Pre-foreclosures are properties for which the seller is distressed and behind on payments. Such properties can be found from title companies or on websites such as foreclosurefreesearch.com, Zillow, and others.
With pre-foreclosures, there is usually not much equity. If there is, the seller would be able to sell.
I am in Washington State. Other states may have similar laws or judges. In Washington State, Chapter 61.34 of the Revised Code of Washington states that buying distressed residential real estate from an owner who is behind on payments or taxes and is facing foreclosure or a tax sale is “equity skimming” and may be illegal, civilly and criminally.
A recent case confirms the risks of buying property from a distressed residential real estate owner. In Jametsky vs Olsen, a real estate investor tried to assist a distressed homeowner who was about to lose his home due to unpaid property taxes. The homeowner sold the property to the investor who then paid off property taxes and then entered into a ‘lease-option’ agreement with the seller to potentially repurchase the property in 18 months. Afterwards, the former homeowner sued to reacquire title to the property. The buyer won in the trial court and appeals court. However, the Washington Supreme Court held that the transaction was a distressed conveyance because of a potential county tax foreclosure.
If you must buy from a distressed seller, it is never a good idea to let him or her stay in the house. It is risky in general to buy residential real estate from a distressed seller. Talk to an experienced real estate lawyer before getting into this kind of business.