What are Pre Foreclosures, and how do they work?
Pre foreclosures are properties that are in default due to the property owner not meeting his obligation to pay an outstanding mortgage amount that is owed for at least the previous 90 consecutive days.
A pre foreclosure is not the same as a short sale.
The pre foreclosure point is started when the lender files a notice of default in non judicial foreclosure, or lis pendens, in judicial foreclosure,( depending on the state ) on the property, which is legal notification to the property owner that the lender will start actively pursuing legal action if the debt is not paid. The property owner now has the chance to pay what is owed to the lender or, if he chooses, can attempt to sell his property prior to it going into foreclosure.
These notices of default are found in your local newspaper, and on some real estate websites. They are often under the Foreclosure section, but are not technically foreclosures until the default period expires, and the homeowner has not paid what is owed.
If the homeowner pays what he owes, this will end the foreclosure pursuit of the lender. It is vital to know if the property is still available before spending a lot of time and energy on it. The surest way to determine if the property has been reinstated, is to call the attorney or trustee attached to the particular foreclosure. These folks can let you know if the property is still available, but won’t be able or willing to give you specific answers about the property.
The default period, the amount of time between when the lender notifies that the property is in default, and when the property is in foreclosure can last several months or more.
This is at the discretion of the lender. Most lenders would rather the existing borrower pay what is owed, than have to take the property back, and resell it. Lenders are in the business of making loans. They are not in the real estate business.
If the homeowner is smart, once he or she finds themselves in this pre foreclosure situation, they will be in touch with their lender.
The lender or mortgage company may be willing to work with the homeowner to attempt to avoid foreclosing on the property. However, if the homeowner does not take the initiative to contact the lender, it is unlikely that anything will change.
It is very possible for an investor to strike a good deal during this period of time. The homeowner may be willing to take a steep discount from what his home is worth, in order to get out from under his debt obligation that he is having trouble paying.
Be aware that the owner may be getting deluged with phone calls, mail, and in person, of people wanting to buy his home. He may not be open to the idea at first, but may change his mind as he gets closer to the date of losing his home.
It is also possible that he will list his home with a real estate agent. If this happens, you chances for a great deal decrease somewhat, but, the homeowner may be willing to make a deal as his time as owner is about to end.
Whether or not the homeowner is willing to make a deal will depend also on the amount of money that is still left on the loan, and the market value of the property, which will determine how much equity is in the home. If there is more owed on the property than the property is worth, called being ‘upside down’, it would then be considered a short sale situation.
Time is of the essence, however, in this pre foreclosure situation, as the property must close prior to the home falling into foreclosure. Once it becomes a foreclosure, the homeowner no longer owns the property, the lender does, and the homeowner is then out of options.
Depending on the type of foreclosure that it is, you may have an opportunity to buy it at the courthouse steps for cash.
If the foreclosure survives the courthouse steps without a buyer, it may show up in the MLS, Multiple Listing Service, as a bank foreclosure.
Learning the process of pre foreclosures can bring you some great deals if you are willing to move quickly.
You should also have cash reserves, and/or a great credit rating or line of credit, and the ability to convince the affected homeowner that selling to you is his best and only logical course of action.
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