How to Buy a Pre Foreclosure Step By Step

Discover how to buy a pre-foreclosure step by step, from what pre foreclosures are to how they are much better than foreclosures and how to make big money with them while helping people. Whether you’re new to real estate or a seasoned veteran, you’re going to find this training extremely profitable!

 

Understanding Pre Foreclosures

To understand pre-foreclosure, we need to look at the foreclosure process and the steps involved. Foreclosure is the legal proceeding the lender uses when their borrower has defaulted on repayment of a loan, whereby the lender takes ownership of the mortgage property and sells it to recover what they're owed on that loan.

Foreclosure Process

The process begins with the default of the borrower. They get behind on payments and after several payments behind, the lender can send a demand letter, which is notice to the borrower to resolve the delinquency. If they don't catch up payments, the lender has an acceleration clause that allows them the contractual right to call the loan due in full. This begins with an NOD (Notice of Default) or a Lis Pendens (Notice of Suit Pending), which one depends on the state and the type of loan. Either way, at this point the public becomes aware this property is now going to foreclosure.

Foreclosure is the next step. The auction may be weeks, months or even a year later, but that is the foreclosure sale and public auction of the property. This is where investors that buy foreclosures are buying and bidding and competing against each other. The bank is seeking to recover what they're owed in principle, interest, penalties and fees. That's usually going to set the minimum bid that may get bid over. It may not. If it doesn't, the bank takes the property back, and it becomes an REO or real estate owned by the bank.

So, pre-foreclosure is everything prior to the auction from the first missed payment to the actual public sale of the property, and that process may take 9, 12, 15 months or more. But this period between default and acceleration is where we focus because there's less competition, and this is where the seller still has some options. Now, let's dig into how to buy a pre-foreclosure.

Buying Pre-Foreclosures Step by Step

Step 1: Finding a Borrower in Default

The first step to buying a pre-foreclosure is finding a borrower in default. They often reach out directly to us and when they do, we review their situation. Where are they at in their loan? How many payments behind are they? Are they perhaps pursuing a loan modification? A loan modification might be a good solution if they have a temporary hardship that they can come out of. Are they considering or filing for bankruptcy, chapter 7 or 13? If so, will this resolve the debt? Have they considered renting the property? That might be a good solution for them if they know how to handle the headaches of being a landlord. But oftentimes, despite all these options, they end up needing to sell the property when they reach out to us directly. Hopefully you can connect with them before the acceleration and all the competition begins, because that can be the gold mine you're looking for. Freedom Mentor has proven techniques to have these sellers come directly to us, and that's key.

Step 2: Make an Offer

The next step in buying a pre-foreclosure is making an offer to the seller. We first consider the timing. How soon could the property go to foreclosure? Are they working on a loan modification or a bankruptcy? How quickly could they get moved out of the property? What kind of needs do they have? Do they have a place to go? Do they need cash to get there? The equity that they have is going to determine the options that we have, especially when they need cash. We want to make sure that there's an upside in the deal and that it's a good deal for us. Are we going to make a traditional cash offer or do something with creative finance?

If you're new to creative financing, check out Phil’s video, Creative Real Estate Versus Traditional Investing. But if you're familiar with creative finance, you know that these opportunities are great for Subject-To property investing. We want to be able to get the deal done very quickly and we want to pick up something with a low interest rate. Often, we can save on closing costs without taking out a new loan or tying up credit. They can also benefit sellers because when we catch up their payments and it helps their credit compared to just paying off the loan in full. These are all opportunities that come with Subject-To properties. If you're new to them, check out my post, Subject To Real Estate Explained Step by Step where I explain Subject-To step by step and help you get familiar with this technique. I think we will see a lot of these over the next year.

Step 3: Due Diligence

Once you've dialed in the offer, you're going to get it in writing in a contract, and then move on to the next step in buying a pre-foreclosure which is the due diligence. And while we move very quickly in these deals, we need to make sure that we are thorough and don't miss anything in this step.

Loan Confirmation: We start by verifying anything to do with the foreclosure so that we don't have surprises on the timing. Next we look into the loan if we're taking over Subject-To, an order or reinstatement, order payoff, and make sure we understand the interest rate, the balance, the escrow, and everything about the loan.

Title Search: The next step in the due diligence process is a thorough title search. This is a critical step. We need to understand any liens, judgments, and the chain of title. On this subject, check out Phil’s training, Investor Guide to Real Estate Title. It will teach you tons about title and make sure that you not only save money, but avoid legal headaches.

Walk-through Inspection: When you're buying a property, you want to do a thorough walkthrough of the property. Bring a contractor if you need to, and make sure to bring some light bulbs, a flashlight, and maybe a stepladder. You need to be able to get to know the product you're going to buy. You want to make sure that you identify any showstoppers that may have you pull the plug on the deal long before you order a formal inspection.

Value Confirmation: Understanding the condition of the property is going to help you understand the value of the property because you now know what to compare to with regards to comps, and that will help you dial in the potential profit you can make on the deal. You don't want to take something over only to find out you don't have any actual equity and there's no upside in the deal.

Professional Inspection: Once all these pieces check out, then you do a formal inspection, hire an inspector, and make sure that you're absolutely clear on the condition.

Step 4: Close the Deal

When you understand the loan and the title, and if you're clear on the condition and the value of the property, you are ready to move forward and determine your exit strategy and close the deal. This is the final step in buying a pre-foreclosure: the closing. You've made it through the due diligence. You've identified a clear exit strategy: Are you going to renovate the property and resell immediately? Or are you going to hold the property? Short-term verses long-term may impact how you close and when you reinstate the loan. If you're taking over Subject-To, you want to close through a title company or an attorney, but in some cases you may not be able to. Are you paying cash for the property? That's simpler, but it may limit the number of deals you can handle. Have you learned to do creative finance? That's going to allow you to do unlimited deals, but they are more complicated, especially for your closing. Do you have the right techniques that allow you to overcome the common problems with Subject-To like insurance or the due on sale clause?

Pre-Foreclosure vs Foreclosure

The complicated nature of pre-foreclosure is really the biggest challenge in comparison with foreclosure. Foreclosures are simpler, but they involve more risk, and they require more capital. Pre-foreclosures are less risky and require less cash, but they are more complicated. However, if you can understand the complications, you can make huge profits on these deals.

Every Successful Real Estate Investor Has a Mentor

Freedom Mentor has mastered the complications of pre-foreclosure. It's what allows our apprentices to close deals consistently month after month. If you would like to benefit from the techniques that we've mastered to find these deals, handle all the complications, and learn to consistently add them to your portfolio or flip them for big profits, check out our mentorship program here: Freedom Mentor Apprentice Program.

If you have any questions, post a comment below or text FREEDOM to 305-315-8030.