Pre-foreclosure simply refers to a property that is in default for any loan attached to it (mortgage, second mortgage, tax lien, etc) and is in risk of having the home foreclosed upon. This status is applied until the defaulted amount plus any associated penalties and fees are paid or it is officially relinquished.
There are a few strategies when buying pre-foreclosures that an investor can profit from:
- Gaining Control – When approaching the property owner in default, use empathy as this person may be in a distressed situation (job loss, divorce or illness among others) or perhaps has tried to make a property improvement, which resulted in the value being less than the mortgage, so the owner is in default. Make a reasonable offer to take control of, purchase, or sub-lease the said property from the owner to help alleviate the pending foreclosure. Attempting to take advantage of the person will often terminate a business proposition, so consider negotiating terms to make you stand out from others trying to win the property. Acting quickly is often the key.
- Short Sale – This is when a lender sells the property for less than the balance due to recoup past payments and have a reliable owner taking over payments. The first step is to contact the agency foreclosing the property. It may be tough to convince a lender to take this option due to a robust real estate market that nearly guarantees a profit.
All examples are for educational purposes only, and should not be construed as investment advice. Always contact a qualified tax attorney or advisor prior to making any financial decision.
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