The first stage takes place before a formal foreclosure complaint is filed. This is commonly called the "pre-foreclosure" stage. There are a few well known purchasing opportunities at this stage ~ with varying degrees of risk.

In the first scenario, the lender and the homeowner try to work out the default by permitting the homeowner to sell the property at less than the total amount owed. This alternative is called a "short sale." This is only permitted when the appraised value of the property is a certain percentage of the amount owed, and the potential sales price is a certain percentage of the appraised value. Because the lender is cooperating in the sale of the asset, a purchaser at this stage may gain equity, with limited (or known) risks.

In the second scenario, the homeowner sells their interest directly without cooperation from the lender. The homeowner usually will accept some percentage of the "equity," which is the difference between what is owed and the home's market value. The are, however, many risks at this stage, including: other liens of record; the inability to know market value; dealing with a distressed owner, etc.