Before a house is foreclosed on, vacated and becomes a REO listing it is considered a pre-foreclosure. Pre-Foreclosures are historically bad investments for a number of different reasons:
- Home Owners don't Normally Leave the House in Good Condition
Not all houses are voluntarily vacated by the occupant and this is not always an easy task. People who have lost everything are not generally amenable to the eviction process. They often blame the bank and take out their aggression on the home itself. Tearing up carpet, walls, stealing appliances and even copper piping is not uncommon in pre foreclosures.
If in fact you are forced as the new owner to perform the eviction process; in some parts of the country this can be performed in days and in others it can take months. Imagine evicting a single mother with children around Christmas? It is not easy when the woman shows up to court with the kids and its snowing outside. Meanwhile you are still paying their mortgage. - Pre Foreclosures are Difficult to Inspect
Because the home owner still lives in the house it usually cannot be inspected until after you take possession. This means the people who have been foreclosed on will look at you as the bad guy and are not very helpful in your pursuit of profits. - The House doesn't Go To Foreclosure
More often than not the house doesn't go all the way to foreclosure. The current owner can file bankruptcy and hold off the foreclosure process. This means that your efforts and information gathering are wasted. - Lender Normally Retains Ownership
If the house does eventually go to foreclosure the lender can retain ownership by bidding on the home. This insures that they don't sustain any more losses. This decision will nullify your bid and again you will have wasted a great deal of time in research and preparation for an auction that will not be on an even playing field. - Unpaid HOA Fees become Your Responsibility
Any unpaid homeowners association fees become the responsibility of you, the new owner. The same is true with condo fees and many times tax and mechanics liens. this means that you are bidding in the blind and your potential profits are reduced based upon information that you find out only after you own the house.
When the house is bought back by the bank, it is finally considered a REO listing and becomes part of the inventory of the bank/lender. This is when it is the most effective to spend your efforts on making a purchase of the property. Every once in a great while lightening will strike but it is rare and not a wise use of time in the long run.
