Pay Attention to Foreclosure ConcentrationNeighborhoods overrun with foreclosures are the most likely to suffer further depreciation. It can be particularly tempting to buy homes out of foreclosure in these areas, because they offer the steepest discounts. If you insist on buying into such a market, make sure you can still make money in the market if it dips a further 10% to 15% over the coming year. Check the neighborhood by walking around and by checking foreclosure-listing services like RealtyTrac.

Have Cash on HandThere are properties that can be turned within a few months, but the overall market is still slow. Even if you have a renter lined up or have enough money for a 10% to 20% down payment you should be ready to weather a depressed market for another two or three years. Make sure that your endeavor is still profitable if you incur two to three years of carrying costs and depreciation.

Control EmotionsIf you're looking at buying a home out of foreclosure--either as an investor or simply a home buyer--you cannot fall in love with a house. If, in the process of buying the home, you're competing with other buyers, or if a bank is stubborn and won't offer a sharp reduction, it isn't worth coming up to meet the asking price.

Neighborhood QualityIn this market, potential buyers have the ability to be extremely discriminating and are going to expect good neighborhoods at a discount. This means that buying in areas that were once considered up-and-comers or that lack good schools, parks or other amenities will not bring much more than low-ball offers. Even in high-end neighborhoods, homes are sitting--at discount--on the market for long spells of time.

Outstanding LiensThe same sort of reckless borrowing that put the previous owner in a predicament can come back to bite a foreclosure buyer. Unless the property goes through foreclosure auction and becomes bank-owned, outstanding liens and fees are simply transferred to the new owner. If you plan to buy out of pre-foreclosure, make sure the property has a clean title; otherwise you'll just be trading places with the distressed homeowner.

BiddingIf you're planning on reselling the property, keep in mind that holding costs, transaction costs, marketing costs and a depreciating market are all in play. (The depreciating market is a particular concern since it's unknown how close the market is to bottom.) Your bid needs to reflect all of these costs. Pre-foreclosure sellers tend to be in denial until the 11th hour, but banks are willing to knock anything between 25% and 50% off the outstanding loan's value, which makes negotiating with them in the bidding process easier.

Be Aware of Appraisal TimingPart of the reason that some homeowners owe more on their homes than they're worth is because the appraised value does not reflect the true market value. This scenario is common in boom markets--and especially the case with homes appraised before the market took its biggest hit in August.

Rental MarketUnless you're a savvy local landlord with considerable experience in single-family home rentals, it's probably a bad idea to expect to rent a foreclosure property with a positive cash flow; current rental yields will depress in a market affected by foreclosed homes. Besides, if you're working in a market ripe with foreclosures, there are hundreds of other investors with the same idea.

 Have Cash on HandThere are properties that can be turned within a few months, but the overall market is still slow. Even if you have a renter lined up or have enough money for a 10% to 20% down payment you should be ready to weather a depressed market for another two or three years. Make sure that your endeavor is still profitable if you incur two to three years of carrying costs and depreciation.

Research CompsA trip to your local assessor's office is mandatory if you're thinking about buying a home out of bank-owned status, or pre-foreclosure. Check every house on the block with a focus on recent sales, with a focus on price-per-square foot. This is the best way to establish what sort of deal you're going to get on the home, should you try to sell it in the current market. Control EmotionsIf you're looking at buying a home out of foreclosure--either as an investor or simply a home buyer--you cannot fall in love with a house. If, in the process of buying the home, you're competing with other buyers, or if a bank is stubborn and won't offer a sharp reduction, it isn't worth coming up to meet the asking price.

Neighborhood QualityIn this market, potential buyers have the ability to be extremely discriminating and are going to expect good neighborhoods at a discount. This means that buying in areas that were once considered up-and-comers or that lack good schools, parks or other amenities will not bring much more than low-ball offers. Even in high-end neighborhoods, homes are sitting--at discount--on the market for long spells of time.

Outstanding LiensThe same sort of reckless borrowing that put the previous owner in a predicament can come back to bite a foreclosure buyer. Unless the property goes through foreclosure auction and becomes bank-owned, outstanding liens and fees are simply transferred to the new owner. If you plan to buy out of pre-foreclosure, make sure the property has a clean title; otherwise you'll just be trading places with the distressed homeowner.

BiddingIf you're planning on reselling the property, keep in mind that holding costs, transaction costs, marketing costs and a depreciating market are all in play. (The depreciating market is a particular concern since it's unknown how close the market is to bottom.) Your bid needs to reflect all of these costs. Pre-foreclosure sellers tend to be in denial until the 11th hour, but banks are willing to knock anything between 25% and 50% off the outstanding loan's value, which makes negotiating with them in the bidding process easier.