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The pre-foreclosure stage -- the period from when a Notice of Default or Lis Pendens has been issued until the time the lender puts the property up for an auction -- can last several months, so buying during this time requires a lot of patience and persistence. It typically offers the best bargains, but it's also the most difficult stage to purchase a distressed home. Understand that the owner still has a chance to stop the foreclosure process by paying off what is owed or by selling the property. Here's what to do:

1) Find properties and look at them. If the house is not already on the market, you'll need to find distressed homeowners by marketing yourself through mailings, ads ("We buy homes fast" and "We have CASH for homes") and networking. You can also look for foreclosure notices in the local newspapers or subscribe to an online listing service like RealtyTrac.

After you find a property, drive by it to get a better idea of its condition and neighborhood. This could facilitate a casual meeting with the owner or yield a wealth of unexpected information from a talkative neighbor. Remember, the owners are still living in the home, so be discreet.

2) Confirm that the property is still in default. Sometimes a homeowner has already resolved the situation. Contact the trustee -- the person or party (often an attorney) who is filing the paperwork to initiate and carry out foreclosure proceedings on a property.

3) Check the potential bargain. Gather this information:

• Outstanding loan balance
• Estimated market value (for tips on how to calculate this, read this)
• Other property liens and loans the owner may have taken out (for tips on how to check these, read this)
• History of ownership
• Your monthly expenses as a homeowner (mortgage payment, taxes, insurance, repairs, etc.)

Subtract all your costs as a buyer (loan balance, additional liens, repair costs) from the estimated market value of the property, and use that number as a basis for your negotiations with the owner. This is all public information so you can research on your own with the county recorder, consult a local real estate agent or use online services like RealtyTrac.com.

4) Contact the owner.

• Start by sending a letter. Let the homeowner know of your interest in the property.
• Try to arrange a meeting to discuss a possible sale and to get a better look at the property.
• For tips on how to work with distressed homeowners, read this.
• You can search for the owner's phone number if it's listed.
• Don't approach the owner in person, unless you're experienced at doing that.
• Arrange to walk through the property to make sure it meets your criteria as a buyer.
• Depending on the owner, you may have to buy the property "as is." For more on buying "as-is," read this.
• Keep a tab of estimated repair costs and subtract them from your purchase offer. Your willingness to put some "sweat equity" in the property will increase the chances of realizing a good bargain.

5) Negotiate a purchase agreement. If you and the owner both agree to proceed, negotiate the terms of a purchase. The goal for you as a buyer is to purchase a property at least 20 percent below full market value, though better deals are possible. When determining the final purchase offer, take into account the rate of real estate appreciation in the area and the potential for increasing the house's value by making repairs and improvements.

• Contact the foreclosing lender and any other lien holders and let them know you plan on buying the house. You may be able to negotiate a lower payoff amount to satisfy the debts owed, meaning you may not have to pay off the entire debt amount. To learn more about negotiating a short sale, read this. A real estate agent can also be a valuable resource during the negotiating process.
• If the loan in default is assumable, you may be able to pay off the amount in default and take over payments under the current terms of that loan.
• If not, you will need to pay off the full amount owed on the loan. If the property has other liens placed on it, you'll need to make sure those are cleared out as part of the purchase agreement.

Homeowners might be more willing to work with you if you offer to help them in creative ways. Consider these:

• If the owner has equity in the property above and beyond the liens, offer to split the equity with them, allowing them to walk away with cash and you to acquire a property below market value.
• Let them stay in the house for a certain amount of time (possibly paying rent) until they find a new place to stay.
• Pay their housing costs for the first month or more after they leave the property.
• If you're purchasing the property as an investment, you may let them stay and pay rent until you decide to resell the house.

6) Close the deal. Once all parties have arrived at an agreement, put the agreement in writing. If you're not familiar with how to draw up a purchase agreement, ask a local real estate agent or real estate attorney. The purchase agreement should make closing the deal contingent on 1) a full title search conducted by a title company or attorney and 2) a professional inspection of the property.An escrow company, who acts as a third party, can manage the transfer of money and property ownership. Assuming that you have your financing secured, this should be a fairly smooth process.

Remember, a property in pre-foreclosure status is not necessarily for sale. The owner may be pursuing other options to cure the default; however, an offer from a pre-qualified cash buyer may be the best solution to get the owner out from under the impending foreclosure. You can also make an offer to the owner prior to the scheduled auction date even if the Notice of Trustee Sale has already been filed.

MORE...

• Foreclosure Buying Guide
• How to Break Into The Foreclosure Market
• The Three Faces of Foreclosure Buying
• Advantages and Disadvantages of Buying a Foreclosure
• Working with Distressed Homeowners
• Tapping the Growing Short Sale Market
• Buying at Foreclosure Auctions
• Buying Bank-Owned Properties (REOs)