Introduction to Pre-Foreclosures

2009-05-19T08:46:00.000-07:00

In the real estate market, knowledge is definitely power—and the secret to profits! Because the subject of this web log is pre-foreclosures, it’s important for you to understand exactly what pre-foreclosures are & what opportunities are obtainable to you. This web log is committed in assisting you build and/or improve a career in real estate through my hard-earned experience & knowledge, so let’s get started!

What are Foreclosures & Pre-Foreclosures?

A foreclosure is a legitimate formula. It’s initiated by lenders as home owners (and others) fail to cope with their mortgage responsibilities. In other words, home owners fail to meet their payments &, as an answer, lenders require the property back. The foreclosure method begins once a lender files a law suit or a notice of default (more about this topic later) in the official public records. We’ll cover this method in more detail in the next chapter.

A pre-foreclosure sale takes place between the time when the lender charges lawsuit & as the property is scheduled to be sold at a public foreclosure action or a trustee’s sale. A pre-foreclosure is not a formal legal process; it’s an opportunity for you to assist stressed-out home owners & make a profit simultaneously.

Why Do Foreclosures happen?

Often, people tend to reckon that foreclosures occur because of poor financial management by home owners & others. Although this certainly can be true, there are lots of different causes why foreclosures happen. It’s important for you to understand these reasons so you can deal effectively with home owners facing foreclosure & help them to make the best of a bad situation.

ONE cause may be a poor on local or national economy. As jobs are lost due to cuts, outsourcing or other factors, homeowners lose their income & could no longer afford the mortgage payments.

A second cause could be personal troubles. Almost commonly, foreclosure is caused by divorce, death of the sole provider, or, increasingly, overwhelming medical bills due to the high cost of health care in the United States.

A Third cause is the tendency of some first-time home purchasers to over-extend them. They fall in love with the American dream of home possession, but fail to have funds reserves to handle unexpected costs & emergency repairs that come with owning property. This means they fall behind & end up in a continual & losing game of “catch up.” Finally, they can’t meet their payments, & foreclosure is the result.

A Fourth reason is the availability of loans with high loan-to-value ratios. These days, loans are offered at 90 to 100% of the value of the property securing the loan. This means buyers can purchase a home with little or no down payment. Since they have little invested in the home, they may walk away at the first sign of financial trouble.

A Fifth reason is the lenient terms offered by such governmental agencies as the Federal Housing Administration (FHA) or the Veteran’s Administration (VA). This means lenders can be tempted to offer loans to individuals with suspect credit & job histories. Unfortunately, the result can be foreclosure.

A Sixth reason is the existence of predatory lenders. These unscrupulous individuals & institutions target borrowers with low income, low credit scores, bankruptcies, & excessive debt. Since these borrowers can’t tap in to the conventional loan market, predator lenders offer them “subprime” loans with high interest rates & outrageously high late fees. Again, the result is often foreclosure.

A Seventh reason is, oddly, low interest rates. Low rates can tempt buyers in to purchasing more house than they can afford. Most families these days have one income earners; however when seven of the earners loses his or her job, the relatives can often no longer afford the payments on a high priced home. They fall behind in those payments, & the lender starts the legal method of getting the property back.

As said before, it’s important for you to understand all these reasons. It will assist you empathize with your customers—the home owners—and, simultaneously, avoid bad deals. Now, let’s look at the benefits of establishing a living in the pre-foreclosure market.

What are the Benefits of Working in the Pre-Foreclosure Market?

First of all, you can purchase properties at a deep discount. Discounts could range from 20% to over 40% of market price. This means you can buy a property, turn around & sell it at under-market value, & still make a great profit.

Second, you can structure deals that will cost you little funds or, in some cases, no funds at all. This doesn’t mean you’ll be able to operate in the market without funds reserves. That’s plain foolish. However, it does mean you can get creative & legally use other people’s funds to finance your deals.

Third, you can buy properties quickly without all the rigamarole that goes on with conventional transactions. This not only means that you don’t get buried in paperwork, but you’re also able to turn relatively fast profits while moving on to the next deal.

Fourth, a great advantage of operating in the pre-foreclosure market is that you’re able to research & inspect properties. This isn’t possible during the later auction phase of foreclosure which means you could end up with a “pig in a poke” if you’re not careful. Buying a pre-foreclosure avoids this potentially disastrous possibility.

Fifth, you’re able to structure sales agreements in a creative fashion. This means you can create the best terms possible for you while, simultaneously, helping a homeowner out.

Sixth, you have the opportunity for financial & personal freedom. In effect, you’re an entrepreneur, & you can set your own hours, rules, & profit goals. You’re no longer slave to a boss & a rigid office method. Best of all, one times you become proficient at buying & selling pre-foreclosure properties, you can ensure a secure future for you & your relatives since you’re not limited to the amount of funds you can make. Also, your knowledge of the pre-foreclosure market will transfer to other aspects of real estate, allowing you to expand your efforts in to different markets.

There’s no doubt about it-the pre-foreclosure market offers lots of advantages to the careful investor.

All fields has its disadvantages as well as advantages, & it pays to be well aware of them so you’re prepared to administer with & overcome them. Let’s look at the disadvantages next.