Definition of Pre-Foreclosure Auction

The pre-foreclosure period begins when the lender files a foreclosure lawsuit with the courts or a notice of default, which is public record. Depending on the foreclosure protocol in the state where the home is located, the pre-foreclosure period may last several months to years. Pre-foreclosure can begin with 90 days to several months of missed payments -- again, depending on the state. The lender posts the date on which it plans to sell the property to the highest bidder via public auction or trustee sale.

Most foreclosure auctions do not result in bids, according to ABC Real Estate. Investors usually do not pay the full loan amount on pre-foreclosures because they are worth much less, The homes end up at auction because the borrower couldn't sell it for enough money to pay off the bank to begin with. Investors who bid at auctions must have the cash on hand in the form of a cashier's check. They buy homes "sight unseen" and "as is," without having inspected the home's interior and without repairs or a warranty for its condition.

When a defaulted borrower and lender fail to work out a repayment plan, the lender may allow a short sale as a last resort. Rather than bear the expense of foreclosure -- about 25 percent of the loan amount -- the lender agrees to take a hit on the loan in its pre-foreclosure stage. It's generally cheaper and more efficient for the lender to allow a short sale, also known as a pre-foreclosure sale. The seller lists the home and remains in possession of it as he tries to recoup as much of the loan amount as possible so the lender will let him off the hook for the debt.

When the lender fails to sell the home at a pre-foreclosure auction to recoup the debt, possession reverts back to the lender, completing the foreclosure process. Once owned by the lender, the property is considered real estate owned by the bank, or REO. Foreclosure extinguishes the mortgage debt, accrued interest and attorney fees to the borrower and becomes a black mark on their credit history. Lenders have a department or hire a third-party company to manage their REO inventory and sell it. Lenders try to recoup as much of their losses as possible on REOs and may or may not do repairs to make the homes more marketable.