When a person stops making payments on their mortgage, they enter “default” status. Missing just one mortgage payment puts a borrower into default, but lenders generally don’t start taking legal action to collect until the borrower has missed three or more payments. Upon the fourth missed payment, a notice of default (NOD) is issued to the borrower, and the foreclosure process begins.
The foreclosure process has six phases in all, beginning with default, then the notice of default (NOD), and carrying on with a Notice of Trustee’s Sale (i.e., preparing the home for auction) if the borrower does not catch up on their missed payments. Here’s what the process looks like, and how investors can buy a home before it gets auctioned by getting involved in the process.
How Long Will it Take Before a Foreclosure Auction Begins?
Laws vary from state to state, but most jurisdictions do not allow lenders to start the foreclosure process until a borrower is at least 180 days behind on their payments. Once they’ve reached that point, the bank will issue a Notice of Default followed by the Notice of Trustee’s Sale. From that notice, the home could go to auction in as little as 2-3 months.
How long it takes for a foreclosed home to go to auction depends on a number of factors, like whether the borrower is bargaining with the lender and attempting to catch up on their payments. State law also impacts the timeline, as some states require court approval for each phase of the process, like before the bank can issue the Notice of Trustee’s Sale.
Why is Buying a Foreclosure a Good Idea?
Investors are often on the lookout for homes in pre-foreclosure and foreclosure because, since the borrower is behind on payments and it’s not a traditional sale, they can typically buy the home for less than market value.
With that said, these homes often need repairs. After all, if a buyer is missing their mortgage payments, they’re likely in a very bad financial situation and cannot afford to maintain the home—potentially for some time before foreclosure begins. In any case, a foreclosure can still be a good deal for an investor.
For most investors, the key to investing in foreclosures is to buy a home before it goes to auction. That means figuring out which properties are in foreclosure and soon to go to auction, and then stepping in so you can negotiate directly with the borrower. In doing so, you avoid the competition the auction presents and can often get a better deal.
How to Buy a Home Before It Goes to Auction
It’s true that you can get a better deal if you buy a home before it goes to auction, but it’s going to involve some legwork. These are the steps you need to follow.
You can find commercial property and homes that are likely going to auction in the next few months by scouring local papers and records. The Notice of Default that the lender issues to the borrower must be made public, and this is your first chance to find a property that’s in pre-foreclosure status. You can also contact your county recorder or local lenders and ask.
Of course, these traditional methods of finding opportunities take a lot of time, and it doesn’t always end fruitfully. If you want to buy a home before it goes to auction, it’s helpful to have a tool like ProspectNow that will discover opportunities for you. By having an up-to-date list of potential properties at any given time, you’ll be able to make smarter investment decisions without the hassle of checking papers and records.
Contact The Borrower
Once you have a list of properties that are in default, the next step is to contact the borrower. This requires a deal of patience and delicacy. After all, most people in this situation are frustrated, exhausted, and even desperate. Be prepared for some not-so-nice responses and be sure to let them know that you’re not a collector. If you do your job right, you can actually help them in this hard situation.
In many cases, borrowers are not able to cure the default on their own, which is why they’re on the path to foreclosure. Once you get ahold of the borrower, let them know who you are and why you are calling. The goal is to see if they’re interested in selling the property to you, allowing them to avoid foreclosure and keep it off their credit report.
In general, foreclosure investing allows you to buy a home before it goes to auction for less than market value, but you have to think beyond what neighboring homes are selling for. Given the buyer’s situation, it’s important that you do some extra research before making an offer.
Check for Damages and Liens
If you talk to a borrower and they’re interested in selling directly to you, the next step is all about due diligence. First, check to make sure that there are no other liens against the property. For instance, if a buyer is behind on their mortgage, they may be behind on property taxes, too. If you purchase the property, these liens will become your responsibility, so it’s important to know the amounts and terms.
Additionally, you should bring in an appraiser and home inspector to look at the home, just like in any other real estate transaction. The appraiser will give you an idea of how much the home is worth, while the inspector can make you aware of potential problems that could take away from the home’s value (or your profit if you plan to sell it).
Negotiate With the Borrower
If you do your due diligence and decide that you still want to move forward and make an offer on the property, you’ll need to sit down and run the numbers. You don’t necessarily have to purchase the home for the amount the borrower owes, but if you are trying to, you will almost certainly need the lender’s approval.
Depending on state laws and other factors, you may need the lender’s approval anyway when you submit your offer. If your offer is accepted, you’ll need to contact the foreclosure attorney and let them know of the pending sale, which will halt the foreclosure process. From there, you’ll go through the standard closing process to transfer ownership into your name.
Find The Best Investment Opportunities
ProspectNow has been around for over a decade offering data that helps users close more deals. If you’re looking for foreclosure investment opportunities, ProspectNow is the tool you need to save time, find more opportunities, and ultimately make more money. Get started today!