Understanding Pre-Foreclosure Properties: Risks and Opportunities

 Foreclosures are rising, a distinct signal that the cracks in these economically challenging times are starting to show. For real estate investors (or would-be ones) this equals opportunity.

The chance of grabbing a bargain by buying pre-foreclosures is high, with some vendors keen to avoid their property being repossessed by the lender.

Now, while this sounds great and is something that experienced investors know how to navigate, those who are newer to the game should always understand the flip side.

Pre-foreclosure property investing is subtly different from buying those that are actively in foreclosure. The latter can often be found for sale through public auction as the lender (usually a bank) wants shot of it as quickly as possible.

Pre-foreclosure is typically the period from when the owner has missed three months’ payments and is issued a notice of default, through to when a lien is put in place. How long this takes varies… It could be as little as a few weeks or may be drawn out over months.

This sorry scenario provides you, as an investor, with a potentially lucrative deal—as long as you understand the investment risks and rewards.

The benefits of buying such real estate include:

• You’re in a very strong negotiating position: The vendor will likely need to recoup their losses, not to mention wanting to avoid wrecking their credit rating.
• You should be able to view and inspect the property: Most full foreclosures sold at auction don’t allow this opportunity.
• Pre-foreclosures have less exposure: Meaning they’ll be less competition looking to buy, unlike auction properties that are widely advertised.
• Financing may be easier: Buying at auction requires you to have the full funds at your disposal. With a pre-foreclosure your options are wider—you could even take out a regular mortgage. However, if you’re considering pre-foreclosure property investing then it’s less likely that you’ll be borrowing in this way. Instead, you might be better off looking at non-traditional forms of funding, such as a hard-money lender or a home-equity-line-of-credit (HELOC).
• The purchase is likely to go through faster: There’s often less red tape involved with a pre-foreclosed home than one that’s in full foreclosure.

And then, there are the cons…

• Beware the hidden costs: There could be considerable monies owing on the property, perhaps to other creditors or the IRS. Once you own it, they become your responsibility. Do not enter into any agreement until you’ve carried out a title search and any other research you deem necessary. While it’s not true of everybody, those in financial difficulties (AKA, the vendor) may not be forthcoming about such debts. This is definitely a case of “buyer beware”.
• There are added risks of the sale falling through: Such as the vendor’s financial circumstances changing or deciding to sell to the bank on a short sale.
• Buying pre-foreclosures typically costs a little more than foreclosures: Banks are often so keen to move the property on that they’ll accept a sum significantly below market value. The vendor of a pre-foreclosed property might not be so giving…

It’s probably going to be in bad shape: But you know that, don’t you? Not only is someone struggling with a mortgage unlikely to carry out necessary maintenance, but it’s also not unheard of for a disgruntled vendor to actively cause further damage in the mistaken assumption that the banks will care about the associated lower price they can get for it.

You’re going to need to run a lot of numbers: This is where novice investors can begin to feel overwhelmed. Experience makes it easier, but there’s nothing to say that the savvy first-time investor can’t successfully make money from pre-foreclosure property investing. Just don’t let your heart rule your head and take the time you need to make a balanced, sensible investment decision.

BRRRR Loans offer various different financing options for real estate investors. Whether it’s a pre-foreclosure that’s caught your eye or anything else, we offer some of the best rates in the industry.

Discover more at https://www.brrrr.com

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