What Does Pre-foreclosure Mean in Real Estate?

What Does Pre-foreclosure Mean?

With inflation on the steepest rise since the 80s and gas prices soaring, many homeowners are finding it nearly impossible to keep up with mortgage payments. You may have gotten a letter in the mail from your lender informing you that your home is in pre-foreclosure. What does pre-foreclosure mean, and is this a lucrative investment avenue?

In short, pre-foreclosure is the beginning of the foreclosure process, and occurs when a homeowner fails to keep up with their mortgage payments.

Once we answer the question of what does pre-foreclosure mean, I’m going to share with you information that will allow you to purchase and resell dozens of homes pre-foreclosure and when we finish you’ll have important information to help you do the same.  

Real estate foreclosure business is well known because of the promotions on nationwide television.  And that’s because everyone believes, as I do, that one man’s garbage could be another man’s gold.  

The real estate business relentlessly goes from boom to bust and boom to bust that’s usually created by economies that change. And the financial influence of the government and the banks has a lot to do with real estate. 

It will boom with low interest rates or it will bust with high interest rates.  I plan to share with you some insights to help you make money in both markets. 

A Brief History of Pre-foreclosure

In the 1900’s, at the start of the century, banks loaned money for only one year.  At the close of the year, the borrower had to pay back 100% of the loan.  That was OK because most of the lenders and all of the buyers understood that farmers would be borrowing the money. And when the wheat was harvested and sold, the farmer paid off his loan.  

Sometimes, Mother nature raised her ugly head and sometimes there is a drought. Sometimes there is too much water and there is a flood. Sometimes a cyclone. Sometimes there are hurricanes.  All of these natural phenomena’s ruin crops, kill cattle and farmers suffer through this every year.  

And if the thunderstorm wipes out the crops, the farmer can’t pay.  The result is the bank gets the property.  But the farmer is bankrupt and goes to live with relatives.  

The crisis was cured.  The government, the Federal Housing Administration (FHA) created a simple solution.  And the simple solution was an amortized loan of 30 years.  And that meant the farmer had 30 years to pay.  And the payments were small.  And they were monthly.  

Today, the banks lend just about anyone that has a decent credit rating and the banks simply wants collateral.  The home, the farm, something they can sell if you don’t pay them.  The majority of borrowers pay their loans.  

However, crises happen, divorce, sickness, disease. Suddenly, the choice has to be made. Should you pay the doctor to pay for your sick son or should you pay the house payment? Easy decision. Your son is forever. The bank can have the house. This is foreclosure. 

The bank wants their collateral.  It would be nice when it doesn’t happen that the bank would wait. They tried that. It doesn’t do any good.  So, foreclosure is nothing more than the bank requesting the return of their capital/collateral.  

Buying a Pre-foreclosure:
An Investment Opportunity

If you are in foreclosure, you could stop it instantaneously by simply signing the deed over to the bank.  There is a term for that. Deed in lieu of foreclosure.  Home owners don’t do that. They fight to hold the property. 

Foreclosure, the bank wants the property so they can resell and reuse the money. The home owner is getting a divorce or maybe the homeowner lost their job.  A mortgage foreclosure is a law suit.  The bank is the plaintiff. The home owner is the defendant.  

A law suit is ugly.  The bank hires an attorney.  The attorney claims the homeowner is a dead beat.  This process of a law suit gets uglier and uglier.  Attorneys are involved, the judge is involved and the appraisers are involved.  Each works very slowly.  

The bank wants the property.  It could take 6 months, 9 months. I’ve seen it take 2 years.  Meanwhile, the bank is not getting paid. Meanwhile, the taxes are not being paid.  It’s getting uglier by the minute.  Once the law suit is filed, it will only be settled when the property is brought to a sheriff’s sale.  And the judge has mandated it to be sold.  

Thousands of people nationwide would like to buy the property at the sale if there is equity. Equity is the difference between the market price and what’s owed. If the market price is $200,000 and the mortgage is $100,000, now there is $100,000 in equity.  

