Everybody loves a bargain — especially on something as expensive as real estate.
Distressed property owners entering foreclosure often don’t have the luxury of time to wait for a full-price offer. They need to sell yesterday to avoid the auction block, so they’re often open to a low-price but fast-closing offer.
But these off-market properties aren’t listed for sale on the MLS. So how do you find pre-foreclosure homes?
- There’s a window of time between when a borrower defaults and when the property goes to foreclosure auction in which you can potentially score a great deal.
- You have a range of options to find pre-foreclosure homes, some free. The fastest and easiest ways to find pre-foreclosure leads cost money.
- Speed matters: it helps to reach owners before everyone else, because competition is fierce.
Refresher: The Stages of Foreclosure
Before you fully understand how to buy foreclosures, you first need to understand the stages of the foreclosure process.
After a borrower first defaults, they get a minimum 90-day period before the lender sends an official notice of default warning them that they’ll soon file to foreclose in court. After 120 days, the lender can file for foreclosure with the help of a law firm.
The law firm files a motion to foreclose with the local courthouse, and a period of public advertising for the foreclosure auction begins. This is the period when most pre-foreclosure purchases take place.
Foreclosure auctions take place at the courthouse steps in most states, and bidders don’t have access to the property. The lender typically starts the bidding at the total amount owed, including late fees, interest, and legal fees. Given the high starting bid and lack of access to the property interior, most auctions receive exactly zero bids.
So the lender buys the property back by default. After another lengthy period to ratify the sale and take legal ownership, the lender must then evict the previous homeowners if they remain at the property. Only after that can they sell the home as an REO property on the MLS.
7 Ways to Find Pre-Foreclosure Homes
You’ve decided you want to try and buy pre-foreclosure properties before they go to auction. Great — now how do you actually find them?
Try these options to find pre-foreclosure homes before the gavel drops.
1. Check Public Records
In days of yore, people went to the courthouse to check public foreclosure motions. I’ve actually done that myself, if you can believe it.
Today, some jurisdictions post pre-foreclosure filings on their websites. But don’t expect a uniform system for these across the country — these are all handled on the local level.
If you’re looking for the most cost-effective way to find pre-foreclosure listings, this is it. Just beware that it’s often clunky and time-consuming.
Once you find pre-foreclosure properties, you can reach out to the owner via direct mail campaigns, or even text message or email if you have access to a service that provides these.
2. Use a Subscription Service
Several excellent platforms provide you with up-to-the-minute foreclosure information in a user-friendly format. You can search geographically and look at pre-foreclosure filings on a map, filter search results, and view other types of distressed sellers such as divorce filings and tax liens as well.
The catch, of course, is that you get what you pay for. None of these services are free.
Everybody knows Zillow, for better or worse. And you can view pre-foreclosure properties on Zillow.
When you do a search on Zillow, go under “More Filters” to “Listing Type” and select “Pre-foreclosures.” It really is that simple.
You can even set up email alerts for when new pre-foreclosures meeting your criteria hit Zillow’s system.
Zillow’s data isn’t as up-to-date or as extensive as Propstream or Foreclosure.com. But Zillow offers a great place to get started for free as you learn how to buy foreclosure properties.
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4. Local Legal Announcement Journals
State laws require lenders to advertise foreclosure auctions publicly, to ensure everyone in the public has equal access to show up and bid. So, local legal announcement journals carry ads for upcoming foreclosures.
On the plus side, checking these journals is free or cheap. But you’ll be the last to know about upcoming foreclosures, compared to paying subscribers of platforms like Foreclosure.com, Mashvisor, and Propstream.
And in this game, you want to reach prospective sellers before everyone else. Their inboxes get flooded with hundreds of letters from people just like you, all offering a solution to their property problem.
5. Build a Network of Bird Dogs
In real estate lingo, a bird dog is someone who keeps an ear out for would-be sellers. If they catch wind of someone in financial trouble, they tip you off — for a generous fee if the property closes, of course.
Once you’ve chosen a target market, start networking with in-the-know people who live or work there. Bartenders, baristas, barbers, hair stylists, postal workers, or just the local gossips all make for great bird dogs. Reach out to them often to stay front-of-mind.
The huge advantage to bird dogs is that they often alert you to distressed property owners before the lender actually files for foreclosure. That puts you in touch with these potential sellers before all those hundreds of other buyers, bankruptcy attorneys, and other solicitors.
