How to Buy a Preforeclosure Home in 9 Steps

Preforeclosure homes are a solid choice if you want to snag a good investment deal. The process is a bit more complicated, but there are benefits, and it’s a great way to grow your investment portfolio. To learn how to buy a preforeclosure home, follow my step-by-step guide. I’ll walk you through everything from figuring out if this strategy suits you to finding listings and ultimately closing the deal on the property.

What Is a Preforeclosure Property? 

Preforeclosure houses typically occur when a homeowner falls behind on mortgage payments, which results in loan default. This is considered the early stages of a home going into foreclosure. During preforeclosure, homeowners have two main options: sell the property or pay off the outstanding loan balance. For investors, this is a chance to snag a property at a price lower than its market value.

Steps on How to Buy a Home in Preforeclosure Home

Finding and buying a preforeclosure property can be more complex than a traditional real estate transaction since listings are not always easily accessible to the public. That’s why knowing all that goes into successfully securing this type of property is important. Here are the steps to buy a preforeclosure home:

Step 1: Understand the Preforeclosure Process 

Preforeclosure is the first phase of the foreclosure process. This is when a mortgage lender can take back the property to recover the money owed on a defaulted mortgage. During this stage, the lender sends a Notice of Default to the homeowner, letting them know that legal action is being taken toward foreclosure. However, the homeowner can still stop the foreclosure by getting enough money to pay the bank or selling the property to pay off the loan.

Step 2: Decide if Buying a Preforeclosure Property Is Right for You

Homeowners in preforeclosure often face financial difficulties, and many prefer to sell their homes rather than risk a foreclosure on their credit report. Preforeclosure homes are frequently available at prices below market value, making them attractive to investors. Options for investors include the following: 

• Fix-and-flippers: They use a hard money loan to buy preforeclosures that need extensive repairs, then flip the property for a profit to pay off the loan.
• Long-term investors: They purchase homes about to go into foreclosure, make the necessary repairs, stabilize the property, and then finish the renovations to make the property eligible for a long-term loan.

Pros & Cons of Buying a Preforeclosure Property

The traditional home purchase process is different from buying a preforeclosure. One major perk of going for a preforeclosure is that there’s usually less competition since it might not even be listed yet. However, there are also some downsides, like dealing with homeowners who aren’t very cooperative and having a longer closing process. Here are the main pros and cons:

Pros	Cons
There’s less buyer competition since some preforeclosure homes are often not on the market yet	Preforeclosure homes sometimes require deferred maintenance or significant repairs
You can buy preforeclosure houses below market value	Preforeclosure properties are difficult to find or search
It has lower settlement costs, and you can often finance the property	Homeowners are sometimes emotional, which makes the negotiating process challenging
You can secure properties in higher-cost locations	Process is slow, and it has a lot of paperwork for the buyers

As you learn how to buy preforeclosure properties, ensure it’s the best route to reaching your real estate goals. Since it takes more time and can require more strategy to lock down this type of property, start by asking yourself why you want to zone in on a preforeclosure purchase rather than a traditional sale. 

Step 3: Conduct Market Research

When learning how to buy a home in preforeclosure, make sure to do your research on the neighborhoods you’re considering. Investing in the right community will help you take advantage of appreciation and maximize your investment profits. It makes all the difference between achieving expected and exceptional returns. Renters and buyers usually prefer locations with certain appealing features:

• Accessibility to supermarkets, parks, shopping, restaurants, and businesses
• Accessibility of public transportation and major routes 
• Walkability
• Highly rated schools
• Sidewalks, street lamps, and roads in good condition 
• Buildings and homes in good condition
• Market time

An easy way to find the right neighborhood to buy a preforeclosure house is to use real estate websites like Zillow. Use its “preforeclosure” listing type filter and choose the location you want to search for, price range, lot size, home type, and current status. When you view listings, you’ll see the number of days on the market, purchase history, taxes, and property type.

Step 4: Find Preforeclosure Listing Leads 

Looking for preforeclosure homes can be a bit tricky. Unlike regular property listings, you won’t always find preforeclosure listings on the MLS or popular real estate websites. But don’t worry; there are plenty of ways to hunt down these homes, whether you decide to work with a real estate agent or not.

