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5 Steps to Buying a Foreclosure

BOSTON ( MainStreet) -- With more than 1 million U.S. homes in some phase of the foreclosure process, great deals abound -- if you know how to separate the wheat from the chaff.

"The No. 1 reason to buy a foreclosure is the potential for a good bargain," says Daren Blomquist of RealtyTrac.com, which follows the U.S. foreclosure market. "Distressed properties have always come with a built-in discount -- even before today's foreclosure crisis."

Would-be foreclosure buyers should tread carefully, since properties are typically sold "as is."

RealtyTrac figures show the average "short sale," or distressed property, sold at a deep discount by a homeowner at risk of foreclosure fetched just $192,129 in the second quarter. That's 20% less than the $241,715 the average nondistressed home sold for.

"Bank-owned" properties, or homes lenders have seized through foreclosure and have put up for resale, sold for even less. Also known as "real-estate-owned" properties ("REOs" for short), bank-owned homes went for only $145,211 on average during the second quarter -- 40% below the average for all housing sales.

"Foreclosures might not be for every buyer, but we believe they represent a great opportunity for many buyers," Blomquist says.

Still, he recommends would-be foreclosure buyers tread carefully.

After all, foreclosed homes are typically sold "as is," even though many fell into disrepair as their former owners struggled with money troubles.

Some ex-homeowners also damage homes on their way out the door, while other properties sit vacant for months or years -- attracting vandals or falling further into decay.

How can you tell the good from the bad and the ugly?

Here are five things Blomquist says smart foreclosure buyers should always do:

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