The long shadow of the housing market crisis doesn t seem to fade.

Despite government efforts to stem the foreclosure crisis with its mortgage-modification programs, new waves of foreclosures are expected to hit this year. According to RealtyTrac, a foreclosure listing service, between three and 3.5 million homes in the U.S. will go into foreclosure in 2010, up from 2.8 million in 2009. Indeed, May marked the 15th consecutive month where there were more than 300,000 households that received a foreclosure notice. We ve plateaued at an unprecedented level of foreclosure activity, says Rick Sharga, senior vice president of RealtyTrac.

Prospective home buyers have long been cautioned about approaching bank-owned houses, or real-estate owned properties (REOs) as they re known. These are homes reclaimed by a bank after a foreclosure auction.

Yes, they can be a great opportunity for would-be buyers to score a deal but the transactions themselves are complicated and prone to snags. Buyers have cited hidden costs and the poor condition of many of the homes.

According to a May survey by Trulia.com and RealtyTrac, 45% of adults are at least somewhat likely to consider purchasing a foreclosure in the future down from 55% who were in May 2009. Yet, although fewer consumers expressed interest in buying a foreclosed home than a year ago, the number of REO sales is increasing. There were 750,000 properties in the U.S. sold either as REOs or short sales last year and that number can as much as double this year, Sharga says.

If snagging a bargain property appeals to you, here are a few things to know about purchasing a foreclosure now.

Specialized help

You can search for foreclosed properties online through sites like Redfin, RealtyTrac or Foreclosure.com (the latter two have monthly charges).

Look in the neighborhood youre interested in, and find handful of agents who deal with specifically with foreclosures because they ll usually know about inventory before it gets onto market. If I know you re looking for a three-bedroom single-family home, and I know Bank of America has one that s about to come onto the market, that s sort of an inside tip, says Zane Burnett, director of business development at Fillmore Real Estate in Brooklyn, N.Y.

Some banks are offering incentives to those who buy foreclosures, with a key focus on sustaining value in neighborhoods. These can be in the form of offering to pay up to 3.5% of buyers closing costs, home warranties and even appliances, says Linda Kody, owner of Kody & Company, a real estate firm in North Andover, Mass., that specializes in foreclosures.

One option is the Fannie Mae program known as HomePath, which offers special financing through approved lenders on Fannie Mae-owned properties. Buyers can get a HomePath property with no appraisal requirement, a reduced down payment and more relaxed credit score standards. And they can avoid mortgage insurance on those loans on slightly higher interest rates, says Frank Ruzicka, a mortgage banker with Cornerstone Mortgage in St. Louis.

Inspections and repairs

With REOs, buyers won t get the usual disclosures about potential property defects they d get from traditional sellers, says Lilly Chen, a real estate agent with ZipRealty in Los Angeles. They re sold as is, so it s important to get an inspection before putting any money down.

Typically, in bank-owned homes, the utilities water, electricity, gas have been completely shut off. Would-be buyers might, at their own expense (if the bank allows it), ask to have the utilities turned on, says Ruzicka, and get an experienced building inspector to check for problems.

Another possible catch-22: the buyer s mortgage lender may require repairs prior to closing, while the bank that owns the property prohibits repairs regardless of who pays because they don t want any liability issues. For instance, the lender might not agree to approve the loan unless the faulty roof is repaired, but the bank won t allow any repairs done on the home prior to closing. One way to handle it is for the buyer to ask if they can hold the amount it would cost in escrow; once the fix is complete, the escrow money would be released, says Ruzicka.

Sometimes there s a standoff, but a lot of that can be alleviated if the buyer consults with his lender upfront, and discusses what s allowed and what s not with bank-owned property, Ruzicka says.