Real Estate Agents

Investors can work with real estate agents with access to the MLS. Your agent will dig through the MLS for preforeclosure listings and help you with everything from negotiating with homeowners to tackling all the paperwork. They’ll also share valuable market insights and gather all the necessary info, like property photos, annual taxes, square footage, and what the home last sold for.

Real Estate Attorneys 

Real estate attorneys represent clients during their real estate transactions, including when their properties are in preforeclosure. Build relationships with these attorneys since they often have leads on preforeclosure situations. Connecting with them at local events or through colleagues is a great way to start. 

Real Estate Wholesalers

Real estate wholesalers are entrepreneurs who acquire properties from homeowners and connect them with buyers or investors. The wholesaler does not purchase the property. Instead, the owner’s temporary contract with the wholesaler gives the wholesaler the authority to sell the contract on their behalf, and the wholesaler keeps the difference.

Public Records

Access preforeclosure listings for free by visiting your county recorder’s office. Look for Notice of Default, Notice of Trustee Sale, and Lis Pendens in the public records section. These are public notices sent to homeowners during the foreclosure process. This approach works well for investors or real estate agents who have the time and know-how to contact property owners for more details.

Online Directories

Online directories offer tons of information about local properties and have filters to help you narrow down your options to get the details you need easily. They’re convenient for anyone investing in real estate since you can access them from any device. However, you should always verify the information you find because some directories occasionally have inaccurate or outdated information. Here are a few online directories to help you find preforeclosure listings:

• Foreclosure.com: Investors seeking a nationwide database by state to see the properties that are available in their area 
• REDX: Investors looking to prospect for nonagent represented listings like preforeclosure leads. 
• RealtyTrac: Investors who want unlimited access to preforeclosure and foreclosure listings

Step 5: Conduct a Market Analysis 

When you’re thinking about buying a property, it’s important to look at the numbers and research the area really well. Start by narrowing your search down to a few preforeclosure homes, and then do a comparative market analysis (CMA) and a rental market analysis (RMA). These reports will help give you a clear idea of the property data. With this info in hand, you’ll be able to choose which property is the right fit for you.

Step 6: Obtain Financing 

To make an offer on the property of your choice, you’ll need to obtain financing and a preapproval letter. This letter shows you your maximum borrowing amount and reassures the seller that you are serious about buying the property and are approved to secure financing. Some financing options include the following: 

• Conventional loans 
• Government-backed loans
• Home equity loans (HELOCs) or lines of credit
• Hard money loans
• Cash 

Reaching out to a lender is the best way to get more detailed information on these different loan options and determine which one fits your investment needs. Ask them about their experience with the specific loans you’re considering when choosing a lender specializing in the particular loan type you need. If you’re working with a real estate agent, they can hook you up with some good recommendations. However, if you’re going solo on the purchase, chat with some investor friends for suggestions or look online and read reviews.

Step 7: Make an Offer & Negotiate

Make an offer on a preforeclosure property once you’re preapproved for a loan, which gets the negotiation ball rolling. It’s important to know how much the house is worth, how much is still owed on it, and if there are any repairs you might need to tackle. Having a real estate agent by your side while making an offer can be really helpful since they’re familiar with contingency deadlines and purchase contracts.

Step 8: Close on the Property

Once you’ve locked in the perfect preforeclosure property for your portfolio, it’s time to wrap up the deal. This part is similar to a traditional home purchase. You’ll get a commitment letter and the closing date, and your lender will share the final details about your closing costs. These costs usually include transfer taxes, title insurance, lender fees, and property taxes. After you sign all the required papers and the money is transferred between you, your lender, and the seller, you’ll receive the keys, and the preforeclosure property will officially belong to you.

Step 9: Complete Post-closing Action Steps 

As soon as you close on your property, there are a few necessary action steps to complete to keep the property secure. Some of these tasks might seem like they can wait, but it’s best to start them immediately.

• Since you don’t know who has the keys, change the locks.
• Transfer or have the utilities turned back on in your name.
• If the property requires repairs, begin as soon as possible. 
• Advertise the property for sale or rent, depending on your investment plan.

Frequently Asked Questions (FAQs)

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Bringing It All Together 

Now that you know how to buy a preforeclosure home, you can dive right in to find your next investment.  While locating preforeclosure properties can be tedious, you can significantly benefit from the lower cost of these investment properties. Have you purchased a preforeclosure property yet?