Looking for foreclosure listings can be a lucrative endeavor but many beleive finding preforeclosures is where the real money is. A preforeclosure, put simply, is a situation where a homeowner falls behind on house payments and starts looking for a way out of the problem. The owner may or may not be officially in default even technically preforeclosure starts at the lis pendens or notice of default.

Investors looking for preforeclosures use bandit signs, newspaper ads, postcards, etc usually stating “we buy houses” to locate homeowners in trouble. Many investors have made fortunes, or so they say, in this real estate investing niche. If you are thinking of doing this type of business you should know it is not as carefree and easy as the late night infomercial gurus want you to believe.

As with any business endeavor there are risks involved. Liens on the property could sour the deal if they are not identified. A lien an encumbrance on the property title that tells the public that the lien holder has some type of claim to the property. For example a mortgage could be considered a lien. The mortgage holder has a right to foreclose if not paid. Or, If the homeowner fails to pay taxes a tax lien may be placed against the property. Liens are a risk in preforeclosure investing but when a property is foreclosed most liens are extinguished.

One type of lien to take special note of is a mechanics lien. If work has been done on the property and the contractor has not been paid they can file mechanics lien and in some extreme cases it can force the sale of the home to pay the balance due. What makes a mechanics lien special is that they are allowed 180 days (states may vary) to file the lien. That means you may buy a preforeclosure in February and find out in May that a lien has been filed because there is a contractor’s bill due on the property.

Liens should be uncovered with a title inspection. Mechanics liens may not show but some type of conversation should occur with the seller to uncover any recent work done on the property and who did it. Then it is simply a matter of contacting the contractor to find out if the work was paid for in full.