While there are many benefits to being a jack-of-all-trades real estate investor, I found more success by choosing a niche and becoming an expert in my local market. In my case, it’s distressed properties—specifically those in foreclosure or preforeclosure. By focusing on undervalued properties, I’ve managed to generate great ROIs (returns on investment) while investing less capital on each project. Plus, I help out local homeowners in financial distress, and improve my town by turning run-down properties into affordable housing.
If you’re also considering a preforeclosure real estate investing niche, you need to understand how the preforeclosure process works and how to avoid potential pitfalls. Here is a complete guide to preforeclosure real estate investing.
What Is Preforeclosure Real Estate Investing?
When a homeowner defaults on their mortgage, their lender—usually a bank—has to notify them before officially starting foreclosure. The bank has to wait until the homeowner is at least 120 days past due before foreclosure can start, and they have to give the homeowner a certain window of time in which to make good on what they owe, though the exact amount of time varies depending on state and local laws.
A homeowner in preforeclosure usually has to pay off the entire balance of their mortgage (plus fees and interest) within that brief time, which makes them motivated sellers. Assuming the homeowner owes less on their mortgage than the home is worth, you could offer them less than the market value and still help them avoid foreclosure. You get a great deal on investment property, and the seller gets to walk away with their credit and reputation intact, making it a win-win situation. That’s why preforeclosures can be an exceptional opportunity for savvy investors.
Your Comprehensive Guide to Preforeclosure Real Estate Investing
State and local laws on preforeclosure vary, and that may affect the window of time you have available to make a deal with the distressed homeowner. For example, New York requires that banks provide 90 days’ notice of their intention to file foreclosure.
Checking local regulations while you’re developing the preforeclosure investment strategy is a powerful move. Here are more tips for preforeclosure real estate investing.
Generating Leads On Preforeclosure Real Estate
The first step is to find leads on homes in preforeclosure. There are a variety of lead generation strategies you can use to find investment properties, including:
- Pounding the pavement. Driving or walking around looking for distressed properties, and then trying to track down the homeowner to see if they’re in preforeclosure and/or interested in selling.
- Searching legal notices. When banks start the preforeclosure process, that becomes part of the public record. That means you can search for legal information on your local government or sheriff’s office website to see a list of homeowners and addresses in preforeclosure.
- Buying lead lists. Lead lists are essentially aggregations of public notices and other indicators that a homeowner may be motivated to sell. Many real estate investors purchase access to multiple lead lists and cycle through them regularly to look for new leads.
Even though these strategies can be useful, they take a lot of time, you’re competing with a lot of other investors for the same leads, and there’s no guarantee that any of the homeowners will want to work with you. Better options for preforeclosure lead generation include:
- Paid advertising. Suppose you get your name out there and build a reputation as an investor interested in buying preforeclosures. In that case, you’re more likely to have distressed homeowners come to you instead of the other way around. Advertising can include billboards, radio ads, and other marketing techniques that generate inbound leads.
- Joining a franchise. The truth is, most successful real estate investors use a combination of lead generation strategies that they’ve developed over years of experience in the industry. As a new investor, you can benefit from this experience by joining a franchise network like HomeVestors®. You’ll get comprehensive real estate investing training, one-on-one mentorship, and access to a wealth of marketing and lead generation tools, all of which make it much easier to find leads on preforeclosure properties.
Evaluating Preforeclosure Properties for Investment
Once you’ve found a preforeclosure property you’re interested in, the next step is to evaluate the property and determine your potential ROI. You should do this using property valuation tools, your training, and experience as an investor. To determine whether or not a preforeclosure property is a good investment, you need to calculate:
- The cost you’ll pay for the property, including taxes and liens
- The cost you’ll pay to renovate the property
- Your holding costs, including loan payments, utilities, and other monthly expenses
- The estimated after repair value (ARV) of the property, which is how much you expect to sell the property for at the end of your flip
Working With Preforeclosure Homeowners
If you determine that a preforeclosure property would make a good investment, it’s time to convince the homeowner to work with you. This is also known as nurturing the lead. However, not every lead is “qualified,” meaning it could be a dead end. How do you know which leads to continuing nurturing and which ones are a waste of time? Some clues that a lead is worth nurturing include:
- The homeowner reached out to you, not the other way around
- The homeowner freely provided information about the property
- Nobody else has access to the lead
When you’re negotiating with the homeowner, remember that this should be a win-win deal. If they’re underwater on their mortgage, you’re never going to be able to convince them to sell to you at below market value. Your goal is to pay enough money that the homeowner can avoid foreclosure, but you can still get a great deal on an investment property.
Closing the Preforeclosure Investment Deal
The short preforeclosure window means that you have a limited amount of time to close the deal. It’s important to know exactly when the seller’s preforeclosure deadline is so you can ensure everything is finalized before that date.
However, in your rush to get to closing, you shouldn’t forget to perform walkthroughs and inspections. Like any distressed property, a preforeclosure is more likely to have major, expensive issues. You need to know what all of those issues are before you take ownership of the property so you can accurately calculate your renovation costs and ensure you still get a positive ROI.
One last preforeclosure pitfall you should be aware of is that there are homeowner protection laws in place that allow the homeowner to walk away from your deal at any time before it’s completely finalized without facing any penalties. That means you could potentially lose any money you’ve spent on inspections, legal fees, and other related costs. You also shouldn’t make any major business decisions based on the outcome of a preforeclosure investment until the property is in your name.
Considering a Preforeclosure Real Estate Investing Niche? HomeVestors is Here to Help!
The entire process of preforeclosure real estate investing—from generating leads to negotiating with homeowners and closing deals—is much easier with the backing of a franchise network like HomeVestors. Not only do you get comprehensive real estate investment training and the one-on-one mentorship of an established HomeVestors® development agent, but you also gain access to the national “We Buy Ugly Houses®” marketing campaign. With the help of HomeVestors’ innovative advertising tools and strategies, you’ll have preforeclosure homeowners reaching out to you with investment opportunities.
Considering a preforeclosure real estate investing niche? HomeVestors is here to help! Reach out today to learn more about becoming an independently owned and operated real estate investing franchise owner.
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