Trying to profit from pre-foreclosure homes? Read this first before you dive into the complicated world of real estate.

Q: I read an article you wrote about buying real estate through tax sales, and it was very good. I met a contractor who told me that he was about to lose some land he owned because of back taxes.

He said he may call me with the details so we could discuss whether we can both profit if I can pay his back taxes and then to own the property at a huge discount for helping him out.

My question is whether there a way to buy homes from owners who can not afford them, and who will lose them completely, before they are foreclosed on or before they are lost to tax sales?

Instead of waiting for the auctions, or wading through the many tax sale notices, is there a simpler way? I have capital, and am able to talk and negotiate with people. I could help them by getting them some money for their property, and feel I could buy property at a big discount.

A: There are so many people trying to do what you want to do, that we hesitate to say that you should jump into this business. To do this successfully (and there are hedge funds that bought tens of thousands of properties that were in or on the brink of foreclosure during the last ten years), you really have to understand the ins and outs of real estate, real estate taxes, tax sales, foreclosures, sheriff sales, redemptions and a host of other real estate topics.

Let’s discuss your contractor’s property as an example. Your contractor may have a lender on the property he is about to lose. If he owes $100,000 to the lender and $10,000 in back taxes, if the property goes to a tax sale, the lender would likely bid at the tax sale to preserve their mortgage rights. So, this lender would bid $110,000 for the property.

If the property has no lender, the starting bid for the property should be $10,000, but if the property is worth $150,000, you better believe there are other tax buyers out there that will bid for that property with the hope that the owner loses the property in the tax sale and never redeems the sale.

You should also know that an owner of the property in some situations might have legal problems in trying to buy back his property through a tax sale and cheat the lender out of money the owner rightfully owes. So keep that in mind as you work with this contractor. You need to know and understand the issues involved and how they interrelate with each other and the pitfalls that you might encounter.

There are a fair number of books out there that discuss buying properties at tax sales. You could read some of those. You can read the many articles we’ve written on tax sales on Ilyce’s website and you can sit through some sales and see how the process works.

When it comes to buying pre-foreclosure homes, there a quite a number of websites that publish information on that process. A pre-foreclosure home is one that has not yet been foreclosed upon but have still be delinquent.

Many of the websites that list pre-foreclosure homes are subscription services (with a paywall) but they show homes that may be subject to foreclosure in the near future. Sometimes a homeowner has fallen behind on her payments but the lender has not yet decided to foreclose. Many of these pre-foreclosure homes never go into foreclosure. The owner ends up paying what the lender is owed and nothing happens.

But in other instances, those homeowners have fallen into hard times. You can try to work with those buyers but many other people are in that space trying to help them out. You may be offering them a quick price on the home, but you should know that many of those homes are underwater. That means that the owner owes more in taxes and loan payments than the home is worth. You’d have to understand what it means to buy this home now, if it has no equity, and waiting to buy it out of foreclosure, when the lender has canceled the mortgage.

Good luck. Please let us know how you fare in this world.