Usually, if the seller notifies them of an impending sale, the bank will hold off on the Trustee sale and let it close with the buyer, but they don't have to. If the borrower is behind and the lender will get all his money out of the sale, they have a great incentive to let the sale complete. On the other hand, if the first or second mortgage (or both) will wind up short at the sale price, then they will study the net proceeds and decide if they want to foreclose or not.
Note that the costs involved in foreclosing, holding the REO, and selling at market later may be so high that a short sale is a better proposition for them. This makes pre-foreclosures pretty attractive. If you wait until auction day, then the price will be the current balance on the loan, not less.
Foreclosures have the advantage that title is cleared of all liens, except taxes. This means HOA liens, mechanics liens, second mortgage lien and so on are simply erased by the foreclosure. Taxes are a superior lien and run with the land. But, the mortgage company's REO will be sold to you with the taxes prorated. Foreclosures can be attractive also.
The downside of foreclosures is that the property may have been attacked by copper thieves, had a foundation shift during its vacancy, been stripped of appliances and anything of value by the foreclosed homeowner or damaged during his move-out. Banks are not required to issue a Seller's Disclosure, so caveat emptor. Pre-foreclosures usually are WYSIWYG. They may need updating or deferred maintenance taken care of, and usually need cleaning, carpeting and painting, but generally are in better shape, and they come with a disclosure statement.
Which one has better pricing? An old REO that needs work. Which one is the optimum choice for most people? The pre-foreclosure.
You can make more money on the foreclosure but it is riskier and requires deeper capital.
1. Short sales where homeowners are selling property for less than what they owe on it. Although seller can accept an offer, it's the lender who makes the final decision. Lender will have to approve the short sale. Sometimes the Seller and the Realtor list the property before the lender approves the short sale. This could be rather risky as the lender may not agree with the price. Additionally, it can take 45 days or longer from the time the offer is forwarded to the lender before the lender accepts, rejects or (rarely) counteroffers the offer. If you have the time, and if you are confident about your offer, this is a good place to start.
2. Trustee Sale. If the property was not successfully sold during a period of time, the lender can issue a Notice of Trustee Sale which is recorded with the County Clerk's office. The sale is held at the court steps, and is open for bid. Sometimes, a minimum bid is announced. Some astute buyers/investors come prepared to raise their bid in increments, and come prepared with certified checks for each increment. However, one may be caught up in the fervor of the moment and overbid.
3. REO (real estate owned/bank owned). The lender has foreclosed and owns the property. They engage realtors to list the properties as REOs. They are not in the business of owning or keeping inventory, and will likely price the properties aggressively so that they will sell. REOs are generally AS IS sales, no credits, no repairs. So buyer beware. Fortunately, the buyers can still have the opportunity to check out the properties --- even after they have an accepted offer, they can have the loan/buyer inspection contingency. If the repairs are deemed too extensive by the buyer's standards, the buyer can back out.
Bruce has a great response as to the difference of the two. I will just add that in a pre-foreclosure; that's usually where most GOOD investors make a killing! However, you've really got to have your system down and know exactly what you're doing before you start dabbling with pre-foreclosures.
If a home goes through the complete foreclosure process and the bank ends up with the home they will usually list it with an agent who works with REOs (Real Estate Owned) by lending institutions. Depending on the conditions of the market in the area a bank may discount the price below market by a little or a lot, and in some markets where the real estate market has remained strong they may not discount the price at all. You should find an agent who knows the local market conditions in the area(s) you are interested in purchasing a home.
We offer a buyers rebate program where you can earn up to 50% of our commissions. Contact my office if we can assist ... I have seen some opp's on new construction that were foreclosures. You will need to be pre-approved for a loan all offers are submitted with letter from the lender