Homes are first offered to approved non-profit organizations, mostly in inner-city neighborhoods, at a 50 percent discount to their appraised values. The non-profits then rehabilitate and resell them.
Any properties not picked up by the non-profits are then offered to police officers and teachers at a 10 percent discount. HUD also recently began giving first shot at homes coming into the system to people made homeless by Hurricane Katrina at the same 10 percent discount. (emphasis mine--Darren)
If, after five days, no teacher, officer or Katrina victim makes an offer, HUD puts the properties on auction for the general public. At that point only buyers who intend to live in the house may bid.
Individuals can look at homes at HUD's Web site and Homesales.gov.
So there you go.