Read: you get a competitive advantage.
6. Network with Real Estate Attorneys
Often homeowners in foreclosure speak with real estate attorneys about their options. These attorneys can list you among those options, as a fast buyer.
That requires a strong relationship with them, however. For attorneys to reliably refer distressed property owners to you, they need to know you and trust you. That requires you to invest a lot of time and often money in taking them out for meals or drinks, getting to know their spouses, and similar wining and dining.
Like most industries, real estate revolves around who you know. Get comfortable with networking if you want to make the big bucks.
7. Network with Wholesalers
If all of the above sounds like a lot of work, you could skip it and just pay wholesalers their fee to connect you with quasi-bargains on properties.
Real estate wholesalers find discounted properties and then turn around and flip the contracts to investors like you. For a markup, of course. You (hopefully) pay less than you’d pay for the same property listed on the MLS, but don’t expect the same kinds of home run deals you can create for yourself by reaching out to owners in pre-foreclosure.
Approaching Homeowners in Foreclosure
Owners facing foreclosure are scared and stressed. If you want them to even consider working with you, you need to bring empathy and tact to all your interactions with them.
That starts with your initial outreach efforts. Historically, investors have used direct mail as their main strategy to reach homeowners in foreclosure. The problem is that these homeowners get hundreds, sometimes thousands, of similar letters. Why should they open your letter? If they do bother to open it, why should they call you rather than the six hundred other investors who mailed them?
Come up with your own unique way to stand out from the crowd. I can’t give you the answer, because then it wouldn’t be unique anymore, and it would probably become outdated within a year anyway. Get creative and do your own online research for ideas.
Bear in mind that most homeowners don’t want to sell — they want to stay in their homes. I’ve seen investors have success by offering a lease-buyback option to homeowners in foreclosure. They offer to let them stay in the property as a renter, rebuild their credit, then buy the property back for a certain fee over and above what the investor paid for the property.
The problem is that if the homeowner couldn’t afford their mortgage payment, how are they going to afford the (likely higher) rent? In most cases they can’t, which raises thorny ethical questions about setting them up for failure. The flipside of that argument is that they’re consenting, competent adults who understand the legal contract they’re entering. I don’t pretend to have all the answers from a moral standpoint. Follow your own moral compass as you negotiate arrangements with distressed sellers.
Pros & Cons of Buying Pre-foreclosure Homes
There’s one giant, glaring upside to buying pre-foreclosure properties: you can potentially score a great bargain on an off-market distressed property.
But pre-foreclosure homes come with their share of downsides. First, the sellers are stressed and emotional, making them unpredictable and unreliable. They often change their minds half a dozen times in as many days, sometimes breaking their contact with you.
That’s assuming you can connect with them in the first place. As outlined above, homeowners in foreclosure get hundreds of letters, each promising the moon. It’s hard to stand out amid all that noise.
And stand out you must, if your marketing campaigns are to yield profits rather than losses. Direct mail campaigns aren’t cheap, so you need to close a certain percentage of leads or eat the losses.
Finally, you need to contend with an unforgiving deadline. All too often, homeowners in foreclosure bury their head in the sand until the last possible moment. They’ll call you a few days before the foreclosure auction, asking how quickly you can close.
Most buyers can’t close within a few days. If you can, you’ll score deals that your competitors miss. That requires an unbelievably streamlined title review and funding process. Your typical investment property lender requires 14–21 days to close a loan, minimum.
Final Thoughts on Pre-Foreclosure Properties
Make no mistake, buying pre-foreclosure homes is a competitive field. When most people talk about buying distressed properties, they mean pre-foreclosures.
There’s plenty of money to be made, if you can overcome the competition. But you need a compelling offer, an empathetic manner, and the ability to close lightning fast. Most of all, it helps to get to owners before your competition.
Consider learning under a mentor or senior partner who specializes in buying pre-foreclosure properties. It’s both an art and a science, and the best way to learn the nuances is from a seasoned veteran.♦
Still have questions about how to buy pre-foreclosure homes? What’s your strategy to find pre-foreclosure properties?
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About the Author
G. Brian Davis is a real estate investor and cofounder of SparkRental who spends 10 months of the year in South America. His mission: to help 5,000 people reach financial independence with passive income from real estate. If you want to be one of them, join Brian and Deni for a free class on How to Earn 15-30% on Fractional Real Estate Investments.