Real estate investors are constantly looking for an edge, whether it is a hot property, better terms, or getting the jump on the news of available properties.

One edge is understanding the timing and nuances of the pre-foreclosure position.

Pre-foreclosure occurs when a property is in the initial stages of being taken over by the lender due to a mortgage default, usually three months in arrears. In pre-foreclosure, the lender has filed a default notice on the property, but the resident or owner can still keep the property if they bring the mortgage payments up to date. Call it the real estate version of being in limbo.

Investing in a pre-foreclosure
In pre-foreclosure, the owner has options, which include selling the property in a short sale (less than the loan balance). This is the option that interests some investors, and though the upside profit potential can be great, it is not without risks.

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“There is no reward without risk”
Many real estate investment professionals consider the pre-foreclosure market to be a difficult time to purchase property. That’s because the property may contain liens or unpaid taxes which may become the responsibility of the investor.

Another common risk is the number of repairs required on the property. It stands to reason that if the owner can’t make the payments as agreed, there is an increased likelihood that the cost of property upkeep was too high as well.

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Locating pre-foreclosures
Despite the risks, a pre-foreclosure auction remains a popular investment option. Typically, pre-foreclosure listings of properties (aka Notice of Default or NOD) are found through:

  • Online listings — More and more lenders and government agencies are posting pre-foreclosures online
  • Real estate agents — Agents have their ears to the ground and can be a reliable and valuable source of pre-foreclosure information
  • County Recorder’s office — This may require an in-person visit, as many county recording offices do not post NODs online
  • Local newspapers — Though many newspapers are no longer widely read, some legal requirements state that NODs must be published in the “Legal Notices” section

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Getting the edge on pre-foreclosures and successfully navigating the landscape requires an investment in time and strategizing. When considering a pre-foreclosure investment, you should consider:

  • Searching for properties in a particular area instead of a particular price range. Though you may get a good price in one area, look first for areas with upside investment potential
  • Reaching out to agents and lenders and ask to be included on updates to the property in which you are interested
  • Establishing the price you’re willing to pay and remember that nothing is set in stone - prices are negotiable
  • Including a walk-through as part of your due diligence so that you can see what repairs, if any, may be necessary
  • Getting every detail of the entire transaction in writing and finalizing the proper recording of the deed once the deal is done
With the right knowledge of the property and the process, pre-foreclosures can be an exciting and profitable endeavor.