The “f” word (as in, foreclosure) is hard to escape these days. The latest media reports are projecting a second tidal wave of foreclosures to hit in late 2009 or early 2010 as unemployment remains high, home prices continue to fall and banks’ self-imposed foreclosure moratoriums expire.

If, by some miracle, you’ve managed to save money over the past few years, now may seem like the perfect time to find prime real estate at a bargain-basement price and buy a foreclosure.

Buyer beware: There’s a gaping chasm between foreclosure myth and reality. Despite the hype, nationwide, foreclosures still comprise less than 3 percent of the actual market nationwide.

“The foreclosure market is tiny, tiny, tiny,” says Andrew Waite, publisher of Personal Real Estate Investor Magazine. “Delinquent mortgages have hit about 7 percent of total properties, which means that 93 percent are still in good standing.”

“There’s a lot of talk about foreclosures,” adds Elmer Diaz, president of the National Real Estate Investors Association, a non-profit organization dedicated to promoting professionalism and standards of excellence in the industry, “but individuals are finding out that they’re not getting the type of properties they’re looking for.”

There are two reasons for this, explains Diaz. First, the typical home in the predicted second wave of foreclosures is a residence in an outer-ring suburban development. “They’re above-median-average homes in the $250,000 to $300,000 price range that stand in a 20-block square that is 25 percent empty,” says Diaz.

Translation: The home may have curb appeal and will be in good shape, but neither the house nor the neighborhood possess enough of the five characteristics that would make it a five-star real-estate investment: value (what it costs to get into the property), convenience (proximity to where you work), amenities (restaurants, shopping), good school district (even if you don’t have kids) and beauty (everyone wants to live in a pretty place).

Second, many of the best foreclosure investments are being bought up by companies that purchase millions of dollars worth of foreclosed homes in blocks, fix them up, then sell them to clients either as an investment property (with a renter already in place) or as a primary residence.

“You need to buy a block of a half-million dollars or more in foreclosed homes to get the cream of the crop,” says Diaz. “The rest is the crap of the crap.”

Finding the discounts

But that’s not always the case. Joe Egan, president of Minneapolis-based Advantaged Equity, has bought and flipped more than 50 foreclosed homes in the Twin Cities metropolitan area over the past seven years. Egan maintains that there are still plenty of foreclosure bargains out there, no matter where you live, especially if you are patient and well-educated in your market.

“I probably make 10 offers to get one house,” says Egan. “My return has to be 20 to 25 percent. If I can’t get that, I walk away and go on to the next house.”

Buying a foreclosed property is a double-edged sword for an individual investor who intends to occupy the home, says Egan. In order to get the best deal on a foreclosure, he says, you need to make a strong offer, likely in cash, without any inspection or financing contingencies.

“With no contingencies you can save thousands of dollars,” says Egan. But that’s where a first-timer or a neophyte will get into trouble. The house could have problems with mechanicals, foundations, electrical or any number of big-ticket items.

“Marginal deals turn out to be bad deals,” Egan says. When he purchases a house, Egan always adds a $10,000 cushion for unexpected hazards. But even he still gets burned on occasion.

“I had to buy one house in winter the day before the bank was going to take it back,” he says. “The roof was 15 years old and there was four inches of snow on it so I couldn’t properly inspect it.”

The snow melted and, sure enough, the house needed a new roof. “Somebody who can’t pay the mortgage isn’t going to add a roof or tune the furnace,” he says.

Even given the potential pitfalls of purchasing a foreclosed home, Egan encourages it. “As long as you know what you’re getting into, go for it,” he says. “If you are looking to get into the home yourself, be patient, be prepared to make a few offers, make sure you get an inspection, and educate yourself on home improvement, even if it’s through free workshops at Home Depot.”

If Egan’s DIY approach feels too intimidating, take Diaz's advice. “If you’re not a roll-up-your-sleeves type of investor, chances are that you’re not going to get back the effort and money you sink into the place,” he says. “That’s why I advise that people should hook up with a turn-key investment. You’re going to pay more, but it’s worth the price.”