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What is a Pre-Foreclosure?

A few days ago I got a random phone call from someone that was asking about a “pre-foreclosure.” I asked, “Did you see that on” I knew he had, because that’s really the only public website that advertises pre-foreclosures. I said to him, “Do you have a few minutes for me to explain what a pre-foreclosure is?” He said he would appreciate that information.

A pre-foreclosure is a homeowner that is behind on their mortgage payments. They’re not in foreclosure at the moment, but they may be three or four months late on their payments to the point where the lender has served them a letter of intent to foreclose unless they get caught up on their payments. There is no way to know how far behind they are, or whether the bank has even set a foreclosure date. Typically the bank will do whatever’s necessary to avoid having to foreclose on a homeowner. It’s bad for business, it costs the lender a lot of money to foreclose, and to be quite honest, the bank doesn’t want the house, they want their monthly payments.

Let me give you an example. Last month a friend of mine called and was worried about a foreclosure notice he received via certified mail. I asked him, “When was the last time you spoke with the lender on the phone?” He said he hadn’t called them back because he got behind at the end of the year and didn’t have the money to get caught up. I told him, “Trust me, the bank does not want your house. Call them back, tell them what happened, and ask what your options are.”

Two weeks later, my friend called me to thank me for giving him that advice. The bank representative transferred him to a supervisor in the Loss Mitigation Department and they agreed this was a temporary situation, but my friend was now back on track financially and would be able to continue making the monthly payments. The bank agreed to take the four months of payments that were owed, and tack it on to the end of his loan. He had to sign what’s called a “loan modification” contract extending his payments an additional four months at the end of the loan, but after signing them, he would be considered “current” again. The shocking part was they even gave him a slightly better interest rate than what he had before, so his monthly payments dropped $181 per month!

Having heard me tell this story, the young man on the phone said, “So how do you know when they will actually be foreclosed on because I want to buy this house?” I said, “There’s no way to know that date or even a price they might end up selling for, and I’m trying to tell you this home may never go into foreclosure.” I asked, “Do you want to buy a foreclosed home?” “Well,” he said, “I guess I’m just looking for a deal.”

I told him, “There are currently only five bank repos in all of Clay and Platte Counties combined. One at 1300 S 4th Street in Platte City for $84,900. One at at 113 Sherri Lane in Excelsior Springs for $87,500. One at 6909 NW Searcy Drive for $124,800. One at 8711 N Oak Trafficway for $129,900 and the last one at 5500 NW 60th Terrace in Tremont Manor subdivision listed at $389,900. The only one that’s ‘a deal’ is the last one listed atĀ $389,900. The other four are not.”

I also explained that we just don’t see very many foreclosures in this market. Home prices have risen significantly in the last three years and if someone needed to sell their home because they’re behind on the payments, they could list it with a REALTORĀ®, get it sold, and still walk away with some money in their pocket. Aside from that, the foreclosures that do hit the market typically even sell at a premium so there are not really any “deals” out there anymore. Now, having said that, there are many deals out there, but you have to know where to look.

After discussing this a little, it became clear this young man is not a good fit for buying a foreclosure or any “deals” in general. He doesn’t have much money to put down, he’s not pre-approved with a lender, and he doesn’t have much cash available to put towards a “fixer-upper” even if we found one. I suggested that we just look for a great home in a great neighborhood that will rise in value over the next five to ten years. To me personally, “a deal” is a home you won’t have to sink a ton of money into. I’d rather help this young man buy the very nicest home he can afford within his price range.

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