Investing in Real Estate: Understand Pre-foreclosures

With prices still at an all-time low, investing in real estate is as smart now as it ever was. But what is the best way to get started? There are three different ways to invest in real estate: buying pre-foreclosures, buying foreclosures, and buying bank owned properties. This article will walk you through your first option, investing in pre-foreclosures. Investing in pre-foreclosures is a safe, smart way to buy a home for less than what it is worth and walk away with instant equity.

To understand pre-foreclosures you first have to know what a foreclosure is. When a homeowner buys a home, they borrow money from the bank to pay for their property. When they stop making payments (usually due to a job loss or divorce) the bank is no longer receiving any money. To get their money back, and ultimately protect their own investment, the bank starts a process called foreclosure. Foreclosure is essentially when the bank starts to take back the home. The house is still worth money, and if there is no money being paid, the only thing left of value is the home. This is a long and drawn out process and the bank works with the homeowner to try and turn their loan around. During this time period the home owner is in what is known as "preforeclosure." They haven't lost their home yet, but if something doesn't change that is the direction they are headed.

How does this translate into an investment opportunity for you? Simple. To get out from underneath their loan, most homeowners will try to sell their home (so they can pay off the bank). However, with all the "no money down" loans many home owners in pre-foreclosure are finding that there isn't enough equity in their home to pay off their loan. (Basically they paid too much for their house and now can't get anyone to pay enough to pay off the bank). This is where the bank steps in, offering what is known as a "short sale." This means the bank is willing to take less than what is owed to them just so that they can get some part of their investment back. (Let's say the house is worth $100,000 and the bank is owed $110,000. In most cases the bank will short sale for as low as $80,000 just so they get some of their money back). Think of is in terms of stocks, when you sell a bad stock for less then what you paid for it, just to stop the bleeding. You know you are taking a loss, but at least you are getting something back. This is how banks feel about short sales.

Have you ever seen a real estate listing saying "the bank has final approval on all offers?" This is a short sale. Basically, you are no longer in negotiations with the home owner, you are now negotiating with the bank. This is a great opportunity to get a low price on a nice house because both parties are desperate to sell the property, and you are seen as their savior. So how do you find pre-foreclosures? It used to be very hard work, (putting ads in the paper, prescreening homeowners, putting up "I buy houses" signs) but now most banks are working with realtors to get the house on the market. A lot of pre-foreclosures will be handled by the same realty firm (and sometimes the same agent), so ask around. Also keep your eyes peeled for any ads mentioning a short sale or "final bank approval needed." These are the opportunities you are looking for.