Here is a summary of a great article on Finding Foreclosures from CNN Money
1-It is easier to find a foreclosure today, you use a website like Realty Trac or Foreclosurepoint.com or better yet, find a specialist agent like me who can navigate the foreclosure market on your behalf. Agents have access to the "remarks" field in their databases and can pull out more detailed information than a search engine.
2-It's best to buy straight from a bank. The downside is the property is sold as-is, no disclosures but REO's are Real Estate Owned, meaning the foreclosure has been finished, the property is owed only by the bank and no homeowners are residing in the property. What you see is what you get. An REO will be a better deal for several reasons, including a lower list price, a chance to inspect the property and a guarantee of a clear title (no unexpected liens will show up at closing).
3-Bring in a contractor to look the property over and ask for a free estimate on the work the property will need to have done. Plan accordingly, an investment property for a rental may not need granite counters and stainless steel appliances, but if you're living in it, you will need at least a functional kitchen!
4-Bid low, as much as 20% off list price. Banks look at all offers and if there are multiple bids, buyers will be asked to submit their best and highest offer. The bank will then choose among these bids for a final offer.
5-Be patient and prepare to wait. Short sales take longer in my experience, and REO's seem to move faster. Banks are overloaded in this market, so let your agent keep in touch with the bank and listing agents on a least a weekly basis.