As a longtime real estate investor in California, I’ve found that preforeclosure homes are some of the best opportunities to make a quick buck. Though you’ll need to do some digging to find worthwhile preforeclosure properties and you’ll need to be ready to move fast once you’ve found a suitable prospect, preforeclosures are a niche where it’s possible to build and scale your real estate investing business quite rapidly. And, unlike fixing and flipping, you won’t need to worry about coordinating with contractors or competing with (many) members of the general homebuying public, which is the icing on the cake.
If you’re not familiar with the preforeclosure process, the gist of it is easy to grasp. Once a homeowner has missed three monthly mortgage payments, the bank that owns the mortgage can serve them with a notice of default. Once the notice has been served, the home is technically in a state of preforeclosure because lenders are within their rights to move forward with the foreclosure process, if the homeowner does not pay the outstanding balance. At that point, many homeowners opt to list their property as a short sale candidate, which allows them to recoup some of their equity while also settling their liability to the lender.
That’s where you come in as a buyer, thereby closing the loop and hopefully generating financial gain. But, if you want to be a preforeclosure whizz in a market like California, you’ll need to understand exactly what it takes to find appealing prospects, make a competitive offer, and subsequently close the deal.
To start, let’s take a look at the state’s competitive landscape for real estate investing so that you’ll understand the context for how to buy preforeclosure homes in California.
California’s Competitive Landscape For Preforeclosures
The availability of preforeclosure homes on the market is ample in California, but it varies widely by county, and some properties in especially hot regions may be intensely overvalued.
Los Angeles County and Orange County are over-represented in the state regarding preforeclosure listings, so either place might be a good place to start looking, assuming that you’re ready to pay a premium for properties. In contrast, rural areas like Glenn County and Inyo County probably won’t have much of a selection for you to work with, so it’s better to steer clear.
In terms of the intensity of competition, you should expect it to increase significantly in hot real estate markets, which tend to be in the major metro areas along the coast, and Silicon Valley. So, as tempting as the Los Angeles County market may be, it might be hard to get established there as an investor that’s just learning, as competition is intense despite a large number of eligible properties on offer. Likewise, areas like San Bernardino County that have a mix of urbanized and rural regions, are less saturated than the coast. However, you’ll still face plenty of other investors.
At the moment, minor inland metro regions like Fresno County and Kern County are probably the best place for new investors to look for preforeclosures. These markets aren’t as crazy as the coastal markets, but they’re still packed with plenty of opportunities for buyers, and often at lower prices than elsewhere.
Of course, no matter where you end up basing your business, you’ll need to have access to financing if you plan on closing deals. Let’s take a look at the details of how to buy preforeclosure homes in California to see what needs to happen.
How To Close A Preforeclosure Deal
Typically, your preforeclosure deals will start by finding a house that’s listed as being on short sale by the homeowner, with your role being that of the buyer. As a buyer, your primary counterparty will be the mortgage lender rather than the homeowner themselves because the mortgage lender has a claim to the property.
Importantly, you won’t always end up being on the hook for the total balance remaining on the mortgage, but the lender will likely be amenable to a short sale anyway because it’ll get them a significant portion of their principal back without the need to actually foreclose on the property. But, that means the homeowner is a significant secondary counterparty whose assent is necessary to make the deal work out for you. Once you appreciate those dimensions of the issue, the general process for how to buy preforeclosure homes in California is pretty much the same as in other states.
Before you close a preforeclosure deal, you’ll need to learn about:
- The fair market value of the home
- If the homeowner is interested in selling the home to you
- How the lender usually manages short sales of preforeclosures
- Any liens on the property
- Any unpaid insurance or back taxes for the property
Once you have that information in hand, you can move forward with the deal if it looks like it’ll be lucrative for you. To do that, you’ll need to:
- Calculate a reasonable dollar value for the offer to short sell the property
- Get the homeowner to agree to the dollar value you calculated
- Send an offer letter documenting the agreement and the dollar value to the lender
- Get the lender’s approval letter
- Close the transaction via escrow
If this process seems complicated, it’s because it is actually quite challenging to understand and to navigate as a new investor.
Buying preforeclosed homes is far more difficult than buying normal homes or foreclosed properties for any investing purpose. And that’s especially true when you’re considering a dynamic real estate market like California, where there are plenty of other investors, plenty of false leads, and plenty of “opportunities” that are likely to be anything but profitable.
Save Time By Screening Preforeclosures Efficiently
With experience, you’ll learn the most efficient techniques for how to buy preforeclosure homes in California.
Until then, it’ll behoove you to get the right tools of the trade for vetting prospects. That means finding a solution for home valuation, getting a good set of sources for leads on preforeclosure homes, and making sure that your access to financing is both quick and seamless.
Many new real estate investors find that becoming an independently owned and operated HomeVestors® franchisee is an elegant solution to address these issues. With HomeVestors, franchisees benefit from using powerful valuation software, not to mention the HomeVestors national marketing campaign for generating quality leads.
Plus, HomeVestors franchisees get preferential access to hard money financing, as well as mentorship from more experienced investors. Especially for preforeclosure investors in California, HomeVestors franchisees have what it takes to rise above the competition and maintain a sustainable business.
Still, wondering how to buy preforeclosure homes in California before the competition does? To learn more about our franchise program for investors, check out our franchise consideration page.
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