Pre-Foreclosures
What investors need to know about homes in pre-foreclosure

Pre-foreclosure occurs when homeowners fall behind on their mortgage payments. Their options are to pay the outstanding balance on the home or allow the bank to repossess the property. In this stage, real estate investors have the unique opportunity to purchase the pre-foreclosed property at below-market value.

We want you, as the investor, to have all of the information you need if you’re considering going into this process. Here’s what you’ll need to know about buying pre-foreclosed properties.

What is pre-foreclosure?

Pre-foreclosure is the first step to an official foreclosure. It is the period after a homeowner falls behind in mortgage payments and before the official foreclosure sale.

After three months of missed mortgage payments, the lender issues a legal notice, known as a Notice of Default, alerting the homeowner to potential legal action. During the pre-foreclosure phase, the homeowner has the opportunity to recover the missed payments and keep their home.

Why buy a pre-foreclosed home?

Unfortunately, many homeowners who have entered into pre-foreclosure cannot make the payments required to keep their homes and are, therefore, often willing to sell the property to avoid foreclosure and the devastating effects on their credit.

Pre-foreclosed homes are an advantageous investment for two main reasons.

  • Pre-foreclosed properties are not listed on the MLS and will have fewer buyers and less competition.
  • Pre-foreclosed properties are typically sold for lower than market value.
What investors need to know

Investors tend to be the primary buyers for homes in the pre-foreclosure process, but the opportunity is open to anyone with the funds to close the deal. The key is to catch them before the foreclosure sale.

Before the property goes to auction, an interested investor can pay off the outstanding loan amount, “redeeming” the home and saving it from foreclosure. The investor needs to be aware of the timelines regarding the foreclosure, as once the sale date comes, it cannot be redeemed.

Read on for details about the foreclosure process.

Foreclosures in Texas

Before we jump into the legal process, let’s look at the different foreclosure routes. In Texas, there are two primary ways lenders can repossess a property: judicial or nonjudicial foreclosures.

How do Judicial foreclosures work?

A lender can file a lawsuit and ask the court to permit a foreclosure sale. If the homeowner fails to respond to the suit with a written response, the lender will automatically win the case. The homeowner can also choose to defend their case, in which case the court will determine the winner.

Should the court award the lender, they will issue a judgment, and the home will be sold at auction.

How do nonjudicial foreclosures work?

The cheaper and faster alternative to courtroom litigation is nonjudicial foreclosure. This is the more common method in Texas.

To qualify for nonjudicial foreclosure, the borrower must have agreed to the process when they took out a loan — the mortgage or deed of trust will contain a “power of sale" clause. With this clause, the lender has the authority to sell the property.

The foreclosure process

Most foreclosures in Texas are nonjudicial, meaning the lender aims to sell the property without bringing a lawsuit against the homeowner.

Here’s an overview of that process and what you need to know as an investor:

  • Missed mortgage payments

The initial trigger for pre-foreclosure is three consecutive months of missed mortgage payments. During this time, homeowners may approach their lender regarding their financial situation and attempt to work out an agreement.

  • Notice of Default

After three months of missed payments, the lender will issue a Notice of Default. This written letter notifies the borrower of the lender’s intent to pursue possession of the property should the debts not be paid.

Texas law requires the Notice of Default to be sent at least 20 days before the next step — issuance of the Notice of Sale.

  • Notice of Sale

Following the Notice of Default, the lender will send the borrower a Notice of Sale. This letter lays out the logistics regarding the sale of the property, including the date, time, and location. The official foreclosure sale date must be at least 21 days after the Notice of Sale is issued.

Investors looking to close on the property before it reaches foreclosure must act swiftly during this period. According to Texas proceedings, you may have less than six weeks from when the Notice of Default is filed to take the home out of the pre-foreclosure process.

How to make an offer on a property in pre-foreclosure

The first step to closing on a property in pre-foreclosure is making an offer. To begin, you will approach the homeowner through a letter, postcard, or even by knocking on their front door.

Understandably, homeowners may be wary of strangers offering the buy their soon-to-be foreclosed home, but the bottom line is that you each have something to offer the other. For time's sake, it is in your best interest to be ready to pay in cash or with hard money.

Costs of buying a home in pre-foreclosure

In addition to paying off the entire loan and the negotiated purchase price, there are several costs associated with buying a pre-foreclosed home.

You will be responsible for any late or miscellaneous fees accrued during the pre-foreclosure process. Additionally, closing costs will typically be around 1-5% of the purchase price. This amount covers various closing-related expenses, such as the title settlement fee and government recording costs.

You’ll also need to consider homeowner association fees and repairs you want to make down the road.

Where to find pre-foreclosure leads

The hardest part of buying pre-foreclosed properties can sometimes be knowing where to find them.

At pointer data, we’ve built a platform that brings property leads directly to investors. BIRDDOG SOLUTIONS provides first-hand information on willing sellers, skip tracing with sellers' contact information, and helps you manage and organize your leads. The most significant advantage for investors is that they get advance notice of opportunities from homes in pre-foreclosure, probate, and other non-traditional circumstances.

Still have questions about buying a property in pre-foreclosure? Our team is here to help. Contact us today.

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