Pre-Foreclosure, Auction, REO: What’s the Difference?

The differences between pre-foreclosures, foreclosure auctions, and REO foreclosures (real estate owned) is that each one is a step in the foreclosure process instead of being a type of foreclosure.  Each one of these steps follow one another and each one has opportunities for you to save your house, although they diminish as each progression occurs. 

Pre-foreclosure is the first step where you get a notice from your lender that they are starting the foreclosure process.  If you cannot work out a deal, the next step is where you go into foreclosure and the lender will auction your “real property” to the highest bidder in hopes of getting their money back. If the auction does not work, your lender may decide to hold onto the property and sell it themselves.  This is called REO foreclosure.  

Now that you know each is a step in the process, let’s dive a bit deeper into each so you can work to avoid losing everything, or if you’re a real estate investor, determine if a foreclosure home is the right one for you to buy and when to engage. 

Note: If you’re a home owner, don’t think of an investor as the enemy.  They may decide to offer you a rent-to-own agreement so you can stay in your home, they earn a profit, and you may be able to buy it back over time.  If you have no other option but foreclosure, a real estate investor may buy your home from you and you’ll at least have some cash in your pocket instead of losing everything.

Let’s start by looking at what each of these steps in the foreclosure process mean, and at the end of this post you’ll find a helpful table sharing ways to avoid pre-foreclosure, foreclosure auctions and having your home become an REO property.

Pre-foreclosure

Pre-foreclosure is the first step of the foreclosure process that begins when the lender notifies a borrower by certified letter that they intend to begin foreclosure proceedings (notice of default). Pre-foreclosure ends when the lender forecloses on the property or agrees to an arrangement with the homeowner. 

Pro-tip: If you’re in pre-foreclosure and your lender won’t budge, contact a real estate investor or real estate wholesaler and see if they would like to buy your house for cash.  You’ll have money in your pocket instead of losing everything.

Foreclosure Auction

A foreclosure auction is the next step, and it happens after the pre-foreclosure process finishes.  The property is now being sold, so the lender can get the money back that they are owed.  The minimum bid at the auction normally starts at the loan balance, and the home is sold to the highest bidder.  These auctions are also called sheriff’s sales or trustee sales.  If you’re a real estate investor and are attending the auction, make sure to prepare a comp on the property so you can estimate your maximum bid and turn a profit if you buy the home.

REO Foreclosure

An REO foreclosure is a property owned by the lender that did not successfully sell at a foreclosure auction.  The bank lists the property on MLS and other real estate listing sites oftentimes at a discount.

Ways to Stop Foreclosure and the Foreclosure Process

Here are several ways to stop each of these steps in the foreclosure process from happening.  And many of them can be applied at the next stage if it doesn’t work the first time.  

Ways To Stop A Foreclosure	Pre-foreclosure	Foreclosure auctions	REO foreclosure
Request a loan modification	X	X
Pay the past due balance along with late fees and penalties	X	X	X
Deed in Lieu of Foreclosure	X	X
Turn the property into a rental to raise money quickly	X
File for bankruptcy	X	X
File a lawsuit		X
Short sale	X	X	X
Sell to a cash investor	X	X	X
Request a forbearance	X
Reach out to a housing counselor from HUD (U.S. Department of Housing and Urban Development)	X	X
Take out a reverse mortgage	X	X
Reach out to the Making Home Affordable program which is a government initiative that provides mortgage help.	X	X

Remember, it is only too late to stop a foreclosure when the property is sold to someone new.  If you really want to keep your home, keep this in mind and keep working on it.

Now you know the difference between pre-foreclosure, foreclosure auctions, and REO foreclosures and how to stop foreclosure proceedings for each once started.