Foreclosure vs. Pre-Foreclosure Property Explained

 

When shopping for a house online, often times buyers encounter a listing marked either "pre-foreclosure" or "foreclosure". There is a distinct difference between these two terms, and how they play into the property current ownership/availability. 

 

Foreclosure - the properties that has been repossessed by a lender, or a lien holder, due to non-payment of the loan, or for non-payment of property taxes. Such properties can be either marketed to the public via a real estate broker, through a court house auction, or an online auction. For the most part, such properties are sold strictly as-is, and the buyer is responsible for assessing the condition, any existing holdover tenancy, as well as any outstanding violations and fines. Often times, the utilities in such properties have been turned off (either for non-payment, or purposely by the bank's property management company). Therefore, conduction a home inspection may be limited to a visual inspection only, without the opportunity to test out the heating system, plumbing, or electric installations. Sometimes, due to a poor condition of the property (either caused by past neglect, or if the house been stripped of fixtures, kitchen cabinets, etc.) the property may not qualify for conventional financing. In such cases the seller may entertain only all-cash offers, or those conditional on a special type of a home loan, called rehabilitation loan.

 

Pre-foreclosure - the property is in a process of being foreclosed on. Typically, three months after the property owner stopped making payments on the loan, the lender will issue what's called Lis Pendens (Latin for suit pending), which begins the foreclosure process. The property at this point is still owned by the current owner, who may or may not occupy it, and may or may not be available for sale. Some online property portals (not Realopoly though) pull up this type of information, from the public records, and include listings of such properties on their sites, where they even include some imaginary dollar figure, as to what such property will be offered at. These listings can be misleading to many potential buyers, as the owner of property may not be inclined to sell the property, or entertain any property showings, or engage in any negotiations. Buyers should be aware of that, before trying to contact such property owners. In some instances, the property owner may decide to list their property for sale. If they have enough equity in the property, they may just sell it before it reaches the point of foreclosure. Other times, if the seller does not have much of equity, the property may be offered for sale as a short-sale. In such scenario, the seller may even offer the property for less than what it's owed to the lender. This type of transaction requires the approval from the lender holding the lien on the property. Short-sale transactions typically are lengthy in time, and since the seller does not get any proceeds from the sale of the property (because they're short on funds to pay off their existing loan), the buyer may be faced with having to pay for outstanding water bill, property taxes, etc., at the closing table.

 

In any of such transactions, it is best to work with a local real estate professional, who can help you navigate the process, and avoid potential (and costly) pitfalls. This article is meant to serve as a general discussion of the subject of foreclosure properties, and should not be considered as a legal advice of any kind.