The basic preforeclosure strategy involves buying the property during the period when the homeowner is in default and the lender has begun, but not yet completed, the foreclosure process. The investor typically works with either the homeowner or both the homeowner and lender to negotiate a discounted price for the property. If the process is successful, the homeowner avoids foreclosure and may even come out of the deal with some cash; the lender saves the time and cost of the foreclosure proceedings and recovers either all or a significant portion of the balance due on the loan; and the investor has a property purchased for a good price that can be either sold or rented out for a profit.

One of the key challenges of preforeclosure investing is that you are usually dealing with homeowners who are in distress because they are facing a financial crisis. They are often confused and frightened, they may not understand the process or their rights, and they’re probably getting conflicting advice from well-meaning but not always well-informed sources.

When you present your offer as a solution to their problem, it will likely be better received if you are knowledgeable about the alternatives the homeowner may have so you can discuss them if they come up. Does this mean you might lose a deal because you told the homeowner what he could do to avoid foreclosure? Possibly. Why should you do that? Because it’s the right and ethical thing.

When a homeowner gets behind on payments

Ideally, when a homeowner is behind on payments, he should contact the lender as soon as possible. Once the loan goes into default, fewer foreclosure prevention options are available.

Some lenders will consider a repayment plan that allows the homeowner to add a portion of what is past due to his regular payment so that the loan is brought current in a fixed amount of time. If the homeowner’s financial problem is temporary and he’s only missed a few payments, this may be a manageable option.

Borrowers may also ask for payments to be reduced or suspended for a specific period, after which regular payments resume and a lump sum or additional partial payments are made to bring the loan current. This is known as forbearance and may be an option when a period of financial distress has a foreseeable end. Forbearance doesn’t help when the borrower is in a home he can’t afford.

Homeowners may also seek to change one or more of the terms of the existing loan agreement to make the payments more manageable. This is known as loan modification and could include lowering the interest rate, extending the term of the loan, or adding missed payments to the loan balance.

The key to effectively using any of these foreclosure prevention strategies is to communicate with the lender early and often. If you are dealing with a homeowner whose loan has already gone into default, it is unlikely the lender will agree to one of these strategies. Certainly you should not discourage the homeowner from trying, but provide a gentle and firm dose of realism. If the foreclosure process has begun, most lenders will insist on full reinstatement to stop the foreclosure. However, many lenders will work with a homeowner who is attempting to sell the property, whether it’s on the open market or to an investor through a short sale.

Of course, the last resort for financially-distressed homeowner is bankruptcy. A Chapter 13 bankruptcy may allow the debtor to keep certain property, such as a house or car, under a court-approved repayment plan. The homeowner should seek legal counsel before making a decision about bankruptcy.

Know the scams

In addition to knowing what legitimate foreclosure alternatives are available, it’s a good idea for you to know about common scams in case you encounter a homeowner who might be a potential victim. Such scams include phony counselors who charge outrageous fees for “assisting” the homeowner; however, their “services” don’t work, the process delays the homeowner from seeking qualified help, and exposes their personal financial information to a fraudster. Another known scam is a bait-and-switch deal where homeowners are tricked into signing over the deed to their home when they think they are signing documents to bring their mortgage current. Victims often don’t know they’ve been scammed until they get an eviction notice. If you suspect that someone is a target of a scam, suggest that he contact the Federal Trade Commission at www.ftc.gov or 1-877-382-4357 immediately.