In today’s real estate market there are thousands of great foreclosure properties for sale, and many of them are once-in-a-lifetime bargains. But before rushing out to bid on or buy a foreclosed home, it is important to first understand that foreclosed real estate can be a minefield of hidden risk and liability. Without knowing those disguised risks it is possible to purchase nothing but problems, but if you are aware of some of the pitfalls associated with foreclosures you can work to avoid them and take advantage of some legitimate bargains and values.

Many homes are foreclosed on because the owners owe considerable debt not just to the mortgage company that is doing the foreclosing but to others such as contractors or the IRS. If you accept ownership of that kind of home you also accept legal responsibility for those other debts. Many people buy foreclosures, for example, and then find that they owe the government tens of thousands of dollars in back taxes that the previous owner did not pay. To avoid buying into this kind of financial trouble it is important to do a title search and check the records at the courthouse to determine whether or not the home is being sold free of debts and liens.

Another common problem with foreclosures is that they may have serious structural problems that require expensive repairs. In order to evaluate a house for this kind of issue it is necessary to hire a licensed home inspector who can study the property and give you a full report on its current condition. But usually it is not possible to inspect a foreclosure before you buy it.

One safer alternative is to wait and buy foreclosures after they have become what are known as REO properties – which stands for “Real Estate Owned.” These are homes that went to foreclosure auctions but did not attract a high enough bid so the mortgage company didn’t sell them but kept them in its own portfolio. When that happens the lender will hire a Realtor who specializes in REO properties and the Realtor will market them just like a regular real estate listing – except that they usually sell at a deep discount.

REO properties can be inspected, they can have a complete title search done, and you can buy them with a standard mortgage – instead of having to pay cash like you do at a foreclosure auction. So you can invest in a foreclosure without the added risk if you shop for REO properties instead of full-fledged foreclosures, and for the novice investor that is usually a less risky way to participate in today’s attractive foreclosure markets.