How to Buy a Preforeclosure Homes: The 3 Main Ways to Profit for an Investor
Real estate investors need ways to find properties for investment deals. One good source to locate a property is with preforeclosure properties. While the real estate market remains strong in much of country, many people face economic uncertainty. Now is a good time to look for preforeclosure properties.
A preforeclosure is usually defined as the time when the lender has filed a default notice on the property but has not held a public auction. During the timeframe in between, the property is available for purchase. This timeframe offers less competition for investors.
It’s important to note that once the public auction takes place, the deal is no longer a preforeclosure and the benefits for the property owner and investor change.
What is a Foreclosure?
Foreclosure is a legal process with laws and timelines varying by state. It is a process that allows lenders to foreclose on liens or encumbrances to become the legal owner of record for the property. This allows the lender to auction the property to recover the outstanding loan amount.
A foreclosure means the debtor no longer has a right to the property and must vacant the home. It also reflects very poorly on the debtor’s credit report. In most cases, after three months of missed payments the foreclosure process can begin.
How to Invest in a Pre-Foreclosure Deals
With preforeclosure’s investors need to act quickly. While the timeframe in some states lingers, other states move quicker. Plus, the quicker you act, the more likely you are to close the deal.
Preforeclosures are publicly recorded and listed at the county level. Most counties now have online listings which makes it easy for virtual real estate investing. Check your county’s listings regularly to identify viable opportunities.
Once you find a property that fits your criteria, contact the property owner directly. You can do so by phone, email or mail. Remember, you want to acquire the property before the public auction to avoid the foreclosure procedure.
Next, talk to the property owner and explain the reasons selling to an investor benefits them. For example, selling to an investor avoids the foreclosure procedures. This helps protect the property owner’s credit. They won’t have a foreclosure listed on their credit report.
Also, the property owner won’t lose all their equity. Depending on the loan amount and back payments, they may walk away with some of the home’s equity intact. In a foreclosure, they do not. Plus, a foreclosure produces stress for the homeowner. The legal process is hard on a family. When they sell to an investor the process goes more smoothly for everyone.
Preforeclosure properties work for many different investment strategies, like wholesaling, buy and hold or fix and flip. Once you negotiate the terms and purchase the property, you decide how you want to manage the property.
Three Main Ways to Profit with a Pre-Foreclosure Investment
With each property consider the best way to work the deal to make a profit. Base how you structure the deal on the specifics of the property and the negotiation process.
1 – Purchase at a Discount
The biggest benefit of a preforeclosure property is being able to purchase the property below market value. In this case, you purchase the property outright from the seller and take possession. Depending on the amount of equity, there are options to structure the deal creatively.
For example, the property owner may receive cash at the closing, or they can receive the balance of their equity in payments or as a balloon payment due later. Regardless, ensure the contract defines how the deal will work.
2 – Investor Takes Over the Loan
Another way to make a profit without going through the financing process is for the investor to take over the current loan. In this case, the investor covers the back payments to make the loan current. This stops the foreclosure process.
The seller benefits because the foreclosure ends and the investor will now make the payments. However, the loan stays in the current property owner’s name until the investor pays off the loan later. The investor may even allow the seller to rent the property back, meaning they can stay in the home. But, the ownership of the property transfers to the investor who can sell the property when they wish.
3 – Short Sale with Lender
A short sale is a discounted loan where the lender agrees to accept an amount less than the owed amount to avoid the foreclosure process. The investor negotiates with the lender to agree on a price. The investor then takes ownership of the property.
The key with each of these ways to structure a preforeclosure deal is acquiring the property for a low price. Preforeclosures translate well to the BRRR method where an investor takes the equity from a rental property to buy additional properties.
With a preforeclosure an investor can purchase a property below market value and have immediate equity in the home. Preforeclosure also work well for fix and flip where the deal’s profit depends on buying low and selling for a higher amount.
Preforeclosures can work as wholesale deals when the investor has a strong qualified buyer’s list and can bring a buyer quickly. Overall, preforeclosures make a great resource for real estate investors.
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