What is a Pre-Foreclosed Home?

With home prices rising in Colorado, a pre-foreclosed home can be quite attractive financially.

When a property is in pre-foreclosure, the owner still has a chance to ward off a foreclosure by getting enough money to pay the bank or sell the property to pay off the loan. In short, a buyer comes in and gets a home at a discount from the full market value without the house ever going on the market. It can be a win-win situation for everyone.

If they can do that, they can likely walk away with a little equity in the home and while avoiding a bad credit mark that comes with a foreclosure — a mark can last seven years.

These went “off-trend” during the housing downturn, but they have come back. There are fewer of them now, but since the housing market is on fire, people are looking for bargains.

How does a home enter into pre-foreclosure?

Unfortunate life circumstances can cause anyone to fall behind on mortgage payments. It’s different these days from when people just got bad loans and got in trouble during the mortgage crisis. Now, the common reasons are death, divorce, and loss of job. These can disrupt lives. These aren’t people who just forgot to pay the mortgage month after month.

How long do people have before foreclosure looms?

After a certain number of months of not paying the mortgage, lenders can begin foreclosure procedures if no agreement can be made. That means that the first public notice will be in the form of a Notice of Default. This is a public record, and that’s how people find out about pre-foreclosure homes.

The timespan of how many days a homeowner has before the proceedings begin varies from bank to bank. But new laws after the housing collapse give people a standard of 120 days.

During this whole time, hopefully, lenders are talking to the homeowners. They want to help them get on track again. It varies from state to state after the notice of default of when the home will go up for public auction.

How many pre-foreclosures are there?

Pre-foreclosures used to be very popular because housing prices were going up fast, and people wanted to invest in real estate. At the peak of foreclosure starts, there was a record 203,000 in April 2009. Foreclosures haven’t gone away. There are just fewer of them, which is good, in general.

How can you find a pre-foreclosed house?

First of all, these are not properties advertised for sale, usually. Once the Notice of Default is written up, it is recorded at the county recorder’s office.

Notice of Defaults also can be issued for failure to pay property taxes or HOA’s (Homeowners Association).

You can go to a county recorder’s office to look for these notices of default. An easier way is to find the information online. Realtors have access to learning a lot about a property and you can always start there.

Who can buy a pre-foreclosed house?

Typically, buying pre-foreclosed homes has been the domain of investors. But anyone is able to buy them with the right funding and patience.

Pre-foreclosures are not for the faint of heart either. It is a higher-risk property. Sometimes, they can be in bad shape either from maliciousness on the homeowner’s part or just because they haven’t had any extra money to maintain the house.

How do you contact the homeowner?

You can talk to the homeowner before the auction and tell them you know they are in a tough situation. You can first either send a letter or postcard or just knock on the door.

Homeowners may not be very cordial, and you never know what situation you will encounter. But if you or your realtor knows the owner is willing, take a tour through the property. Make sure you take note in your head of how much repairs and renovation might take. Having great tact and empathy can help. Remember that these homeowners are in distress.

What should you offer on a pre-foreclosure?

Here is an example. If the home is valued at $300,000, but the owners still owes $250,000 to the bank, they have to satisfy the bank. After doing your homework on the home’s valuation and what it might take to fix it up. You could offer $275,000. They walk away with some money in their pocket, and you get a home at a good price. But every scenario is different.

How can you pay for a pre-foreclosed home?

Most investors pay cash, and that can make it a little tougher for the regular home buyer. If there is competition for the house, the cash buyer might get it first. If the home goes on auction before you could buy it as a pre-foreclosure, you will have to have cash for that purchase.

Can you finance a pre-foreclosed home?

Yes, you can get a loan for a pre-foreclosure but if there is competition for the house it will likely go to the cash buyer first. We recommend getting prequalified for a loan before ever making an offer. You’ll then know how much you can afford for the house and for any repairs. Banks are always happy to give loans on properties even if they aren’t listed for sale.

Let us know if you want to learn more about this topic, our team at Rocky Mountain Realty would be happy to assist you.