Can someone explain pre-foreclosure to me?

[Avalon]

Forgive me for this question, but I'm young and this is new to me. I've done a bit of research, but I don't understand the exact process.

Reason I'm asking is because my friend's father is in the real estate business, and he was telling me lately how he's been buying foreclosed and pre-foreclosed houses for unbelievably cheap prices and then selling them later.

I was curious so I looked up pre-foreclosed places for sale and was finding places down the street from me posted, decent places too. I was using a mortage calculator and after property taxes, HOA fees, insurance, mortgage, and other miscellaneous stuff I could think of, the average place I was looking at would only cost me roughly $650/mo on a 30 yr mortgage...I'm paying almost $1300 in rent right now...

It almost seems like there's something I'm not getting.

 

[Crusty]

Originally posted by: Avalon
Forgive me for this question, but I'm young and this is new to me. I've done a bit of research, but I don't understand the exact process.

Reason I'm asking is because my friend's father is in the real estate business, and he was telling me lately how he's been buying foreclosed and pre-foreclosed houses for unbelievably cheap prices and then selling them later.

I was curious so I looked up pre-foreclosed places for sale and was finding places down the street from me posted, decent places too. I was using a mortage calculator and after property taxes, HOA fees, insurance, mortgage, and other miscellaneous stuff I could think of, the average place I was looking at would only cost me roughly $650/mo on a 30 yr mortgage...I'm paying almost $1300 in rent right now...

It almost seems like there's something I'm not getting.

You'll know why it's so cheap once you look at the inside of the place. Most likely anything that's worth recycling for money or reselling is GONE. Wires, plumbing and various door/window/cabinet hardware.

 

[Avalon]

I do remember my friend's father mentioning doing repairs on some of the places. Thanks for bringing that up, I did not know, which is why I've asked you guys.

I'd be looking for a place to keep.

 

[Crusty]

Originally posted by: Avalon
I do remember my friend's father mentioning doing repairs on some of the places. Thanks for bringing that up, I did not know, which is why I've asked you guys.

I'd be looking for a place to keep.

Obviously not every house is going to be like that.. but if you're going for a great 'deal'... it's not really a deal

 

[an51r]

If you can buy a house cheap now and it needs moderate work, I would say go for it, property is a great investment 70-80% of the time. Pre-foreclosure is exactly what it sounds like, with any financial transaction there are stages and before your house or property is foreclosed the bank/lender knows its going to foreclose at some point and while it is in motion til it is official your house will be in pre-foreclosure.

 

[Avalon]

True

Well, here's an example. One place I was looking at was quoted at $80,000, and was actually 5 houses down from me. I live in a sub community near UCF, and all the places in this sub community are exactly the same, all built 3 years ago. They're 3 bedroom, 4 bath, 1600sq ft houses. HOA fees are $30/mo. I can probably put down about $10,000. A mortgage calculator I did (with all those factors/fees I mentioned in my OP) said I'd be paying $650/mo on a 30 year. I'm currently renting an identical place for $1300/mo. If the place wasn't trashed (and my friends and I can do some pretty heavy duty home repair), I would think (could be wrong) it'd be a deal in so much that not only would I be saving money each month, but I'd be putting money down towards something I own rather than throwing it away to renting.

That's why I kind of got excited when I was talking to my friend's father, but then thought there had to be something I'm missing. Obviously I'd be doing some real hunting around, but this is what I've been using as a base line.

 

[Avalon]

Actually Crusty now that you mention it...another friend of mine got kicked out of the house he was renting because the owner went into foreclosure...they left the place unbelievably trashed, too. Said they still had a key and went back to see it months later...it looked even worse. They hadn't even done anything to it.

 

[sjwaste]

Originally posted by: Avalon
Forgive me for this question, but I'm young and this is new to me. I've done a bit of research, but I don't understand the exact process.

Reason I'm asking is because my friend's father is in the real estate business, and he was telling me lately how he's been buying foreclosed and pre-foreclosed houses for unbelievably cheap prices and then selling them later.

I was curious so I looked up pre-foreclosed places for sale and was finding places down the street from me posted, decent places too. I was using a mortage calculator and after property taxes, HOA fees, insurance, mortgage, and other miscellaneous stuff I could think of, the average place I was looking at would only cost me roughly $650/mo on a 30 yr mortgage...I'm paying almost $1300 in rent right now...

It almost seems like there's something I'm not getting.

Pre-foreclosed means the bank has not started formal foreclosure proceedings yet.

It's usually synonymous with the owner knowing they're fucked. They will try to do a short sale, meaning to sell quickly at less than the balance of the mortgage principal. Sometimes the bank agrees to this, but 99% of the listings you see in this stage, the bank has not. Therefore, you see a great deal and think WOW this is great. However, the bank isn't going to actually approve it. This is the #1 question to ask the agent listing a short sale, has the bank approved?

If yes, be prepared to wait. The bank sits on offers, waiting for more, usually because there's no incentive to approve, let alone close, a short sale because there is generally mortgage insurance on it -- after all, most subprimes didn't have 20% down.

Often, you'll see the same property some months later hit the market at like 25% higher in list price. It's usually noted as an REO (Real Estate Owned), meaning the bank has it. That is a foreclosed property. Feel free to make offers, but the bank will yet again sit and wait for a certain # of offers usually, just to see what they might get. If they do accept, they usually require their own contract addendum, taking away a lot of purchasers rights. Things like making it an "as is" sale, no warranties at all, and no disclosures required.

In other words, stay away unless you know someone that does this. Their personal relationships can help grease the process, otherwise its difficult. We looked into doing it, buying a short sale and then REO home in a decent part of town and rolling an extra $100k into the mortgage to basically gut and renovate. No dice.

We ended up spending the $100k in a great part of town for a smaller house. No distress sales in the zip code at all, walking distance to the Metro. Saved us some hassle.

 

[an51r]

The property market is like every other market right now, saturated, with no one to buy these properties the prices will just keep dropping. Take a walk through your local mall every store is filled with 50-75% off signs, I doubt the property sales people would be as successful using the brightly colored sign tact though. I am looking into buying soon I think the market where I live is going to bottom out soon and I will scoop up something relatively cheap. I def do not mind more than a little elbow grease at that point cause from there on out it is all "investing" .

 

[sjwaste]

Originally posted by: Crusty
You'll know why it's so cheap once you look at the inside of the place. Most likely anything that's worth recycling for money or reselling is GONE. Wires, plumbing and various door/window/cabinet hardware.

Uhhhhhh.... QFT!

Most we looked at didn't have much copper left. No appliances. Flooded/moldy basements.

Generally the types of folks that can't afford to keep their house also can't afford to maintain it.

In some areas, we saw a lot of 3 level homes (basement plus 2 floors) basically turned into 3 separate living areas. None of them were in good shape.

Look hard enough, though, and you might find a real deal.