In simple terms, foreclosure is the legal process by which property is repossessed and sold at auction to cover the costs of an unpaid debt. This is usually the result of a homeowner defaulting on mortgage or loan repayments. The most common causes of foreclosure are divorce, loss of employment or a death in the family. Every year, around one million homes across the US are sold as foreclosures by banks and private mortgage institutions.

Some government departments can also repossess property to cover the costs of outstanding taxes and other debts. Large numbers of homes are repossessed and sold on every year by the US Department of Housing and Development (HUD), the Internal Revenue Service (IRS), the Department of Veterans Affairs (VA) and US Customs.

For those unlucky enough to default on their mortgage repayments, foreclosure can be a drawn out and traumatic affair. Once a loan secured on a property goes into default for more than three months, the lender can start the ball rolling for the property to be sold to recover the outstanding debt. This typically takes 12 to 18 months from the date when the notice of default was filed.

As well as costing people their homes, foreclosure can have a devastating effect on personal credit. People who have lost property as a result of foreclosure will struggle to obtain loans or mortgages and may even fail simple credit-checks for home rental agreements - all in all, a very bad situation to be in. Most financial advisors advise homeowners to do everything within their power to avoid going into foreclosure.

Conversely, foreclosures can provide lucrative investment opportunities for home-buyers and investors. Houses auctioned as a result of foreclosures often sell for well below the market rate and savvy investors can pick up a bargain. However, full payment is required up front and property is sold 'as is', with no guarantees or insurance.

Predictably, there are plenty of pitfalls for unwary investors. Buyers should carry out a thorough inspection to assess the cost of repairs and ensure that no additional debts come with the title deeds. The following sections have more information on avoiding foreclosures and buying foreclosure properties.

Buying foreclosures can be an easy way to make money or an easy way to lose money. Which way you go will largely depend on how much research you do before hand. Here are some common pitfalls of buying foreclosures.

1) Not doing enough home work - before think about buying, read up on foreclosures and land law and research housing prices in the local area.

2) Going over budget - set your self a budget limit and stick to it. If the bidding at a foreclosure auction goes above your limit, walk away.

3) Buying a wreck - a full and proper inspection is rarely possible on a foreclosed property. If you have any doubts about condition of a property, don't buy it.

4) Overconfidence with refurbishments - avoid buying a run-down home to refurbish unless you know what you are doing. Renovations can take much longer than expected and the costs of a refurbishment mount up quickly.

5) Forgetting to do a title check - never assume that the foreclosed loan is the only outstanding loan on the property. Any additional loans secured on the home will pass to the new owner at the point of sale.

6) Outstanding liens - as well as loans, a property may carry liens for government taxes. If unpaid taxes are not paid off, you could lose the property as fast as you gained it.

7) Previous occupants - if you buy a home at auction, the previous owner may be unwilling to move and you may have an unpleasant wait until they are evicted

8) Right of redemption - in some states, previous owners are legally entitled to buy back the foreclosed property for up to a year after the foreclosure auction, for the amount of the winning bid. Many investors avoid buying at auction in states with right of redemption laws.

9) Overborrowing - if you purchase REO's or VA/HUD foreclosures using a loan, make sure you borrow within your means. Otherwise, you may end up facing foreclosure yourself a few years down the line.

10) Frightening off sellers - pre-foreclosure sales are a delicate business and there's a fine line between showing you are keen to buy and harassment. If you get it wrong, you'll scare off the seller and you'll have to find the process all over again.