What is all the fuss about “Pre-Foreclosure” listings on Zillow? And what does it REALLY mean for you as a buyer?? It seems nowadays that hardly a week goes by without a buyer asking one of our agents about that status of a home on Zillow that is listed as a “Pre-Foreclosure.” We actually just had a buyer ask to schedule an appointment to see the inside of a home being advertised as a “Pre-Foreclosure”, but the issue remains that 99% of consumers do not understand that these homes are NOT actually for sale. If this is so, then why is Zillow even advertising them at all?
What Does Pre-foreclosure Mean?
First, let’s start at the very beginning so we can understand how this wild goose chase typically ends at a dead-end street. First off, a “pre-foreclosure” and foreclosure are NOT the same thing (duh, right?). And while this may seems obvious, you must understand how the foreclosure process actually works. The process of actually buying a foreclosure and/or an REO property (bank-owned property) is already a confusing topic unto itself…in fact, they are not even the same thing. In any regard, you should always consult with a seasoned agent, or a title attorney if you are considering purchasing a foreclosure, REO, or auction property.
Second, you must understand how “listings” actually start. Listings, or a home being offered for sale, do not start with Zillow.com, Realtor.com, or any other consumer website for that matter. The source of all listing data begins with the local multiple listing service (MLS). If the MLS does not have the listing, then the property is not for sale – not even an REO property, because banks also list homes through the MLS.
The phrase “Pre-Foreclosure” is a common street term that is actually describing a lesser-known legal term known as Lis Pendens, or “LP” for short. Lis Pendens is the required public notice filed with the county clerks office initiated by a bank (or lien holder) that a foreclosure action has formally started. Keep in mind that with most mortgage agreements, the property owner conveys a mortgage interest to a bank as security for the re-payment of a loan. This basically says, “Should I fail to re-pay you, then you may take the house back as collateral”. Should the property owner fall behind on making payments, typically after at least 3+ months, the lien holder may choose to initiate a foreclosure action by filing the LP.
In short, a pre-foreclosure is a property where the owner is behind on payments and the lender has started legal action, but has not yet re-possessed the home. And the lender may never ultimately re-posses the home when it is all said and done.
How Does Zillow Know About Pre-Foreclosures?
Zillow uses a computer robot to scan this public data when the LP is filed with the county clerks office. Their system then consequently advertises these properties online, while the current owner is clueless to the matter. Yes, this has technically always been public information; however, the problem arises when this information is being mixed in and incorporated with traditional real estate listings on a platform where consumers are mostly engaged in retail home shopping. I believe websites like Zillow are doing a huge disservice to serious home buyers as they try to sift through mountains of information on the internet on the topic of home shopping. On top of that, it is also potentially a nightmare for the current homeowner as well because the public now believes their home is available for sale when it actually is not (yikes!).
What are the Homeowner’s Options Regarding Pre-Foreclosures?
Since the homeowner is having difficulty making mortgage payments, the property is also typically distressed since the owner does not have money to maintain the property. When a homeowner falls behind, they have a few options…
- Let the foreclosure process play out, which could take YEARS. Unfortunately, many are embarrassed and will bury their head in the sand; which clearly is not a wise decision.
- The owner may initiate a process called a “short sale” in which the lender agrees to accept less than what is owed on the property. The lender is essentially agreeing to a “haircut”, which was very popular in 2008-2013 after the mortgage crisis. Even if a property has an LP on it, the owner may be working in conjunction with the lender to restructure the loan or get approval for a short-sale.
- The seller may do what’s called a deed-in-lieu of foreclosure where the owner conveys title back to the lender at no cost and walk-away. This saves the lender the lengthy and expensive foreclosure process; and can be less of a hit on the owners credit status for future purchases.
Can I Buy a “Pre-Foreclosure” Home?
So then you’re probably still wondering…can I buy a home listed as “pre-foreclosure”. Sure, theoretically you could, but there are challenges you are likely to face:
First, getting in touch with the home owner. As I said before, they are typically already embarrassed and do not want to talk to anyone. Or in many cases, they may have already vacated the property and are nowhere to be found.
Second, since the properties are usually in a fair amount of distress, you would need cash to purchase it. Since most buyers typically use conventional, FHA or VA financing, they would not be eligible to purchase the home due to standards set forth by the lenders. Once the appraiser viewed the house, they would outline items that must be fixed in order for them to provide a loan, and of course the seller does not have the money to do these repairs. With FHA and VA financing, the standards tend to be very strict!
Third, depending on the amount owed on the property, the home is likely worth less than what is owed to the bank or lien holder. Meaning, even if the owner was willing and able to entertain your offer, they would not have the money to pay the difference on what would still be owed to the bank in order to payoff the lien. Of course, the buyer could pay this but then you’d be paying over fair-market-value for a property that likely needs work.
Fourth, depending on the timing, the home may already be on the docket to be sold at the master commissioner’s sale. Therefore financing would not be possible since that can take 30-60+ days, plus there is likely other defects or encumbrances on the title that can take additional time to clear.
Bottom Line on Pre-Foreclosure Homes
Overall “Pre-Foreclosures” tend to be very misleading and is NOT a listing that the owner has expressed the desire to actually sell. Therefore, as you can see, they are properties that come with many obstacles if you were actually interested in a particular home. We always advise our buyers to filter these kinds of properties out of their search criteria to ensure a smooth, enjoyable home buying experience that doesn’t lead into a wild goose chase that inevitably ends with lots of frustration and no new home to enjoy!
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