If you're shopping for a foreclosed house that you want to flip, lie down until the urge passes. Your checkbook and credit report will thank you.

But if you're looking for a home to live in, buying a foreclosure might save you some money.

Foreclosed homes typically cost 10% to 15% less than comparable homes in the same neighborhood, even after you've made all the needed repairs. Savings of 20% or more are not unheard of.

Just follow our 10 smart moves for buying a foreclosure to make sure you get the best deal and avoid costly pitfalls:

Smart move 1. Don't buy at an auction.

In today's housing market, even experienced auction buyers are getting burned because so many foreclosures are in dreadful condition.

When you buy at an auction, especially the ones they're holding at your local city hall or courthouse -- right on the steps, weather permitting -- you usually aren't allowed to look inside before you bid.

That means it's impossible to know what shape the home is in until you get the keys. At that point, the house and all of the unexpected costs are yours.

So here's the one, inviolate rule of buying a foreclosure: Don't commit to a home you haven't thoroughly inspected, inside and out.

Smart move 2. Buy through a real estate agent.

In many foreclosure auctions, no one bids, or no one bids enough to cover the outstanding mortgage.

When that happens, the lender obtains title to the home and becomes responsible for selling it. Those banks or mortgage companies usually hire a real estate agent specially trained to sell what are called real-estate owned, or REO, properties.

Before those homes are put on the market, the lender usually repairs the worst of the damage. You're also allowed to tour the home so you can see exactly what you're buying before making an offer.

This also allows you to sign with a similar, REO-qualified agent to represent you, much as you would contract with an agent to buy a non-foreclosed home. (Agents handling REO sales are paid a commission from the sale, just as with a normal transaction.)

Smart move 3. Start your search on a foreclosure bus.

Many agents offer guided tours of foreclosed properties, and they're a surprisingly good way to see a wide range of repossessed homes in just a few hours.

Don't hop aboard expecting to buy one of the homes you see. Your goal should be to identify the one or two homes that come closest to what you're looking for. Using that as a guide, the agent should have little trouble locating seven or eight similar homes for you to consider and possibly bid on.

Our 8 rules for taking a foreclosure bus tour will show you how to find the right tour and get the most out of the ride.

Smart move 4. Know what it will cost to make the home livable.

Good foreclosed homes are merely houses that have sat empty and neglected for months, with dead lawns, peeling paint and other relatively minor problems.

Others, however, have been trashed. Some people about to be evicted take their frustrations and anger out on the home. Cabinets and appliances get ripped out. Walls have holes punched in them. Toilets are torn up. Light fixtures are broken, carpeting stained and wooden floors gouged.

Good home inspectors can tell you what's wrong, but they can't generally tell you what it will take or how much it will cost to fix something. And many home inspectors feel more loyalty to the real estate agents who recommend them than to the clients who pay them. So they might downplay the damage and underestimate the repair costs. You might call a home inspector every four or five years -- if you move that often -- but real estate agents call on them all the time. So they don't want to hit the buyer with really bad news that could louse up a sale.

That's why you might be better off bringing in a dependable licensed general contractor and asking for a bid to repair everything that is broken. A good contractor has experts to call on for specialty work: plumbing, electrical systems, landscaping, heating and air conditioning and so on. A good contractor also knows that getting the job depends on you, not the real estate agent.

How much you are willing to spend on the house, including making repairs, is a decision that only you can make. But it is part of the financing equation.

Smart move 5. Know what the experts say the house is worth.

An appraiser will tell you what the home you are looking at sold for the last time it was bought, and what similar -- but well-maintained -- houses in that neighborhood are selling for now.

Depending on where you live and the size of the house, an appraisal will cost between $300 and $500. Unless you know an appraiser or get a recommendation from a friend, use the person the real estate agent recommends.

Smart move 6. Determine what the home is worth to you.

Consider that to be a starting point. We're in a buyer's market and the appraised value of a home is often merely wishful thinking.

Also, remember that the actual cost of the house is the total of the money you're paying the seller and what you'll have to spend on repairs and renovations. Some experts say that number should not be more than 90% of the appraised value of a similar but well-maintained home. Others put the figure at 80%.

Only you can decide what's right for your family, how much you want a particular home in a particular neighborhood and how much you're willing to spend.

Smart move 7. Bid low.

The whole point of buying a foreclosure is to get a great price, and bidding low is an essential step toward that goal.

Take full advantage of three things working in your favor:

• The seller is not emotionally attached to the home and has no irrational expectations about how much it should be worth.
• The bank or mortgage company has a large and ever-growing number of foreclosed homes to get rid of. It's losing money every day that house sits there.
• In this market, you're probably the only potential buyer the seller has.

Tap your agent's expertise to determine what your initial offer should be and how to react to a counteroffer. Set a firm maximum price and be prepared to walk away from the table if the lender won't accept it.

Smart move 8. Don't put all your cash into a down payment.

Make sure you have enough for critical repairs without having to borrow. You don't have to paint every room or replace every appliance the moment you move in.

But you should have more than enough on hand to ensure that the home is secure, with solid doors, windows and locks, and has all of the essentials, such as a working furnace and leak-proof roof.

Smart move 9. Arrange buying and refurbishing financing together -- in advance.

Depending on how much work the house will need, you might want to consider a 203(k) loan from the Department of Housing and Urban Development.

It allows you to finance the purchase and repairs with one long-term loan. The money comes from a traditional lender, but HUD guarantees it will be repaid, making it easier and cheaper to obtain. You also benefit by getting the second loan at low first-mortgage rates. Fannie Mae has a similar program called HomeStyle that your lender can explain to you.

Whatever you do, start working on your financing as soon as you start looking for a home. Here's our step-by-step advice for finding the best mortgage with the lowest rates and fewest fees.

Smart move 10. If at first you don't succeed . . .

. . . keep looking.

The number of foreclosures is still climbing, which means this is a great time to be a home buyer, especially if you are willing and able to make the extra effort required to buy a foreclosed home.

By Stef Donev

Interest.com Contributing Editor

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