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How to Approach Pre-Foreclosures

Authored By: 
Andrew Goodwin

For most owners who have defaulted on a home mortgage, a short sale is the best option. The problem is that many owners try to hang onto their home as long as possible.While foreclosed homes and other properties can definitely offer you a cheap way to purchase real estate, sometimes it's tough to get great bargains because of the competition. If you're tired of the competition that comes with foreclosure properties, you may want to consider what pre-foreclosures have to offer.

What is a Pre-foreclosure?

A pre-foreclosure is the first stage of the foreclosure process. At this point, the homeowner has missed a minimum of a single payment and the lender considers the homeowner to be delinquent on their home loan. It's possible at this point to offer the homeowner a short sale, which allows you to purchase the property for significantly less than the market value.

The benefit for homeowners is the ability to avoid foreclosure on their home.

Understanding the Homeowner's Situation

If you plan to offer a short sale to a homeowner on pre-foreclosures, it's important to first understand the situation they are in. Homeowners are deeply distressed when faced with the possibility of a foreclosure in the near future and you must understand the psychology of the homeowner before you can help them.

Usually, a homeowner gets behind on his mortgage because of a negative event that occurs in his or her life. Job loss, divorce and illness are some of the top problems that can lead to financial distress.

In some cases, homeowners make the problem worse by procrastinating or denying the situation altogether. It's important to understand the problem being faced by the homeowner so you can help.

In some cases, offering a short sale may be the last option for a homeowner that is soon going to be faced with foreclosure.

Negotiating a Deal

When you're ready to offer a deal to a homeowner, it can be challenging to get their attention. There's a good chance that other real estate investors have tried contacting the homeowner too. Many investors simply send out a postcard or letter, which is a passive approach. However, it's more effective to actually talk directly with the homeowner. This can be done in person or on the phone and offers the best way to get their attention and build rapport and trust with the owner.

For most owners who have defaulted on a home mortgage, a short sale is the best option. The problem is that many owners try to hang onto their home as long as possible. The closer the auction gets, the more likely the owner will be to make a deal. It's important to keep in contact with the homeowner as they explore all of their available options.

It's important to talk to a homeowner in an understanding and courteous way. If you're going to negotiate a deal, you need to show understanding of the dilemma they are in. Homeowners are going through a scary time and simply being there to show you understand may be enough to help you get the deal. Take the role of a consultant and work on offering help to the owner.

Research the Property

While much of landing a short sale on pre-foreclosures has to do with courting the homeowner, you cannot forget to research the property. You must do some homework and research, especially before making an offer on this type of property. Here are a few things you should be researching:

  • Do a title search to ensure the title on the property is clear.
  • Check out the loan to value ratio, which compares the mortgage balance to the property's value (this helps you figure out if there is equity in the property).
  • Calculate all your costs, which is especially important if you plan to flip the property quickly.

If you've reached a deal with the homeowner and the title is clear, then you can go on to sign a Real Estate Purchase and Sale Agreement at this time. You can get the financing arranged and make sure that the process of foreclosure will be stopped by the lender.

Once the process is complete, you'll have purchased a piece of property for a good deal while helping out a distressed homeowner with a short sale offer.

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