Pre-foreclosures typically indicate problems for homeowners… but they represent opportunities for real estate investors.
The homeowners of properties in pre-foreclosure are often motivated to sell so as to avoid the foreclosure process, which can result in a significant loss of equity and damage to their credit. This provides investors with an opportunity to purchase properties at a bargain price and get a positive return on investment.
But how do you find and buy pre-foreclosure properties?
It’s not as complicated as you might think. But there is some stuff you need to know before you get started. Here are six steps.
Step 1. Determine Your Goals
Why do you want to buy a pre-foreclosure property?
Your investing business model is your guiding light when it comes to figuring out how much you should pay for a property and what type of property you should buy.
If, for example, you plan to use the property as a rental, then you might be willing to pay a bit more money for it because you’re in it for the long-term. If you want to flip the property, then getting a great deal and knowing your numbers is more important since you’re looking to make a profit within the next 6 months.
Here are some different ways you can make money from buying pre-foreclosure properties…
- Fix and Flip: Buy the property, fix it up and then sell it for a profit.
- Rental Property: Buy the property and rent it out to tenants. This is also called buy-and-hold investing. Use a property management company.
- Wholesaling: Buy the property at a discounted price, but then turn around and sell it quickly to another investor for a slightly higher price and make money in the middle.
- Wholetailing: Buy the property, do some very minor repairs, and then list on the MLS for a profit.
- Landlording: Buy the property, fix it up and then manage the tenants yourself.
Of course, you might just let the pre-foreclosure property you find dictate the investing method you’re going to use… but it’s still important to have an idea of what you plan to do with a property before you buy it.
Step 2. Secure Financing
Obviously, buying a pre-foreclosure or foreclosure property requires cash (unless you’re wholesaling it, in which case you’ll just find a cash buyer for it during the dispositions process).
Here are some different options for securing financing…
Hard Money Lenders : These are private lenders who offer short-term loans with higher interest rates and fees compared to traditional lenders. Hard money lenders are often used by real estate investors who need quick access to cash to close a deal.
Private Money Lenders: This is the goal standard of real estate investing. These are individuals or companies that lend money to real estate investors. Private money lenders can offer more flexible terms than traditional lenders, but they may require a personal relationship or referral to get a loan.
FHA 203(k) Loans: These are loans backed by the Federal Housing Administration (FHA) that can be used to purchase and renovate a property. FHA 203(k) loans are a good option for buyers who want to buy a foreclosure property that needs some work.
Conventional Loans: These are loans offered by traditional lenders such as banks and credit unions. Conventional loans typically require a higher credit score and down payment than other loan options.
Home Equity Loans or Lines of Credit: These are loans that allow homeowners to borrow against the equity in their home. Home equity loans or lines of credit can be a good option for buyers who have a significant amount of equity in their current home and want to use it to purchase a foreclosure property.
Step 3. Understand The Stages of Foreclosure & The Different Types
As a real estate investor, you might not only seek out pre-foreclosures, but full foreclosures as well. Either way, here’s a list of the different types of foreclosures you’ll encounter and how the buying process works for each…
Pre-Foreclosure: This is what we’re talking about here. Pre-foreclosure is the early stage of the foreclosure process when the homeowner has missed one or more mortgage payments, but the foreclosure hasn’t been finalized yet. At this stage, the homeowner may be motivated to sell the property quickly to avoid foreclosure. As a real estate investor, you can reach out to the homeowner and make an offer to buy the property before it goes into foreclosure. If the homeowner accepts your offer, you can buy the property directly from them.
Auction: Foreclosure auctions are public sales where foreclosed properties are sold to the highest bidder. The auction process varies by state, but typically, the auction is held at a courthouse or other public location, and the bidding process is fast-paced and competitive. As an investor, you need to do your due diligence and research the property before the auction. Often however, you have to buy the property site-unseen at an auction. If you win the bid, you’ll need to pay for the property in full, often in cash, and take possession of the property within a specific timeframe.
Real Estate Owned (REO): Real Estate Owned (REO) properties refer to foreclosed properties that are now owned by the bank or lender who issued the mortgage. When a borrower defaults on their mortgage payments, the lender can seize the property and sell it at a foreclosure auction. If no one buys the property at auction, the property becomes an REO property, and the lender becomes the owner. Investors can purchase REO properties through a few different channels. One way is to buy directly from the bank or lender that owns the property. Banks typically list their REO properties on their websites, and investors can make an offer on the property. Another way to purchase REO properties is through real estate agents who specialize in foreclosures. These agents have access to information on REO properties in their area and can help investors find and purchase them.
