As a prospective homebuyer in the U.S. who is interested in affordability, you may have considered buying a home from someone who can no longer make the mortgage payments and is therefore being foreclosed upon.
It is important to understand, however, that the foreclosure process involves many phases, with differing implications as to who you would be dealing with and just how good a financial deal you might get.
The very first phase is known as “preforeclosure.” When a house is in preforeclosure, this means that the homeowner has fallen behind in payments and the house is in the early stages of foreclosure (the lender has filed a notice of default or started a lawsuit to officially begin the foreclosure process), but the foreclosure sale has not yet taken place.
During the preforeclosure period, the homeowner generally has a certain amount of time to catch up on past-due mortgage payments plus fees, sell the home to pay off the loan, or work out an alternative to foreclosure, like a mortgage modification, short sale, or deed in lieu of foreclosure.
From your perspective, preforeclosure means that the bank would not even be involved in the sale yet. But it’s entirely possible that the homeowner has not yet taken active steps to list the property for sale – or even definitively decided to sell it. An offer from an interested buyer such as yourself might, however, tip the scales.
So, how do you find out about a preforeclosure property? This information is, in fact, publicly available, even if the homeowner hasn’t listed the property for sale.
Online services like foreclosures.com or realtytrac.com compile information on homes headed toward foreclosure from public records. Their members pay a modest monthly fee (approximately $30–$50) to get the information.
That allows aggressive homebuyers or investors to locate approach the defaulting homeowners to make an offer.
Of course, a savvy buyer in such a situation will be primarily interested in properties that are worth more than their homeowners owe on the mortgage. That’s because the buyer will be able to offer less than market value and get a bargain while still helping the homeowners get out from under the mortgage. (If the seller owes more than the property is worth and can’t make up the difference or negotiate an agreement with the lender, the only alternative short of foreclosure is a short sale, in which the bank agrees to the sale of the home for less than what the owner owes on the loan.)
Another question in such a situation is whether you are willing to step into a delicate situation and make a proposal that might be entirely unwelcome. The homeowner may already feel like the vultures are circling around the property, and feel beset by bank notices and perhaps even offers from other would-be buyers or investors.
If you find a homeowner who is, in fact, ready to sell, you can negotiate just as you would any other home-sale transaction (although with a short sale you’ll also be negotiating with the bank).
However, you could be very pressed for time. Depending on the state you are buying in, the homeowner could have as little as a few weeks between the time the lender files what’s known as a “notice of default” (advising the owner that he or she had better catch up on the mortgage by a certain date) and the foreclosure sale date. That means you would have to close the deal by then, before the lender puts the house up for auction. An auction is the traditional form of selling a home that has gone through the “preforeclosure” phase. Once the auction takes place, the home is considered foreclosed.
See Nolo’s website for more information on buying foreclosed properties.