Pre-Foreclosure Phase: Time to Buy?
First Stage of Foreclosure Offers Opportunities for Investors
As reported on RealtyTrac.com on May 13, 2009, the 342,048 foreclosure filings in the United States for April 2009 represented an increase of 32 percent from one year ago and a record. The foreclosure filings reported by RealtyTrac refer to bank repossessions, default notices, and auction sale notices.
For real estate investors, properties facing or in foreclosure may offer opportunities to enhance existing real estate investment portfolios. Contrary to the impression given by infomercials and other high-pressure advertising, investing in foreclosure properties is a high-risk venture for the novice, uninformed real estate purchaser.
One key way to be informed is to know the stages of foreclosure. By understanding how foreclosures progress, investors can assess which stage is the best for them to locate and buy properties. Investors who want to succeed must always remember that they can control how much risk to take on so that they do not become overwhelmed. All of this is done while following the dictates of a real estate investment plan, which sets out the investor's financial goals and timetable.
Although some sources say there are three phases foreclosure, and Steve Berges identified four phases in his book The Complete Guide to Investing in Undervalued Properties (New York: McGraw Hill, 2005), there are arguably five phases:
- pre-foreclosure
- foreclosure
- sheriff's sale
- redemption
- post-foreclosure
This article focuses on the first phase of the foreclosure process.
Phase One: Pre-Foreclosure
The pre-foreclosure phase is when a homeowner’s financial distress becomes evident. The homeowner does not make the monthly mortgage payments. The mortgage lender may send a delinquency notice before declaring the mortgage loan in default and informing the homeowner that he or she has a limited time to bring the mortgage payments up to date. This grace period can be several several weeks or several months, depending on state law. If the homeowner fails to pay the delinquent amount of the mortgage loan by the end of the grace period, the lender can initiate a formal foreclosure procedure.
There are several ways in which the homeowner can avoid the foreclosure phase:
- The homeowner pays all of the arrears and late fees and brings the payments up to date, thereby reinstating the mortgage loan.
- The homeowner sells the property to a third party, often at a deep discount (20 percent to 60 percent). If the sale price is less than the loan amount, a short sale occurs; the homeowner may be able to work out an agreement under which the lender agrees to accept the proceeds of the sale and forgive the rest of the mortgage debt. However, a sale without the prior approval of the lender may violate provisions of the mortgage.
- The homeowner transfers title to the property to the lender by means of a deed in lieu of foreclosure.
Investor Due Diligence
Investors must consider that homeowners who are falling behind in their mortgage payments may also be falling behind in property taxes and the maintenance of the property. There may also be delinquent second and third mortgages on the property.
This is why investors must be diligent in doing their background work before offering to buy a property in the pre-foreclosure phase. Investors should have the title examined – which will disclose the potential of tax foreclosures and other outstanding claims against the property – and the property inspected.
Falling Down
|
What do you think about this article?
More in Business & Finance
Latest Articles