At the auction, the lender will bid an amount equal to the loan in default. You will have an opportunity to bid as well. While the prices of property at foreclosure auctions are very low, there is substantial risk that must be considered, including (1) you will have NO information or disclosures about the property; (2) you will not have the opportunity to inspect the property prior to purchasing; and (3) you will have to deal with any occupants in the property, including tenants or the defaulting borrowers.
The above assumes that the foreclosure is "non-judicial". If the foreclosure is "judicial" meaning that the lender filed a lawsuit against the borrower to foreclose the property, the borrower as a one year right of redemption. That means the borrower can continue to live in the property and seek to payoff the loan for the one year period.
Of course, before the property goes to auction, there is the opportunity to attempt to purchase the property directly from the borrower. These are often "short sales" in which the sales price will not cover the amount of the mortgage. Short sales require the cooperation and agreement of the lender, and have many challenges.
If the lender does foreclose and is the winning bidder at the auction, it will not doubt market the property for sale eventually. That property is known as an REO and Jed's advice is relevant.
Jeff Woo, Esq.
Sedgwick, Detert, Moran & Arnold LLP
Complex Rental Property Group
The banks also don't feel that state law applies to them so be sure that you can force the neccesary seller mandated actions out of them or be prepared to pay for them youself. The agents representing banks run the gamut from arrogant and un-involved to very good and efficient.
Be sure you work with an agent that is there to protect you and make your vision happen.
As the others have stated, there are different kinds of foreclosure properties - those that have already been foreclosed and those that are in process. If you buy at auction you have to put up a cashier's check "on the courthouse steps" as David mentioned.
If it's already been foreclosed (REO) and offered through the MLS the offer process is close to the same as a regular sale, although you won't get as much disclosure information as you would in a "normal" sale. Although foreclosed properties are usually sold "AS-IS," you do have the right to inspections, which will allow you the ability to determine the condition of the property prior to purchase. Keep in mind that sometimes buyers will make offers with no inspection contingencies, and unless you really know what you're doing this is a VERY bad idea. If someone else wants the property that bad, go on to the next one.
Last, as the others have suggested, get a knowledgeable broker to help you. Too much money on the line to do otherwise.
Lance King/Managing Broker
If you want to purchase a home after it has foreclosed, then that's a bank owned property (REO) which is much safer because you have plenty of time to do your due deligence including getting inspections.
Now, to answer your question about how you purchase a REO, you should work with a local agent who is knowledgeable about the area and who you trust. Ask a friend or co-worker to refer you to someone. Another way is to find an agent on Trulia.
Good luck, and also make sure to get pre-approved for a loan if you are going to finance your home.
Be prepared for a time line with no measure. I've had bank-owned properties which close within a few months, and I just encouraged a buyer walk away from from a negotiated short sale which we agreed to the terms in July 09.
Buyer beware is the best advice in a short sale/foreclosure purchase. I encourage my clients to do dual duty if they want to go forward with a short sale. Most often we continue searching for a "regular sale" and whatever happens first, so be it.