How to Buy a House in Preforeclosure

What is preforeclosure?

Foreclosure is when a mortgage lender seizes a home after a homeowner fails to keep up with their monthly mortgage payments, while preforeclosure is the precursor to this lengthy process. If a home goes into preforeclosure, the homeowner will receive notice that the loan is in default.

Homes typically go into default after a homeowner has missed one or more mortgage payments. At this point, the homeowner must do something to stay out of foreclosure. They can take any of the following steps to remedy the situation and avoid having their home seized:

• Work with their lender to get back on track with the payments they owe
• Modify their home loan
• Enter into a repayment plan
• Ask for forbearance, or a temporary reduction or suspension of payments
• Sell the home

What is a preforeclosure sale?

A preforeclosure sale is similar to a typical home sale, though the seller may not have the means to complete many of the tasks you would see in a normal sale.

Jonathan Faccone, founder of Halo HomeBuyers in New Jersey, said that many homes in preforeclosure are in disrepair due to “prolonged abandonment or neglect.”

This is typically a reflection of the financial distress buyers facing foreclosure are in. It also means that, when you purchase a home in preforeclosure, there’s a good possibility the seller won’t be able to complete any needed repairs or renovations to get the property to closing.

Faccone also said it’s crucial to research and assess any liens or legal claims on the property and make sure they are properly addressed before closing. And he advises buyers to look beyond the preforeclosure home at everything nearby.

“[R]esearch the neighborhood and surrounding area, as foreclosure homes may be located in areas where crime or other issues are present,” Faccone said.

» MORE: Homebuying checklist

How to buy a preforeclosure home

Colby Hager, owner of Capstone Homebuyers in San Antonio, said that buying a home in preforeclosure is a lot different than buying a home in foreclosure. If a home is already in foreclosure, that means the bank or lender has already taken possession of the property.

“These homes are typically auctioned off, whereas homes in preforeclosure can still be directly negotiated with the homeowners,” Hager said.

With this in mind, you can find and purchase a preforeclosure home by taking the following steps:

1. Check a preforeclosure list

Research potential areas and properties that you’re interested in, and look over preforeclosure lists found in public records.

Colby Hager said that you can look for preforeclosures by checking county court or recorder’s office records, which list properties that have received a notice of default.

Also, you may want to speak with real estate agents or other professionals in your area since they may have inside knowledge.

“[T]alk with real estate agents, lenders and investors who specialize in such properties and get their advice on available options,” Jonathan Faccone said. “There are also websites where you can search for preforeclosed homes or sign up for notifications when new ones become available. For instance, Zillow has a search feature where you can look for preforeclosed homes.”

2. Consider direct contact

When you have knowledge of a home in preforeclosure that isn’t officially listed for sale, it may be OK to approach its owners directly, as long as you're respectful of their situation.

“Since they might be eager to avoid foreclosure, they might be more flexible on price,” Colby Hager said.

You may also gain insight into a home’s condition and potential issues by speaking directly with the person who owns it.

3. Inspect and research the home

Many homeowners in preforeclosure don’t have the funds to maintain their homes, so you’ll usually find preforeclosure homes in need of repairs and deferred maintenance. Also, there may be liens on the property. This is critical to know since these financial obligations become your problem once you’re the owner.

Do a property lien search to check for any pending legal actions against the property before you buy.

To deal with these risks, pay for a professional inspection to assess necessary repairs and conduct a property title search with the county recorder, clerk or assessor's office where the home is located. You can find notices of default, notices of sale or pending legal actions.

» MORE: How to negotiate after a home inspection

4. Secure financing and write an offer

Hager recommended that you get preapproved financing or proof of funds before you write an offer, as this can speed up the process.

Whether you work directly with a homeowner or with a real estate agent who communicates on your behalf, you’ll want to ensure you write up a fair and reasonable offer that takes the homeowner’s situation into account.

For example, a homeowner with a mortgage in default isn’t going to be in a position to cover thousands of dollars in closing costs to seal the deal, so it doesn’t make sense to ask for any seller concessions.

John Myers, a real estate broker and owner of Myers & Myers Real Estate in New Mexico, said that many homes in preforeclosure may not have any equity to pay off the mortgage and closing costs, so a short sale is usually the best option for the homeowner. A short sale is when a property is sold for less than the full amount of the mortgage.

Bottom line

There are potential advantages that come with buying a house in preforeclosure, although some of them depend on the home and the specifics of the seller’s situation. For example, if a buyer finds a preforeclosure home that hasn't been officially listed for sale, they may be able to buy with less competition and secure a lower sale price.

Still, homes in preforeclosure aren’t always in the best condition. You could pay less upfront but wind up spending more to get the property in good shape. As with any home sale, enter the process with the discipline to walk away if the deal isn't a good one.