As a NY-based real estate investor, distressed properties are my bread and butter. I don’t waste my time trying to compete with big investment firms in the high-end Manhattan market. Instead, I look for undervalued homes that I can fix and flip for a profit without inflating the selling price.
Since I’ve got a reputation in my professional network for dealing primarily with foreclosures and homeowners in financial distress, it’s no surprise that I’ve fielded at least a dozen questions from newer investors about how to buy a preforeclosure in NY. Though the process is similar to purchasing a foreclosure property in NY, there are some specific challenges and pitfalls you should look out for.
How Does Preforeclosure Work in NY?
Preforeclosure means the homeowner has missed enough mortgage payments to be considered default, and the bank or lender is planning to start the foreclosure process. Federal foreclosure laws require lenders to wait until mortgage payments are 120 days past due before officially starting foreclosure. In addition, NY state law says that if a property is borrower-occupied, a one- to four-family dwelling, or a condo unit, the lender also needs to send the homeowner a notice at least 90 days before starting foreclosure.
The exact actions a homeowner can take to prevent foreclosure during this period will depend on the terms and conditions of the mortgage. Often, as soon as preforeclosure starts, the bank will accelerate the loan, forcing the homeowner to pay the entire balance due within a brief window—at least 30 days, and up to the entire 120-day, preforeclosure period to avoid foreclosure. For most homeowners in preforeclosure, the only way to pay the balance on their loan is to sell their house—fast. This creates an opportunity for savvy real estate investors.
How to Buy a Preforeclosure in NY
Though the preforeclosure period technically lasts at least 120 days from the first missed payment, most NY homeowners don’t know they’re in preforeclosure until they receive the notice from their bank 90 days before foreclosure starts. That means you have a pretty brief window of time to find a preforeclosure property, convince the homeowner to sell, and sign the deal before the bank forecloses.
Step 1: Finding a Preforeclosure Property in NY
First, you need to find properties in the preforeclosure process that you think would make great investments. For many new investors, this is the hardest part. There are a variety of lead generation strategies for finding eligible homes, including:
- When a mortgage lender files a notice of default on a property, check legal notices; that information is posted publicly at the courthouse, Sheriff’s office, or on the municipal website. If you make a habit of checking these notices regularly, you may spot a potential deal, but this can become quite time-consuming.
- Searching online, some real estate listing sites specialize in foreclosure and preforeclosure property, though you usually have to pay for access to them. Other general listing sites will sometimes include a handful of preforeclosures as well. In both cases, you’ll face incredibly steep competition over a relatively small number of eligible properties, so your chances of landing a deal are slim.
- The best way to generate leads on pre-foreclosures is through incoming marketing. Essentially, you get your name and contact info out there so that homeowners in preforeclosure know they can come to you if they need to sell their property fast. You can usually accomplish this through advertising campaigns like the “We Buy Ugly Houses®” billboards and radio ads.
Step 2: Evaluating a Preforeclosure Property
Once you’ve found a preforeclosure property you’re interested in, it’s time to do some research. You need to know how much the property is currently worth, what is still owed on the mortgage, and how much you could sell it for after renovations. This is a crucial step for buying a preforeclosure in NY while avoiding money traps and other issues.
You should only invest in a preforeclosure if the property is worth more than what’s owed on the mortgage. Think about it—the reason a homeowner needs to sell the property fast is so they can pay off the entire balance of their loan before foreclosure. If the home is worth more than the balance of the mortgage, then you can offer them less than market value and sell it for profit, and the homeowner will still make enough money to avoid foreclosure proceedings.
However, if the homeowner is underwater on their mortgage—meaning they currently owe more money than their home is worth—you can’t offer them enough money to clear their debt without overpaying for the property. The more you overpay, the smaller your ROI will be, especially if the home still requires significant renovations (as many distressed properties do). That’s why you should only invest in a preforeclosure in NY if you have the property valuation tools and/or experience to evaluate the property quickly and accurately.
Step 3: Negotiating With the Homeowner
Next, you need to contact the homeowner, so you can make an offer. This is another area where many new investors struggle. First, you need to track down the homeowner and make contact, and then you need to convince them to sell on favorable terms.
It’s best to approach this with extreme sensitivity. These homeowners are in financial distress and may have other personal issues like a divorce contributing to the pending foreclosure. They may not react kindly to a stranger cold calling or knocking on their door, especially one who knows about their embarrassing financial situation. Even worse, you may not be the first investor to call, so they may feel like you’re just another vulture circling.
Of course, this can be avoided if you use incoming marketing to generate preforeclosure leads. In that case, a distressed homeowner reaches out to you for help offloading their preforeclosure property. They’re much more likely to approach the deal as a win-win situation: they avoid foreclosure and can start fresh somewhere new, and you get a great deal on a distressed property.
Step 4: Finishing the Deal
Remember, the preforeclosure window is short, so you have a minimal amount of time to finish the deal. You may find it challenging to schedule the usual walkthroughs and inspections within this time frame, but they’re essential if you don’t want to end up with a money pit.
You should also be aware that homeowner protection laws give preforeclosure sellers the right to rescind the deal right up to the moment the paperwork is signed. That means you should be careful not to count your chickens before they’re hatched—don’t make any business decisions under the assumption that this is a done deal until it is.
Avoid Pitfalls When Buying a Preforeclosure in NY With HomeVestors
Buying a NY preforeclosure while avoiding pitfalls is easy with the tools, support, and knowledge you gain as a HomeVestors® franchisee. For example, with the help of the nationally known and recognized “We Buy Ugly Houses®” marketing campaign, you’ll have leads on preforeclosures in NY coming to you. Plus, you can use the proprietary ValueChek® property valuation tool to accurately estimate the current value of a preforeclosure and avoid overpaying.
Learn more about how to buy a preforeclosure in NY and avoid the potential pitfalls by contacting HomeVestors® today.
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