Should you buy a foreclosure?

Make $500,000 in one year! Buy houses for pennies on the dollar! The business of buying foreclosures and pre-foreclosures has never been hotter. The experts will guide you every step of the way to help you get rich quick. Just take a seminar or buy a book and you'll be on easy street in no time.

With foreclosure filings reported on 291,000 U.S. properties in February, up 30% from a year ago, it's easy to entertain visions of buying cheap houses and flipping them for quick profits.

The only trouble is, it's not so simple. New realities are changing the foreclosure business, and the unwary investor can be left in the lurch.

Here's what's changed and what you might want to watch out for:

There may be little or no equity on the table. Dana Mackey used to send 100 letters at a pop to distressed homeowners in the Agoura Hills, Calif., area. He would typically get about a 10% response. Of those, he would be able to work with several families either by carrying paper so they could stay in their homes or by purchasing the homes from them, and he'd make a good profit.

That doesn't work anymore. Most of the houses in trouble in his area are now "underwater" -- people owe more on their homes than the homes are worth. Many homes have $950,000 mortgages but are worth only $700,000 in today's market.

"Before, I was able to help them," says Mackey, of Prosperity4Kids. "Now, they're so far gone that there's nothing you can do. The banks don't want to negotiate. The banks don't want the property back, but they don't want to take the $250,000 hit right now either. And the market keeps dropping." Mackey has stopped sending the letters.

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