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BUYING A PRE-FORECLOSURE PROPERTY

“ Be aware that a pre-foreclosure property is not necessarily for sale.”

The pre-foreclosure stage can yield some real bargains, but most experts agree it’s the most difficult stage during which to purchase a distressed home.

Be aware that a pre-foreclosure property is not necessarily for sale. The pre-foreclosure stage is the period between the time in which a Notice of Default (in nonjudicial foreclosure) or lis pendens (in judicial foreclosure) has been issued to the homeowner and after the property is sold at a foreclosure auction.

The owner may be working to cure the default, or they may be hoping for a pre-qualified cash buyer to help them avoid the impending foreclosure.

Here are 10 tips to guide you through the search for and purchase of a pre-foreclosure home:

1. Begin the hunt

One of the trickiest aspects to buying during this stage of foreclosure is finding properties. That’s because some of these houses are not yet on the market. Start your search by looking on Zillow for pre-foreclosures. This information is free after you register with a free account. Or, check your local newspaper for foreclosure notices. You may also want to market yourself with online postings, signs, fliers or postcards with a message such as “Willing to pay CASH for your home.”

2. Drive by

Once you find a property, go see it so you can get a better idea of its location and condition. This could facilitate a casual meeting with the owner or a chatty next-door neighbor. Remember, the owner is probably still living in the home, so be judicious.

3. Get a status update

It’s not uncommon for homeowners to resolve their financial problems, so you need to do your homework and verify whether the property is still in default. The trustee who filed the paperwork to initiate the foreclosure should be able to provide this information. Or, contact a local foreclosure specialist to help you.

4. Learn the values

Check public records to determine the outstanding loan balance and liens on the home and consult with local real estate agents. Additionally, Zillow offers two data points that can be helpful to ascertain value:

  • The Foreclosure Estimate, which is the price we predict a property will finally sell for if it’s listed as a foreclosure (bank-owned property or real estate owned).

  • The Below Zestimate value, which is a number that represents the difference between two estimated market values as calculated by Zillow: the Zestimate home valuation and the Foreclosure Estimate. The Foreclosure Estimate incorporates foreclosure data; the Zestimate does not.

5. Do some math

Subtract the costs you will encounter as a buyer (loan balance, liens, insurance) from the estimated value of the property. If you enter into negotiations with the owner, you can use this figure as your breakeven number.

6. Reach out

Once you’ve done considerable homework, it’s time to contact the homeowner by letter or phone call and let them know that you’re interested in their property. Remember that homeowners facing foreclosure are distressed, so enormous amounts of tact are required. Try to arrange a meeting so you can get a better look at the property and potentially discuss a possible sale.

7. Walk through

If the owner is willing, take a tour of the property. Determine how much you’d need to spend on repairs and subtract that amount from your breakeven number. If you’re not comfortable estimating repair costs, consider taking your contractor along for the tour — just remember to be considerate of the owner’s circumstances.

8. Negotiate

Many factors will figure into your offer, including regional real estate appreciation and the potential for increasing value. Ideally, your offer will be considerably lower — perhaps 20 percent or more — than your breakeven number. Be creative. For instance, an owner may be more willing to flex on price if you allow them to stay in the property for 30 to 45 days while they find a new place to live.

9. Put it in writing

Once a deal has been reached, draw up a purchase agreement. If that’s not within your realm of expertise, turn to either a real estate agent who specializes in foreclosures or an attorney for assistance. Make sure that the agreement makes the deal contingent on a full title search conducted by a title company and a professional inspection of the property.

10. Make it official

An escrow company, which acts as a third party, can manage the transfer of money and property ownership. Not all homeowners will welcome your interest in their pre-foreclosure home — and that’s fine. Others, however, will realize that, by selling during this stage, they may be able to salvage some equity and minimize damage to their credit record.