Primer: Pre-Foreclosures and Short Sales

We’ve all heard about foreclosures for some time now. But what about pre-foreclosures? That’s different. What does it mean? Probably, just what you think it means. We’re talking about a property that’s not yet into foreclosure officially. The owner of the home is simply late on their payments. A type of pre-foreclosure where the owner owes more money than the home is worth is called a short sale.

Photo of a pre-foreclosure home

In this article, we’re going to cover four important aspects of purchasing a pre-foreclosure or short sale property.

Things You Need to Know About Pre-Foreclosures and Short Sales

1. Price

The reason you can potentially get a great deal on a pre-foreclosure is better the seller is highly motivated to sell. They are late on their payments. In fact, they couldn’t be any more motivated given that the lender is about to take back the property.

Because of this, they will consider a price far below market value to get out from under the long-term damage to their credit. But the homeowner isn’t the only stakeholder in this process. The lender has a say in how low the price can be depending on how much is still owed.

An experienced local Realtor will understand this entire process and can help walk the seller through their tasks. On the buyer’s side, the agent will certainly need to fully disclose all the negative aspects of buying a pre-foreclosure that go along with the amazing positive of paying such a low price.

We’ll talk about that more in the next sections.

2. Condition of the Property

Because the owner of the pre-foreclosure is having financial difficulties, otherwise they wouldn’t be in this position, they aren’t likely going to have the home in move-in ready condition. Often the home is in great need up updating or even major repairs.

And don’t look to the lender to pay for any repairs. They just want this property off their books. So be informed, the condition of a pre-foreclosure will likely be far worse than average.

3. Time

A big factor in purchasing a pre-foreclosure is time. Pre-foreclosures generally take far longer to purchase than standard homes.

Standard real estate transactions take anywhere from 40-50 days on average. This is measured from the time of an accepted contract to the actual closing. Pre-foreclosures take between 3 and 6 months, and sometimes longer!

The reason for this is due to the fact that companies that lend money aren’t in the business of selling real estate. They don’t have an in-house process setup for doing this. Delays are the norm. This is often the greatest price you’ll pay for getting such a sweet deal on the price.

4. Risk

Last, but certainly not least, is the risk. Trying to purchase a pre-foreclosure means uncertainty because there could come a point when the lender changes their mind about something and throws a wrench into the transaction. The “wrench” could simply be a delay. Or, it could be much worse.

Buyers keen on grabbing up the amazing deal need to understand that the whole deal could fall apart months after the paperwork has been signed by the homeowner. Buyers also need to look and see if there are any liens or unpaid taxes on a pre-closure or short sale.

Conclusion

Homebuyers considering a pre-foreclosure or short sale need to be fully prepared for the wild and crazy ride that awaits them. If they can navigate the obstacle course successfully, they’ll have some instant equity in their home. Having a strong real estate expert on your side is crucial. The process of buying one of these homes can be very different.

A short sale in real estate comes with its pros and cons. Understanding this from the start is a huge step in the right direction!