For potential home buyers, foreclosures conjure up images of bargain-basement buys.

But anyone considering buying a foreclosed home should forget about paying pennies on the dollar. In today's hot real estate market, such deals are rare.

"You can buy foreclosures for as cheap as 30 or 40 percent below market, but most foreclosures sell for 5 percent below market," said John T. Reed, editor of Real Estate Investor's Monthly, a newsletter based in Alamo, Calif.

Yet the savings may be twofold if the property is purchased from the lender who holds the mortgage that's in default. That lender may be willing to waive some closing costs, maybe even offer a break on the interest rate or the down payment.

Investment of time
A novice must learn to navigate the foreclosure process. Todd Beitler, owner of the Real Estate Library in Boca Raton, Fla., and author of a foreclosure how-to manual, says the time and effort can translate to savings. "If somebody spends 10 hours a week for five weeks to do research, it's worth it."

For most consumers, however, the foreclosure process can prove daunting, Reed says. Good buys are available, but they require research, preparation, patience and persistence.

The foreclosure process starts when a property owner falls behind on mortgage payments. Because the homeowner has been in financial trouble before defaulting on the mortgage, the home likely hasn't been maintained.

This can be a boon -- or boondoggle -- for a buyer. Houses in poor condition might fetch bargain prices, but repairs can boost the cost again.

Reading assignments
When a lender decides to foreclose on a property, a lis pendens (Latin for "lawsuit pending") or notice of default is filed, depending on the state. This document is a public record, and for buyers, it's the first step in locating a property in foreclosure. A buyer looking for foreclosures also can buy magazines and newsletters that list properties in default.

Once a home has been located, search public records. Look for liens on the property, since they can drive up the purchase price. Liens typically are placed on a house for unpaid property taxes. Also check assessed values and sale prices of neighboring properties.

Research local state foreclosure laws, since they differ. Some states -- such as Florida, New York, Ohio and Pennsylvania -- require the lender to sue the borrower and get a court order for the sale of the property, a process known as judicial foreclosure. Other states -- including California and Texas -- follow the non-judicial foreclosure process, which doesn't require a lawsuit.

For novice investors, buying from the lender is the safest way to buy. Most foreclosures are taken back by the bank during auction, Beitler says. While well-located homes in good shape generally don't sell for deep discounts, rundown properties can be sold more cheaply.

Sometimes, the banks hire a real estate agent and sell foreclosed homes in the traditional manner, Reed says. But sometimes buyers can succeed by pestering bank loan officers with low offers.

Buyers might try low-balling the lender's REO (for "real estate owned") officer shortly before the non-performing assets have to be reported to supervisors, Beitler says.

The safest deals
Bank-owned properties offer the safest deal for inexperienced foreclosure buyers, Beitler says: "There's no risk. There are no taxes, no liens, no tenants to evict."

A lender that's eager to sell might be willing to offer attractive terms, says George Tribble, head of Tribble Mortgage Co. in Oakland, Calif., and president of the California Association of Mortgage Brokers.

The lender might offer to finance the property at a below-market rate or with a lower-than-usual down payment. Because the bank already has done an appraisal, the buyer might not have to pay an appraisal fee, Tribble says. And lender deals typically include title insurance, which removes much of the risk that accompanies buying homes earlier in the foreclosure process.

For more daring investors, there are two other points in the foreclosure process to buy homes:

• Before foreclosure. The buyer finds a homeowner about to go into default. The homeowner doesn't want to lose all of the equity in the property, so accepts a portion of the difference between the equity and the home's market value.
  
  Pre-foreclosure buys offer bargains but demand persistence. That's because creditors are often hounding owners at this stage. "Trying to get through to the homeowner is virtually impossible," Beitler says.
  
  If the homeowner is contacted, the buyer could be in for a surprise, Reed adds. Homeowners in default might not have phones or electricity, and they might have alcohol or drug problems. What's more, they probably need somewhere to live before they can move out of the property the buyer wants.

• During an auction. This is a high-risk, high-reward proposition, and it's not for first-time foreclosure buyers, Beitler says. Most auctions take place at the county courthouse steps, and they pose disadvantages: Buyers might not be able to inspect the property, and they'll have to put up the entire purchase price the same day.
  
  The U.S. Department of Housing and Urban Development also runs auctions to unload homes it has acquired through defaults on federally backed mortgages. There aren't a lot of steals in this process, according to a study by Tim Allen, a real estate professor at Florida Atlantic University.
  
  Allen tracked sales at a HUD auction in Florida in 1998; he found that buyers paid prices very close to assessed value. Beitler agrees that there's a "frenzy" at HUD auctions that can push prices to unreasonable levels.