Suddenly a maverick entrepreneur realizes the foreclosure has been filed.  And the attorneys work very slowly.  And the judge works at very close to glacier speed.  The foreclosure will be continued for 6 months, 9 months, even 18 months.  

The maverick entrepreneur could go directly to the homeowner, pre-foreclosure auction, before the auction on the court house steps. This is pre-foreclosure.  what does pre-foreclosure mean

The seller still owns the property.  If the seller loses the property at auction, they will get no money.  If the seller would take some cash and move, and the property is worth $200,000 and the mortgage was $100,000 and the seller took $10,000 to move, $90,000 in equity just went to the pre-foreclosure buyer.  

Foreclosure is a process. It’s a legal process and with a mortgage. Attorneys are involved, judges are involved and appraisers are involved. Everyone is getting paid and working very slowly. Pre-foreclosure buyers are a force in the marketplace.  Does the bank care? Yes. But what they want more than anything is payments on the loan.  

I’m not giving you a course in pre-foreclosure. I’m explaining the process.  In Texas and much of the west, the lenders do not use a mortgage because the mortgage requires attorneys and judges and it may take years, as I’ve just explained, to regain the collateral/capital. 

So, in Texas and the west, they use a deed of trust or Trust Deed whichever you prefer. A Trust Deed does not involve attorneys, it involves 3 parties.  The first of which is the trustee. The second of which is the trustor and the third is the beneficiary.  

I’ll explain.  The trustee is an independent 3rd party. The trustor is the home owner. And the beneficiary is the bank.  If a property owner is late on a payment, no bank and no attorney and no judge are involved.  The trustee simply sends a notice giving the property owner “x” days to pay or the trustee will sell the house or the property.

The trustee has the power of sale under the law in those states.  For example, in Texas, if a trustee issues a notice, 21 days later, the property will be sold on the courthouse steps.  Compare that with 6 months, 9 months or 2 years on a mortgage.  

In California, the trustee will allow you, the defaulting home owner, 111 days. If the trustee issues a notice, it is a public record. You can go to the courthouse and see the record of everyone that’s issued a notice of default every day.  

Once you have the notice for who’s in default, you can go to those people and purchase the property in a pre-foreclosure sale, pre-Sheriff’s sale, pre-trustee sale.  

What’s the difference?  Trustees can sell properties in days when the lending documents are deed of trust. When the lending document is a mortgage, attorneys and judges can take years.  

In either case, once the notice of default is recorded, anyone can purchase the property pre-foreclosure auction.  

Now you understand the opportunity of a place like Los Angeles county. In a bad economy, I’ve seen many weeks, I want to emphasis “weeks”, where there were 1,000 trustee sales announced. That’s the default notice. 


I hope that I’ve answered your question about what does pre-foreclosure mean in real estate. As a free gift to you, I would like to offer you a free gift that talks about another sub-set of real estate investing.

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Ted Thomas

Ted Thomas is America’s Leading Authority on Tax Lien Certificates and Tax Deed Auctions, as well as a publisher and author of more than 30 books. His guidebooks on Real Estate have sold in four corners of the world. He has been teaching people just like you for over 30 years how to buy houses in good neighborhoods for pennies on the dollar. He teaches how to create wealth with minimum risk and easy-to-learn methods.

The Ted Thomas Difference:

  • Ted is recognized as America’s Tax Lien Certificate & Tax Deed Authority and has been helping people with investing in tax defaulted properties for over 30 years.
  • Ted has built a team of certified coaches that have 70 combined years of auction experience and are available to his students by phone to guide and mentor you to avoid getting overwhelmed or worse, losing money
  • Ted has ironclad PROOF that what he is teaching you does work. With hundreds of successful students providing testimonials and a 4.9 Google rating which is unheard of in this industry.
  • Ted and his staff don’t hide behind a website; they can be reached during office hours at 321-449-9940.

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