I would like to clarify the advice Elizabeth gave about buying "directly " from the bank. The " bank" that owns the property will not deal directly with the consumer. the consumer must be represented by a real estate agent. The bank is also represented by a real estate agent. So there are middlemen involved when buying bank owned homes.
The only way to buy directly from the bank is if you are a cash investor that is purchasing in bulk, 20 to 100 or more houses at a time. Generally these types of investors are other corporations with millions of dollars in cash available.
There are many types of distressed homes. Bank owned homes are called foreclosures. These are also called REO's. To confuse you, the home may be purchased on the courthouse steps at the time the bank is scheduled to take title in an auction process, which is also called foreclosure. Then there is the pre-foreclosure, which is also know as short sale, foreclosure pending, and defautl period. The "short sale / pre-foreclosure" is the time before the owner has formally lost the house to the bank. They may still be living in it, or they may have voluntarily moved out. The bank cannot evict them until after the bak takes title to the home.
To confuse you still further some houses are offered in secondary auctions that are held after the bank has acquired title. So not all auctions are of the all cash at the courthouse steps variety.
Do you need to pay the amount owed? No. the amount owed is irrelevant to the market value. You need a real estate agent to guide you in bidding because there are hundreds of different companies representing hundreds of different banks. each house has a different set of forms called addendums that have to be interpreted for you. The most efficient "auction" for both the banks and the buyers is the MLS.
By using the MLS, you and your agent can review 99% of the properties available for purchase including bank owned at full retail prices, bank owned - priced and available for auction style bidding,
The MLS also has listings of the short sales and pre-foreclosures as well as builder close-outs, probate sales, bankruptcy sales, relocation buyouts, and even normal human being sellers that need to sell for personal reasons.
You and your agent then choose a few house to go look at that meet your wants and needs list. Then you and the agent discuss which one (s) you want to make offers on . You may be competing with other buyers.
If the home appears to be priced very low in comparison to similar homes you might be competing with many other buyers. Yes even this market. These MLS multiple offer situations are also known as "auctions" - This often results in a sale price that exceeds the list price. I can prove this.
The real estate market is very efficient for sellers, Becasue of wide exposure to most serious buyers, sellers are usually able to receive a high percentage of current market value for the houses. The key word is "current" market value. The reason why houses are such deals today is that the current market values in Sacramento are 30 to 50% below the market values of the peak of the market 3 years ago.