In pre-foreclosure, a homeowner has missed at least one mortgage payment and is sent a notification that he is considered delinquent on his loan. This is referred to as a Notice of Default, also called an NOD or Lis Pendens. These are essentially the same thing, the difference being that they signify whether the loan is secured through a mortgage or deed of trust. When the trustee files a Notice of Default it becomes part of the public record.

Understanding Distressed Homeowners:
To help a homeowner in distress, you must understand his psychology. In most cases, the owner is dealing with a negative event that has caused him to fall behind in his payments. This can be the result of divorce, illness, job loss or other obligation that has become unmanageable. Often this is compounded by an owner succumbing denial or procrastination, which makes the situation worse. Only once you understand these problems, you can be prepared to help. Remember, as a prospective purchaser, you may very well be the last recourse for a homeowner who is facing foreclosure.

Preventing further credit damage:
It’s unlikely that a distressed homeowner has great credit, but adding foreclosure to his history will have long-term consequences. It will make buying another home or establishing other types of credit very difficult.

Saving some equity:
If you can pay the owner an amount above the mortgage balance, it may well be more than they would receive through an auction. The reason for this that often the owner’s equity is offset by the expenses and fees incurred leading in an auction.

Deficiency Judgment:
This is a court judgment making an individual liable for paying off an amount due because the full amount was not obtained by foreclosure. If the proceeds from the foreclosure sale are insufficient to pay the lender in full, the borrower is liable for the deficiency. Depending on the particular state, a judgment like this can result in garnished wages, seized assets and potentially even federal income tax liability.

Negotiating With the Owner:
Often the biggest difficulty in buying a pre-foreclosure property is getting the homeowner’s attention. Because a Notice of Default is public record, other investors probably will have contacted the owner. Many investors write letters or send postcards expressing their interest. We recommend against these passive approaches. Instead, we find it more effective to speak directly with the owner. This helps instill confidence and trust in the owner.

Often the best option for an owner in default is to sell the home to obtain relief from financial duress. But many owners make a concerted effort to hang on to their properties for as long as they can. When the auction date approaches, however, the homeowner is likely to be motivated to close a sale. We recommend you keep in regular contact with him. Make sure he knows you will immediately buy the house if he is willing to accept your price.

When talking to distressed homeowner, be courteous and demonstrate your understanding of his situation. Be prepared to adopt a consultative approach with the goal of reaching a mutually beneficial agreement. This way, you may help the owner through the problem while deriving no immediate gain for yourself. This may seem discouraging, but you may still benefit . It is not uncommon for a distressed homeowner to solve his problem only temporarily and ultimately to default again. Having helped him the first time, it’s possible he will seek your counsel again. As more such deals come your way, you may find yourself in multiple good opportunities.

Closing the Deal:
Before you sign an agreement with an owner, be sure the title of the property is clear. Never release money until your real estate attorney confirms this. If everything checks out, you and the owner need to sign a Real Estate Purchase and Sale Agreement. At this point, you should arrange your financing and ensure that the foreclosure process has been stopped. If all goes well, you will have bought a property at below market value