do not bid, the money will be deposited back in the account. The amount taken depends on the auction company.
You will also need to qualify for the auction. Because the auctions are “all-cash” or “cash only,” you need to be able to pay. This does not mean immediately, however; you might have a short window of time to get the money, either in actual cash or a cashier’s check, to the company. This also depends on the state’s laws. Generally, though, you should have the necessary amount ready to go at the time of auction.
There are two types of auctions you can bid on: absolute or minimum bids. An absolute auctions means there will be a winner; a new owner will be announced. Minimum bids, however, could have no winner despite having bids. This is when the bank deems the bids too low, and will not accept the auction. In this case, if you bid and still want the house, talk to the lender after the auction.
The seller, usually the lender in most cases, still has to approve the bid. They usually have about 15 days to decide whether they will accept the bid. Plus, there’s also time needed to arrange closing, which can take an additional few weeks.
After the Auction
Even if you do win an auction and the lender accepts the bid, you do not take the title immediately. Depending on the state, the owners of a pre-foreclosure might have the right to equity of redemption, or paying off the original mortgage they defaulted on. In this case, because they have paid off the mortgage in full, they retain all rights and continue owning the property.
While most liens are sublimated, or forgiven, during a pre-foreclosure sale, there are some exceptions. Speak with your insurer or an attorney before taking possession of the property.
Finally, once you have won the auction, the lender has accepted the bid, or you simply bought the house in pre-foreclosure and the title is yours, you might face squatters – which could even be the previous owners. If you did not make arrangements with the previous owners, and they are indeed squatters, you may need to evict them through legal means. Squatters who have simply taken up residence in a vacant house may need to be cleared out by law enforcement, such as a local police department or sheriff’s office.
How To Buy a House in Pre-Foreclosure
Start Your Search for Pre-Foreclosure Properties
Searching for pre-foreclosures can be tricky, as some are not listed, or are not actually on the market yet. There are a few ways around this, however, involving either a real estate agent or a visit to a courthouse.
By hiring a real estate agent who specializes in buying homes in the foreclosure process, you can give yourself a leg up on the competition. Usually, these agents have very good relationships with the bank’s REO, or real estate owned, division. This is the part of the bank that actually sells property assets. It’s important to note they are completely separate from the division that deals with mortgages, which any real estate agent deals with. Due to this relationship, they may have information on homes that are in the foreclosure process but not on the market.
The second method of finding pre-foreclosure properties involves a visit to your local courthouse. The actual pre-foreclosure process begins with the lender filing a lawsuit or a notice of default, which are both public record. The pre-foreclosure period, depending on state laws, can last months to years. The lender will post the expected auction date. Again, many pre-foreclosures either do not see a bid, or the bid is not accepted by the lender as it is too low. We’ll discuss more about auctions below.
Research and Inspect the Home
Before an auction, it’s vital you do your research. This usually consists of driving by the house. Remember that, even if it’s vacant, you are still subject to trespassing laws. You can, however, get a sense of the condition of the exterior of the house. It may be possible to have a casual meeting with the owner, though remember that because they are in the foreclosure process, they may not want to talk to you. It could be a better idea to instead ask a few neighbors what they know about the property.
In some cases, you might be able to take a virtual tour, or there may be an open house. If so, be sure to attend or hop on your computer. The more information you have, the better. If you can, drive by right before the auction and try to determine if the condition has worsened since disclosure papers for the pre-foreclosure were filed. If you can, get an appraisal of the home in order to ascertain its value.
Keep Track of Foreclosure Proceedings
Pre-foreclosure houses are not yet foreclosed. Because of this, it’s entirely possible the owner is able to resolve their situation before the bank takes over ownership of the property. You will need to keep track of the entire process, until you are able to make an offer. Once property is foreclosed, and bank-owned, you will only need to deal with the bank.
Consider Both Long and Short Term Costs
Before bidding, you will need to repair and renovation costs, problems with the home, and figure out what kind of offer you’ll have to make or are willing to make. The home is sold as-is; in an auction, you will not be able to negotiate the owner painting a room or making repairs.
Some previous owners are angry that they had to go through the foreclosure process, and are vindictive against the banks taking ownership. They may purposely damage the property. Do the hidden costs of the house still make it worth it?
Make an Offer or Attend the Auction
Consider trying to meet with the owner and making an offer directly to them. Again, because the house is not in foreclosure yet, the bank does not own the property. You can lowball the offer, or negotiate. Remember that you will need a large amount of tact, as the owner is likely under a lot of stress due to this very situation. Unlike the bank, the previous owner may be willing to flex a little, patch up a hole in the wall, or give you a good deal if you let them live in the house for another month while they make other arrangements. You can also approach the bank directly, though they are much less likely to negotiate.
Otherwise, you will need to attend an auction. You can usually find auctions in the newspaper, or by asking your real estate agent. You will find other investors and buyers at the auction, such as professional house flippers.
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