Buying Foreclosures Worth the Trouble?

Many properties in this stage are sold without the opportunity for prospective buyers to make an inspection, so you won't know the condition of the house until you buy it. That's a potentially major risk. You must also determine whether there are any liens on the house or any other problems with the title; this information is generally available free (but with a lot of paper shuffling) from your county records office.

If the auction doesn't meet the minimum asking price set by the lender, then the lender takes ownership of the property. This sets the stage for the most popular option for buyers of foreclosed homes: Real estate owned (REO) property, in which you buy the property directly from the lender or trustee.

In this case, Sharga says, the best deals often come after the bank has held the property for at least 60 days and is facing rising carrying costs for utilities, insurance and property taxes. Still, Sharga says buying a REO "is more of an art than a science." Banks want to get the most they can from a property, so there is no guarantee that you'll get a steal.

Know the Property And the Market

The most common mistake made when buying a foreclosure property is underestimating the cost of rehabilitating it. As the previous owner struggled to keep up with the mortgage, it is unlikely that he or she spent much, if anything, on upkeep.

Another common mistake is overestimating the local market. If you plan to have tenants, know the going rate for rentals in the area.