How to Invest in Pre Foreclosures: The Basics

Pre foreclosure home investing is one of the most profitable ways to invest in real estate. Here’s a quick primer on the basics for successful pre foreclosure investing.

What is a pre foreclosure?
When a homeowner gets behind on his mortgage payments, the bank starts the foreclosure process in order to recoup as much of its money as possible. The time from the notice of default up to the time of the foreclosure auction is known as pre foreclosure. The pre foreclosure period offers the best investment window of opportunity for you as an investor because you can work with the homeowner directly, and usually buy the property at well below market value.

Why buy pre foreclosures? Why not just wait until the auction?
Buying during the pre foreclosure stage has a number of advantages, including the opportunity to inspect the property, as well as check out the area. Buying during pre foreclosure also allows various ways to creatively finance your purchase.

At a foreclosure home auction, you’re likely to be competing with a number of other motivated buyers, and often, you won’t have been given the chance to properly inspect the property.

With a pre foreclosure home, as mentioned, you’ll be working directly with the homeowner who is likely to be very motivated to unload his property.

Where do I find pre foreclosure homes?
Start looking for pre foreclosures by searching the Public Notice section of the local newspaper for Notices of Sale. You can also find the public records of pre foreclosure homes at your County Recorder’s office, filed with the Clerk of Courts; look for a Notice of Default (NOD), Lis Pendens, or a Notice of Sale. Subscribing to an online listing service is another great way to find pre foreclosures; many of these services also provide additional information about pre foreclosure homes, including loan amount and seller contact information.

What should I think about before I buy a preforeclosure home?
Before you invest in any pre foreclosure home, be sure your investment will actually yield a profit when you re-sell. Inspect the property and make note of needed repairs. Be sure that repairs to the pre foreclosure home won’t cost you too much in time or dollars. Take a look at the area surrounding the pre foreclosure home; is it an area that future buyers will find attractive? Will you be able to re-sell the pre foreclosure home at an attractive price and still make a profit? Remember, a pre foreclosure is not a deal if it’s a money pit.

Isn’t buying a pre foreclosure home taking advantage of someone when he’s down?
First, understand that you are not causing anyone to lose his or her home. By the time you find a homeowner whose home is in pre foreclosure, he has already gotten behind on his payments, and is slated to lose his home through foreclosure. Your purchase of his property while it is in pre foreclosure prevents the bank from foreclosing on the property, and causing greater damage to his credit. Taking the foreclosure home off of the owner’s hands before this happens is a win-win situation: you get a deal, but the homeowner gets rid of a burden that has probably been the source of a great deal of stress.

What are some key points to keep in mind?
Here are some other things to remember when investing in pre foreclosure home.

Perform a title search on the pre foreclosure home. Usually, all liens and unpaid property taxes will become your responsibility.

Pay attention to location. Though you can buy cheap pre foreclosure homes in “risky” neighborhoods, the best deals are in safe, pleasant neighborhoods that will appeal to potential buyers when you sell.

Stick to your budget. Don’t overpay. It can be easy to get caught up in the spirit of a pre foreclosure deal. The owner of the pre foreclosure may try to get the most out of the sale, or another potential buyer may try to initiate a bidding war, even before the foreclosure auction.

Focus on pre foreclosures in just a few zip codes. Taking a blanket approach to pre foreclosure investing can work against you. Be “the expert” on a specific area. You’ll learn what to offer when buying pre foreclosure homes in your target area, how much you can expect to get from resale, and how much the pre foreclosure homes are likely to be worth in the near future.

What are the basic steps for success?

Here’s the basic process to pre foreclosure investment success:

Locate loans in pre foreclosure
Evaluate and narrow down the pre foreclosure homes you want to pursue
Inspect the property
Evaluate the property owner’s needs
Determine the market value of the pre foreclosure home, as well as repair costs, potential sales price, and, of course, your profit
Close on the property, do the necessary repairs, and resell it quickly

Today’s real estate market is full of pre foreclosure investment opportunities. To succeed, you don’t have to have real estate or investing experience, and you don’t even need a pile of money. But to ensure that you get the best pre foreclosure deals, you do need to do your homework.

About Lance

Lance Young's expertise in real estate investing is grounded in more than 19 years of independent real estate deals and mentoring of novice investors. His first success came with buying and selling preforeclosure houses. Later, he made tremendous profits in the probate house market. In 1996, Lance wrote down what he had learned in a one-of-a-kind, step-by-step program for beginners and seasoned investors that shows how to make money buying preforeclosure and probate houses. The programs are updated frequently to fit the changing real estate market. His investing techniques require just a $10 contract deposit and 10 hours a week finding the most profitable opportunities. Testimonials from his students show that with no experience, people have made first-time profits of $11,000, $31,000 and even $80,000 just by following his simple guidelines. Through his web site, PropertyForeclosure.com, Lance Young has shared his simple, yet powerful investing methods with thousands of students while continuing as an active investor himself. His motto is: To teach others to become successful, you must keep your hand in and practice what you preach.
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