What Is a Pre-Foreclosure, and How Do You Buy One?

A home enters pre-foreclosure when the lender starts the formal foreclosure process, usually after several missed payments. How it starts depends on the state:

• In non-judicial states such as California, the lender records a notice of default with the county.
• In judicial states such as New York or Florida, the lender files a lawsuit, and a notice called a lis pendens is recorded.

Those notices are public, which is how buyers and investors learn that a home is in pre-foreclosure.

Pre-foreclosure is the first of three stages a distressed home can pass through.

More on the later stages: how foreclosure auctions work and what a bank-owned home is.

You buy it from the owner, before the auction. The usual steps:

1. Find the homes. Look up notices of default or lis pendens filings in county records, or use a data service that tracks them. Some pre-foreclosures are also listed by agents.
2. Reach the owner respectfully. The owner is under real pressure. Be clear and honest about who you are and what you're offering.
3. Check the numbers. Find out roughly what's owed and what the home is worth. If the loan is larger than the price, it's a short sale.
4. Get lender approval for a short sale. The lender has to agree to take less than it's owed. This can take time, and the auction date doesn't always wait.
5. Do your checks. Get a title search, inspect the home if you can, and use a real estate attorney or agent who knows distressed sales.
6. Close before the sale date. If the deal isn't done before the auction, the home may be sold to someone else.

A short sale is when the home sells for less than what the owner owes, and the lender agrees to accept that amount. The Consumer Financial Protection Bureau describes it as one of the options to avoid foreclosure. For buyers, the key point is that the lender, not just the owner, has to say yes.

Yes, when they're done fairly. Buying from an owner in pre-foreclosure is legal, but several states, including California and Maryland, have laws that protect owners in foreclosure from unfair purchase and "rescue" deals. These laws can require specific contract terms, give the owner time to cancel, and make some arrangements illegal. If you plan to buy pre-foreclosures, have a real estate attorney in that state check your process and your contract.

Expect delays and surprises:

• The deal can fall through. The owner may catch up, file for bankruptcy, or the lender may say no to a short sale.
• The clock. The auction date may arrive before the lender approves the sale.
• Hidden debts. Second mortgages, tax liens and other claims may need to be cleared. A title search will show them.
• Condition. Owners under financial pressure may have put off repairs.

Neither is better for everyone. Pre-foreclosure can mean a lower price, but it's slow, personal and uncertain. Bank-owned homes are usually simpler for a first-time buyer: the bank owns the home outright, and title and occupancy questions have often been worked through. Most buyers on Vihara start there.

On Vihara, every property shows its starting price next to an estimate. Find a property deal, or talk to a Vihara advisor about what kind of deal fits you, at no cost.