Why Pre-foreclosures Vs Foreclosed Homes
While this is definitely going to be the year of the foreclosed home market I stillbelieve you can make some pretty darn good money finding and buying homes in pre-foreclosure.
So what is the difference between a foreclosed home and a pre-foreclosure? Basically a foreclosed home has already gone through the legal process of foreclosure and the lending institution (bank) has taken legal ownership of the home from the borrower. A pre-foreclosure is a home where the bank is in the process of taking back the home but the home is still legally owned by the individual home owner.
There are some pretty profitable upsides to working the pre-foreclosure market. The first one, while you cant measure it with cash in your pocket, is you are helping an individual who is having some type of financial and emotional pain surrounding a home. You get to be the person that will help alleviate some of that pain and financial burden keeping their home from becoming a foreclosed home.
Secondly you have a chance to get the home at a greater discount than you would if the home has already gone through the foreclosure process. Banks care about money and saving it. The foreclosure process can be costly and time consuming for a bank and they dont want to shell out the $12,000 to $15,000 it costs them to take a home back. If you can save them this money you have added a sizable discount to your purchase price of the home.
Lastly, we all know from our economics classes that increased demand and constant supply equals higher prices. If you have one home and one buyer the price will be lower than if you have one home and ten ready buyers. When a home is in pre-foreclosure and you put an offer in on it there is only one person looking to buy that home, you. Once a home has been foreclosed on it will end up on the MLS (Multiple Listing Service) and everyone and their brother will have access to make an offer on that home. Which scenario do you think will yield you the best deal?
Of course no real estate investing strategy is without its detractors. Most of the situations you find in todays real estate market will be a home owner that owes nearly as much or more than what their home is worth. To purchase this home at a discount attractive to you, the real estate investor, you will need to buy it for much less than what is owed on the loan. To do this you will need to perform a short sale.
The ins and outs of short sales is a conversation for another article. The unfortunate fact is banks are overwhelmed by homes in pre-foreclosures and short sale offers. Because of this situation you and the home owner are going to need to be prepared for a long process and one where at times it seems the bank is completely unresponsive. Patience is a virtue everywhere in our lives and no more so when it comes to real estate investing and short sales. You will also have to be prepared, and the home owner too, for the fact that for whatever reason not every attempted short sale will be successful and some of your deals will go through the foreclosure process and be taken back by the bank.
Taking everything into account pre-foreclosures with their limited competition and potential financial upside will continue to be a profitable way to increase your real estate portfolio and continue to make you money for years to come. Plus they have the added upside of helping a distressed home owner move on and stay out of the ranks of foreclosed homes.
by: Allison McArthurAbout the Author: