A Pre-foreclosure home is the real estate version of house purgatory: a limbo state where the owner still technically owns the house, but is on a slippery slope towards losing their home to foreclosure.
In pre-foreclosure, the property owner has been delinquent on their mortgage payments for at least 3 months. This prompts their lender to issue a notice of default applying to the property and the owner. The homeowner is then given a timeframe of several months in which to recover their good standing with the lender.
The owner can either muster their finances and pay the mortgage payments which would pull the property out of pre-foreclosure, or the owner can opt to sell the house, sometimes for a lower price than the balance left on the mortgage. This is called a short sale. Not all short sales are pre-foreclosures, but some homes slated for foreclosure may fall into this category when they enter this distressed financial state.
Short sales can carry a lot of uncertainties with them and can result in a much lengthier house buying process, which means they may not be for everyone.
Since this default notice becomes public record once it is issued, websites like Zillow will list some properties as pre-foreclosure. Just because they are listed this way does not mean they are actually for sale. Yes, the house is publicly listed as being in a distressed financial situation, but it doesn’t mean the owner or lender has agreed to put the house on the market.
The reason why Zillow would alert the general public to a property in pre-foreclosure is to offer those interested the opportunity of negotiating with a homeowner. This homeowner is most likely, desperately trying to figure out what to do with an ailing mortgage.
Property owners that know they won’t be able to pay their mortgage debt can choose to sell their house during this pre-foreclosure time to avoid marring their credit. A house sold during pre-foreclosure may result in a loss of equity for the homeowners but will not count against their credit.
Buying a house in pre-foreclosure is usually the domain of experienced real estate investors who feel comfortable approaching the homeowner to negotiate a purchase before the house becomes listed. The investor then fixes the home up in order to then sell it for a profit at a later date. The average home buyer who is just looking for a place to live may not have the market knowledge or capital to make a pre-foreclosure work for them in their search for a house.
Many houses that lapse into pre-foreclosure will never officially be for sale because the owners eventually catch up on their mortgage payments. If you are interested in a house that has entered the pre-foreclosure process, the best thing to do is watch that house and see how its status progresses over time.