One of the side effects of being a real estate investor for over 20 years is that most of my friends and acquaintances are also in the industry. That means the conversation at all my dinner parties and barbecues inevitably turns to shop talk: everyone wants to know who’s made a big deal recently, what vendors they used in the process, and how they generated the lead. In fact, lead generation is always a hot topic, because leads are the lifeblood of the real estate industry.

One of my colleagues recently closed an incredibly lucrative deal on a preforeclosure property, and it’s been the talk of my social circle for several weeks now. I’ve been surprised to learn that, even some of the veterans in my local industry, have confusion over what exactly a preforeclosure is or how to turn one into a profitable investment. That’s why I wanted to take this opportunity to explain preforeclosure from the perspective of a potential investor.

What Does Preforeclosure Mean?

First, it might be helpful to understand what preforeclosure means for a distressed homeowner. As the name implies, preforeclosure happens before the bank starts the foreclosure process. After several months of missed mortgage payments (usually, 90 days—though, there are exceptions), the bank will issue a notice of default, which tells the homeowner that legal action is being taken. The homeowner will have a short window of time to either make good on their missed payments (plus fees and interest) or sell the property to somebody else to pay off the loan. If the homeowner cannot do so, the bank will repossess the house and list it for sale at a foreclosure auction to recoup their losses.

HomeVestors Explains Preforeclosures for Investment Leads

As an investor, preforeclosure presents you with several potential opportunities depending on the homeowner’s financial situation and the lender’s willingness to avoid foreclosure proceedings.

One option is to work directly with the homeowner and negotiate a quick cash sale of their property. If the home is worth more than the balance they owe on the mortgage, this could potentially be a win-win situation. You can offer them less than market value for their home and sell it for profit, and they’ll still earn enough capital to pay off their loan and avoid foreclosure. However, it’s important to remember that many homeowners in preforeclosure are underwater on their mortgage, which means they owe more than the property is worth. In that situation, you can’t offer them enough money to pay off their loan without overpaying for the property and losing any potential profits. Even if they’re not underwater, they’re likely in a delicate financial situation and may not respond kindly to unsolicited offers to buy their family home.

Another option is to bypass the homeowner and try negotiating with the bank. Sometimes, the lender would rather short-sale the property than go through the hassle and expense of foreclosure proceedings and auctions. That means you may be able to convince the bank to sell you the property at a steeply discounted price if you’re willing to close the deal quickly. Or, the bank might be willing to transfer the defaulted mortgage note to you in exchange for clearing the outstanding fees and interest charges, which means you could get a property that’s already half paid off. Again, this will only work out to your benefit if the mortgage balance is less than the property’s resale value, so you’ll need to do your research before attempting such a deal.

Invest in Preforeclosures While Avoiding Pitfalls

Even if you find a preforeclosure that isn’t underwater and you’re able to negotiate a deal with the homeowner or bank, there are a couple more pitfalls to avoid on your way to earning a profit.

For one, preforeclosure properties are usually not in the best condition. However, since preforeclosure sales happen very quickly, it can be challenging to schedule inspections and walkthroughs before committing to a purchase. That means you could end up with a money pit that costs far more to repair than you estimated you could make in profit.

In addition, homeowner protection laws give preforeclosure sellers the right to rescind on a real estate deal at any time before the sale is complete. You could spend weeks developing a preforeclosure lead, not to mention hundreds of dollars on legal fees and other pre-purchase expenses, only to have the homeowner accept a last-minute loan modification or simply change their mind right before you sign the paperwork.

However, both of those scenarios can be avoided if you have the training, tools, and experience to tell a good preforeclosure investment deal from a bad one. Luckily, you can get all of that and more by becoming a HomeVestors® independently owned and operated real estate investment franchise. HomeVestors® provides comprehensive real estate investing training, a development agent’s one-on-one mentorship, a full suite of proprietary real estate investing tools and software, and more.

Would you benefit from a real estate investing development agent’s support and guidance to explain preforeclosures for investment leads? Contact HomeVestors® today to request more information about becoming an independent real estate investing franchise.

Each franchise office is independently owned and operated.