Government Foreclosures: In some cases, the government can foreclose on properties due to unpaid taxes, delinquent payments on government-backed mortgages, or other reasons. These properties are often sold at auction, and investors can find them through government agencies such as the Department of Housing and Urban Development (HUD) or the Internal Revenue Service (IRS). See the list of websites above.
Step 4. Check Out These Pre-Foreclosure Websites
The easiest and fastest (not necessarily the best, however) way to find pre-foreclosures is by checking out the websites below. These websites list properties that are the pre-foreclosure phase. You can search each in your specific target market.
- Foreclosure.com — Foreclosure.com is a subscription-based website that provides a comprehensive database of pre-foreclosure, foreclosure, and bank-owned properties. The website offers a 7-day free trial and allows you to search by location, price, and property type.
- RealtyTrac — RealtyTrac is a website that provides pre-foreclosure, foreclosure, and bank-owned property listings. The website offers a 7-day free trial and allows you to search by location, price, and property type. RealtyTrac also provides analytics and market trends data for real estate investors.
- Redfin — Redfin is a real estate website that provides pre-foreclosure and foreclosure listings. The website allows you to search for properties by location, price, and property type. Redfin also provides a tool that allows you to track and receive alerts about pre-foreclosure properties in your area.
Keep in mind, though, that these deals will be competitive because they’re so easy to find — which is why we always recommend (if you’re in this for the long-haul) finding your own off-market deals. We’ll show you some ways to do that in the next step of this article.
If you also want to check out homes that have already been foreclosed on and are now being sold at a discount, here’s a list of the best foreclosure websites…
Step 5. Build Your Own List
Building your own list of pre-foreclosure properties is the most sure-fire way to find good deals that other investors might not have their eye on.
The easiest way to build your own list is to pull data from Propstream of pre-foreclosure properties in a certain zip code.
You can stack that filter with other filters as well if you want to improve your niche targeting and increase the chances that the sellers you’re contacting are motivated. Here are a few other lists you might stack pre-foreclosure with (you can pull these from Propstream also)…
- High Equity — This means the homeowners have a lot of equity and thus might be willing to sell for a lower cash offer.
- Absentee — This means the homeowners don’t live in the property.
- Vacant — This means the property is a rental but it doesn’t have any tenants occupying it.
Then you can send direct mail to those homeowners offering to buy their property for cash — we recommend using Ballpoint Marketing (their hand-written mailers get the best response rates in the industry). Once your phone starts ringing, we can answer it for you so you don’t have to be available 24/7!
And don’t forget to follow-up with those homeowners (here’s the follow-up process we recommend).
Tip: To make sure you’re getting the most up-to-date data, we recommend checking back with Propstream every month. The first investor to contact a motivated seller is often the one who gets the deal.
Another way you can find pre-foreclosure properties (and distressed properties in general) is by driving for dollars. This is a technique where you drive around neighborhoods and look for signs of abandonment, financial distress, or other indications that the homeowner is in trouble and may be willing to sell. Write down the addresses and then reach out to the homeowners either by skip tracing and then cold calling them or by sending direct mail.
Step 6. Know Your Numbers & Comps
Whenever you buy a property as a real estate investor — whether it’s a pre-foreclosure or otherwise — you need to have a clear idea of the math you’re dealing with. Things like…
- The after-repair value (ARV) of the property — This is how much the property will be worth on the market (MLS) once it’s been repaired and listed.
- The cost of repairs — This is how much it will cost to repair the property and get it up to the point where you can either rent it out or sell it on the MLS.
- Holding costs — This is how much it’ll cost you to hold the property (taxes, utilties, insurance, etc) until you’re able to sell it.
- Your max offer — This is the max amount you should pay for the property in order to still be profitable and is calculated after understanding the previously listed metrics.
Whether you’re a wholesaler or a flipper, you need to know your numbers… and you need to know them well. If you’re unsure, then we highly recommend partnering up with a real estate investor who has experience and/or getting a professional inspection done on the property.
In real estate investor jargon, this process is called “running comps“… and we don’t want to get into the nitty gritty details here, but you can click on those links for some more detailed guides on how to calculate ARV, repair costs, and generally how to run comps.
Final Thoughts
Pre-foreclosures indicate homeowner motivation to sell and are thus a great opportunity for real estate investing looking for good deals.
But how do you find and buy them?
The six steps above provide a starting place to finding and buying pre-foreclosure properties. It requires time and effort, but getting the right property at the right price can be extremely rewarding (and profitable).
The most important thing is to remember that no two deals are ever alike, so it’s important to do your due diligence on each one. Research the neighborhood, make sure you’re using the current market comps, and be ready to make your offer when the time comes. Investing in pre-foreclosure properties requires patience and persistence, but with everything else going for it, it can be a great way to invest.
Happy hunting! 🙂