What are the Pros and Cons of Buying Pre-Foreclosure Homes?

Dale Marshall

Real estate investors and buyers seeking new residences should be aware of the tremendous value offered by pre-foreclosure homes. Their sellers are usually highly motivated and may offer deep discounts from the market value, and the quality of the properties themselves is often much better than one would expect from a home that’s actually been repossessed. While there are definite benefits to buying pre-foreclosure homes, though, prudent purchasers should also be aware of the drawbacks.

Pre-foreclosure homes are sometimes deeply discounted.
Pre-foreclosure homes are sometimes deeply discounted.

Homes in pre-foreclosure status, or default, can be more difficult to find than those that have already been repossessed by the lenders. Technically, any home for which the loan payments are not current is in default, but not every such home is actually for sale. Thus, lists of pre-foreclosure homes often include many properties whose owners are technically in default but who are just a payment or two behind, and are working to bring their loans current. The difficulty of finding pre-foreclosures for sale, though, generally reduces the competition for them.

The outstanding debt on a property may be greater than its fair market value.
The outstanding debt on a property may be greater than its fair market value.

Once a pre-foreclosure home has been found whose owner wants to sell, it may be advisable to deal with a real estate agent. Many homeowners who are forced into selling because they cannot keep up their loan payments become resentful and uncooperative. This can sometimes make the negotiation process difficult, especially for those who are buying their principal residence, and who don’t negotiate home purchases very often.

Another problem faced by sellers and buyers alike is that pre-foreclosure homes are sometimes "under water," that is, their outstanding debt exceeds their fair market value. In these cases, the seller must seek the lender's permission to sell the house for less than the balance of any outstanding loans, called a "short sale." This can be a complex and time-consuming process which often delays closing the sale. Sometimes, lenders will simply withhold permission for a short sale, repossess the home and try to sell it for at least the amount of the outstanding debt.

These problems notwithstanding, buying pre-foreclosure homes is an attractive option because it usually provides purchasers with a number of benefits, the most obvious of which is the significant discount often given by the sellers. The reason for this is that the seller is usually in financial distress, cannot make the monthly payments due, and must sell the property quickly to pay the loan balance before the home is foreclosed. Thus, selling the home is more important than receiving full market value, as long as the sale price is at least sufficient to pay off the outstanding debt.

Another clear advantage of buying a pre-foreclosure home is that the property usually doesn’t sit vacant for any long period of time, unlike homes that have been repossessed by a lender. Vacant homes are inviting targets for thieves, who will steal the electric cable, plumbing and other fixtures and pipes for their resale value. In addition, homeowners who are foreclosed on sometimes vandalize the property upon moving out; those who sell pre-foreclosure are much more likely to avoid such behavior to prevent having the sale canceled.

Securing a real estate agent can help when negotiating the sale of a pre-foreclosed home.
Securing a real estate agent can help when negotiating the sale of a pre-foreclosed home.

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