The Pros and Cons of Buying Properties in Pre-Foreclosure

Buying houses in pre-foreclosure might seem like a no-brainer for a real estate investor. Foreclosure is imminent and the homeowner is desperate to sell before they lose their home. It’s true there are definitely some advantages to buying pre-foreclosed properties and a savvy investor knows how to take advantage of the situation. However, you should understand all the pros and cons before jumping into such an investment of your time and money.

So, what are the pros and cons of buying properties in pre-foreclosure?

Pros of Pre-Foreclosure Houses

Bargaining Power

If the seller isn’t underwater on their mortgage loan, they may be more motivated to conduct a fast home sale and/or make some concessions so they can get out before foreclosure and walk away with some cash. Likewise, a short sale property (when the homeowner still owes more than the house is worth) can net you a low sales price. Both the seller and lender might be willing to accept a lower price to avoid foreclosure.

Condition and Title History

The seller must be able to provide a complete history of the property’s condition. You can also research the title records yourself. This information helps you know what the house has been through and if the purchase price is acceptable.

Financing Options

A house in pre-foreclosure can be purchased by any type of financing. Whether you are buying with cash, a mortgage loan or working out some other creative financing arrangement with the seller, you have more options. Once it goes into foreclosure, your options may be limited.

Avoiding the Red Tape of Foreclosure

You may be able to get an even better price once the house has gone through foreclosure and the bank is eager to sell as quickly as possible. However, the process of buying a foreclosed home can be slow and more complex. Buying it directly from the seller before foreclosure happens (in other words, in pre-foreclosure) should allow you to get the deal done much easier.

Cons of Pre-Foreclosure Houses

Higher Price

You will likely be paying more for a house in pre-foreclosure compared to one that has gone through the foreclosure process. You should be able to use your bargaining power to get a good deal (perhaps below market value), but it still probably won’t be quite as cheap as buying a fully foreclosed property directly from the bank or at auction.

Condition

The risk with any distressed property (especially one in pre-foreclosure where the homeowner may have “given up”) is that the condition of the house won’t be great. You may be planning renovations anyway, but it may be more work than you want to handle. Buying in pre-foreclosure should allow you to perform your own inspections, though, so you should make an effort to see what you are getting into.

Lack of Certainty

Buying a pre-foreclosed home can still have some complexities and uncertainties. The seller may change their mind if their financial situation improves, or they may want to drag out the process to move out later. The bank may still be involved in the negotiations on some level (short sales).

Ultimately, you have to decide for yourself if the pros outweigh the cons when buying properties in the pre-foreclosure or short sale process. You should be able to get a decent deal and close quickly, but there may be some extra hurdles. It’s important to have a strong investment plan, so you can do your research on any property you are thinking about buying. Run the analytics, understand the exact situation of the home seller and/or bank and make smart real estate investment decisions.

For help with all your real estate investment needs, consider joining the PropertyLark home buying network. Learn more about us and apply to see if you qualify by visiting our buyers’ pages.