What is the difference between pre-foreclosure and foreclosure? — FIbyREI
As you dive into real estate investing, you’ll find that there are many types of properties on the market. A few of the listings you might encounter include pre-foreclosure and foreclosure listings.
Although the two types of listing may seem extremely similar, there are significant differences that set them apart. Let’s take a closer look at the difference between pre-foreclosure and foreclosure properties.
What is the difference between pre-foreclosure and foreclosure?
First things first, it’s important to understand what a foreclosure property is. Let’s say a borrower took out a mortgage for their home purchase. Unfortunately, they were unable to keep up with the mortgage payments. After a certain amount of time, the lender will have the right to foreclose on the property. At that point, the lender will own the home. Typically, lenders sell foreclosed properties through an auction setting.
The major difference between a pre-foreclosure and a foreclosure is whether or not the lender owns the property. When a buyer fails to make payments for a certain period of time, the lender will issue a notice of default. At this point, the property will be classified as a pre-foreclosure and the borrower is still the owner of the home. But if the borrower does not catch up with their mortgage payments, then the lender will reclaim the property.
When the lender officially reclaims the property, it will be classified as a foreclosure.
How many months does it take for a house to go from pre-foreclosure to foreclosure?
When a homeowner misses three months of mortgage payments, or is 90 days late on their loan, the loan will go into default. At this point, the home will be considered a pre-foreclosure.
The lender may try to work with the borrower and provide some leniency to help them catch up on their payments. But if there is no sign of the borrower being able to catch up with their payments, then the bank will foreclose on the property.
The amount of time that a lender allows a property to remain in pre-foreclosure will depend on the discretion of the lender. But generally, the home will move from pre-foreclosure to foreclosure status within three to six months.
How does pre-foreclosure work?
The pre-foreclosure process is started when a borrower is unable to keep up with their mortgage payments. Typically, a homeowner that is 90 days late on their mortgage will be in pre-foreclosure status.
When the property is considered a pre-foreclosure, the owner has a few choices, including:
- Find a way to catch up on their payments.
- Look for a buyer who can save them from impending foreclosure.
- Wait for the completion of the foreclosure process.
With that, the pre-foreclosure process could be concluded with a resolution of the borrower’s payment issues, a sale of the property, or a final foreclosure notice from the lender.
Pre-foreclosure vs. short sale
If you are looking into pre-foreclosure options, you may run into the term short sale.
A short sale is a case when the property owner owes more on the property’s mortgage than the market value of the property. The property owner will ask the lender if they can accept a lower amount than what is owed on the property.
A property owner who can complete the short sale with their lender’s blessing is not necessarily in pre-foreclosure. Instead, a short sale can be the result of anytime when the owner owes more on the mortgage than the property is worth.
If you are pursuing short sales, consider the fact that these deals can take a very long time to close. In fact, it could take between six months and a year to finalize the deal. Also, the lender could back out of the deal if they decide that a short sale will not work for them anymore.
Can You Profit by Buying a Pre-foreclosure Home?
A real estate investor can potentially profit from buying pre-foreclosure homes. Of course, not every pre-foreclosure home will result in a profit for the investor. As with all potential properties, you’ll need to run the numbers of the specific deal to ensure you can make a profit.
Is it bad to buy a pre-foreclosure home?
Like all things in real estate, it is not necessarily bad to buy a pre-foreclosure home. However, you’ll need to decide for yourself if an individual property is a good option for you.
One difficult part of buying pre-foreclosure homes is that you’ll have to deal with homeowners in financial distress. It can be challenging to work with homeowners in these circumstances. With that, make sure to maintain a kind and professional attitude at all times.
Benefits to buying pre-foreclosure or foreclosure
The major benefit of buying a pre-foreclosure or foreclosure is the potential profits. Although not every pre-foreclosure or foreclosure is a good deal, many offer a profitable return on your investment.
Typically, these deals are only found off-market. With that, you won’t be facing as much competition from other investors while closing the deal. Plus, the seller is likely extremely motivated, which could allow you to negotiate a below-market purchase price.
The advantage of buying pre-foreclosure properties instead of foreclosure properties is that you won’t have to deal with an auction setting. Instead, you can see the property before negotiating an offer with the seller.
How to find pre-foreclosures and foreclosures
If you’ve decided that you want to pursue pre-foreclosures and foreclosures, you’ll need to know where to look. Typically, pre-foreclosure homes are off-market properties that are not listed anywhere. Although there are some great deals to be found, it can be a challenge to find these deals.
First, you’ll need to find leads on properties with homeowners in financial distress. A good way to do this is by advertising that you are willing to buy houses through direct mail and cold calling. You can also drive around neighborhoods looking for homes that are clearly in disrepair.
After you find a potential deal, then you’ll need to perform your due diligence on the property. Make sure that the property is in good shape. Once you are satisfied with your due diligence, you’ll need to find the funding you need to acquire the property.
How to negotiate a pre-foreclosure
Once you’ve found a deal, you can negotiate with the homeowner. Typically, homeowners in distress are more willing to negotiate.
Don’t be afraid to get creative with your negotiations. For example, you could allow the homeowner to stay in the property for a set number of weeks after the closing, so they have time to find a new place.
The bottom line
A pre-foreclosure could be a good opportunity for a real estate investor. Although the details of a particular property will determine if it is a good deal or not, you may be able to find some great deals among pre-foreclosures. In order to find those deals, you’ll likely need to do quite a bit of legwork.
If you are interested in learning more about real estate investing, then take advantage of our free guide to start investing in real estate. You’ll learn everything you need to know to start building your own real estate portfolio.