Distressed properties are houses and condominiums in which the owners have defaulted in paying their mortgage, property taxes, or water bills. Foreclosure procedures vary from one community to the next, between federal and local agencies, and between government-backed and private mortgage holders.

In the case of nonpayment of local property taxes and water bills, you can contact your tax collector or other public official who conducts the tax sales and ask about the next auction of such properties.

There are a few points you should consider when pursuing properties up for auction. For one, the owners of the properties sometimes manage to come up with delinquent payments and save their homes before auction, even after their property has been publicly listed. Thus, some of the addresses you see on the tax collector's list will never actually go to auction. Also, most houses have mortgages, and mortgage lenders do not allow their properties to go on the auction block for unpaid taxes. They pay the taxes and foreclose on the property. Finally, this is a complicated arena for the novice buyer. Ask your lawyer to explain city tax sales. You might indeed decide to forgo this type of house hunt for one that is less complicated.

The U.S. Department of Housing and Urban Development (HUD) also sells its foreclosures. These are the homes taken by HUD for the nonpayment of FHA-backed loans. Those homes and condos are usually sold through sealed bids. Would-be buyers send in their best offer to the office handling the sale and the highest bid wins the house or condo. Financing is arranged through a conventional mortgage lender and insured by the FHA. Down payment requirements can be as low as a few hundred dollars with some incentive programs. Buyers can finance up to 100 percent of the closing costs, including the initial mortgage insurance premium required by the FHA. Sometimes HUD helps with repair costs, too.

Many of these distressed homes will need work, to put it mildly. They may be damaged far beyond the definition of handyman's special, so get as much information as you can. However, you're likely going to be able to get a distressed home for a much lower cost than you could otherwise find. As one HUD spokesperson put it, “When you buy a house well below market price, you have to expect to put in some sweat equity.” Look for words in ads indicating repairs that are required or for the term “handyman's special.” These may indicate distressed properties that you can get for a bargain.

In the private sector, houses are also sold by banks that have taken them back for mortgage default. Contact the real-estate-owned (REO) department of any bank, and ask whether they have a list of their foreclosed properties. Some banks deal directly with prospective buyers for those houses; others turn them over to a local real-estate agency to sell for them. Start with the bank first.

If a lender is really eager to get rid of an REO property, it could make the mortgage financing very attractive, with a low down payment requirement and good interest rates. That's what makes REO properties worth pursuing — not their sale price, which is usually no great bargain.

Distressed properties come in two forms. The first is physically distressed, when they require repairs and maintenance to put them in order. The second situation is when the seller is distressed from illness, an excessive financial obligation, or even a management headache, turning a very good and reasonable piece of property into a good buying opportunity for you. Remember, “One man's ceiling may be another man's floor.” In other words, the limit of what someone else can handle financially may be perfectly acceptable to you.

Look at elbow grease or a handyman special as being something that will benefit you by allowing you to put what's called sweat equity — labor you invest that results in improvements that increase its value — into the property.

When you're dealing with banks, savings and loans, credit unions, or other institutional sellers, you may find that what you perceive as a distress sale is not always available to you. Why, you might ask, if a bank has foreclosed on a piece of property did they not view the property as a distress sale? Oftentimes a lending institution will be able to afford to carry the real estate without the property being a negative obligation. If that's the case, then the institution naturally wants to get a reasonable payback on their books after having made a bad loan.