This is the first stage in the foreclosure process. The process is started when the homeowner misses at least one payment and is now considered delinquent on the loan. A pre-foreclosure can also be referred to as a Notice of Default or Lis Pendens, which is a formal warning sent to the borrower on a loan regarding the delinquent payment(s). A Notice of Default or Lis Pendens are essentially the same thing, but signify whether the loan is secured through a mortgage or deed of trust. Once the trustee files a Notice of Default, it immediately becomes public record.

If the proceeds from the foreclosure sale are not enough to pay off the lender, then the borrower is liable for any deficiency. Depending on the particular state laws, a deficiency judgment that is not resolved can result in garnished wages, seized assets and potentially federal income taxes. For additional options see the "Short Sales" section.

Before you can make an offer on any type of real estate, you should do your homework. Ask the assistance of your sales associate to analyze the property including a detailed title search to ensure a clear title. Determine the loan-to-value ratio of the property. This ratio compares the balance of the mortgage to the value of the property. The difference between these two variables is the owner's equity or the potential gross profit in the deal. If there is little or no owner's equity in the property, we recommend you go no further. If there is little or no equity in the deal, it will be very difficult to create a true win-win situation with the owner.

Negotiating with the Owner:
The biggest challenge of buying real estate in pre-foreclosure is getting the attention of the homeowner. Since a Notice of Default is public record, other astute investors have probably contacted the owner as well. Many investors will simply write a letter or send a postcard indicating their interest in the property. We recommend that your sales associate /broker speak to the owner either over the phone or in person. This is the best way to gain the confidence and trust of the owner who is the ultimate decision maker.

If you are planning to "buy and sell" the property rather than occupy it as a primary residence, you should calculate all the costs to buy, carry, repair and sell the property. If there is still a reasonable amount of owner's equity after subtracting all necessary expenses, you have identified a good investment. So how much should you offer the homeowner? While every deal is different, a very reasonable approach is to split the remaining equity with the owner. This way both parties end up in positive positions.

Before you sign any agreement with the owner, double check to ensure the title of the property is clear. Never release any money until your real estate associate/ broker has assured you of a clean title. If everything checks out, you will need to sign a Real Estate Purchase Agreement. At this point, you will want to arrange your financing and ensure that the foreclosure process has been stopped. Assuming all goes well, it looks like you just bought some real estate at below market value.