Congratulations on getting ready to purchase your first home, how exciting! I am a realtor working in the Bay Area and I do understand how housing price here can be prohibitive for the first time home buyers and why you would want to consider foreclosure properties.
This is a huge question and I really don't know if it can be adequately answered by a quick forum. You are putting a lot of money at stake here. However, by posting your question on Trulia is definitely the first step.
Right now, a lot of people want to buy a foreclosed property and there are a lot of talks and classes for realtors and consumers alike about foreclosure properties. Some are able to invest in that successfully, others are not.
There are quite a few steps to go through before a house is formally foreclosed. For properties that are being foreclosed on or have already foreclosed, you will most likely be buying it 'as isâ€™ because some of the houses will not have disclosures; and the person who owns the house, whether it's the default owner or the bank just want to unload the property and are usually not interested in negotiating for repairs (the owner just don't have the money). If the house is foreclosed by the bank, sometimes the owner will tear up the house before the house is foreclosed - I have seen some pretty sad houses where it looks like a tornado was there). These are some of risks you will be looking at. Others are the title issue because there might be several liens against one house; generally, IRS being #1, the first loan being #2, the second loan being #3, then you could have other loans, such as mechanical loan, .,etc.
Not trying to scare you, but I always believe in preparing for the worst case scenario and then you will come out way ahead when the situation is much better than that
I want to caution you that just because a house is a foreclosed property, it may or may not be the best buy as you would have hoped. You really want to do a lot of research and/or go with somebody who knows about the current market condition and how the house you are interested in stake up against other houses that are on the market. Because we are pretty much in a buyers market now (or tilting toward buyers market), there are a lot of choice on the market and price reductions. I suggest you look at both before diving into the foreclosed arena.
So, back to my previous suggestion, do a lot of research and learn about the subject, or work with a knowledgeable, trustworthy and compassionate Realtor who can both advise you on foreclosed properties and local market conditions to ensure that you get the best deal on the right house for you.
Best of luck, and let me know if I can help you in any way.