There is no doubt that this is a buyer’s market, and there are a lot of homes from which to choose. Among the many affordable homes in metro Atlanta are increasing numbers of foreclosures.  Typically, this has been investors' territory, but more and more owner- occupant buyers are considering foreclosed properties. If you are one of these buyers, here's some information and advice about the process.

DISCLAIMER: I am not an expert in foreclosed properties, but have over 25 years of experience in residential real estate in Gwinnett and northeast metro Atlanta, Georgia. 

Georgia is a non-judicial foreclosure state, which means that the lender is not required to sue in a court of law to foreclose. The lender gives a minimum of 30 days notice after default. At that point, the lender may begin foreclosure proceedings, advertising the foreclosure for four consecutive weeks in the local legal newspaper. During this time, the owner has the right to cure the foreclosure by paying the amount owed plus any additional interest and penalties. After four weeks, the property is auctioned on the courthouse steps or sidewalk.

Basically, there are two ways to buy a foreclosure:  at auction, or after the home is listed.

BUYING A FORECLOSURED HOME AT AUCTION ON THE COURTHOUSE STEPS  

You may find pending foreclosures scheduled for auction through the local legal newspaper (Gwinnett Daily Post's online newspaper includes the legal announcements). You may do a drive-by and bid on it at auction. Auctions take place  on the county courthouse steps or sidewalk.  The lender's attorney usually opens the bid with the amount the owner/lender needs to break even. If there is no acceptable bid, the property goes to the lender’s assets manager to determine fair market value and make arrangements to list the property with a real estate company.  

The condition is "AS IS," and the buyer must have proof of funds in place (a line of credit, cash, or approved loan) to bid at auction. Chances are slim that you'll be able to do an inspection prior to auction, as the property may be occupied or, if it's vacant, may not have utilities in service. 

If you never have attended a public auction, you would be well served to observe a  few before getting into the "game."  It is assumed that bidders understand the process and are ready, willing, and able to pay cash or present proof of funds and  financing at the time of auction.

BUYING A FORECLOSED HOME FROM MULTIPLE LISTINGS

The second way to buy a foreclosure is to purchase a foreclosed property which has been listed with a real estate firm representing the seller.  Most of the advice below is based on purchasing a foreclosure listed in multiple listings.  You would do well to work with a Buyer's Agent who represents you in the transaction, but you may make an offer without representation through the Listing Agent/Broker .

 If you have found a property of interest, and it’s a foreclosure, FAIR MARKET VALUE and CONDITION should be your primary concerns. ALL foreclosures are sold AS IS.  The addenda that the seller (lender) attaches to the contract may range from 4 pages to 15 pages, and it all says the same thing: The seller does not claim any knowledge of or liability for the condition of the property. 

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PRICE

Sellers are just trying to recover what they’ve invested in the property, and often take a substantial loss. Price is negotiable. Before making an offer, be sure to check recent sales of comparable properties. If the home is in poor condition (more about that below), and if you must spend $20,000 to bring it up to average condition, will it be worth what you paid for it plus $20,000?

The seller may agree to terms that are not allowed by the lender for your particular loan. In lieu of an allowance for repairs, most lenders will require a price reduction. For many loans, the seller is only allowed to pay 3% toward the buyer’s costs of closing. Be sure to ask your lender about these options before making an offer. 

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CONDITION

The one thing all foreclosures have in common is that the prior owners ran out of money. It may have been a fairly recent reversal of fortune – a loss of income, a health crisis, a death in the family. Or, it may have been an owner who was in over his/her head from the beginning due to a sub-prime or adjustable rate loan. In any case, realize that the house may not have been properly maintained for a long time.

If it’s in really poor condition, it may not appraise for the purchase price, your lender may not be willing to make the loan, or your insurance company may refuse to insure it (or threaten to cancel your policy after closing).

Even after you’ve closed, your homeowners association and city or county governments can force you to make repairs immediately, including the removal of any hazardous trees. 

If the house is in poor condition, do you have the funds and the time to bring it up to normal market condition immediately after closing?   

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TITLE

Foreclosures have messy histories. Liens may have been filed and not yet recorded, and the lag time is longer in some counties than in others. There may be outstanding tax liens and unpaid utility bills. There may be liens for unpaid repairs.   (Be sure to get Owners Title Insurance at closing).

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FINANCING  

The seller may agree to a Due Diligence period to determine if you have the ability to obtain the loan described in the Agreement.  Before making an offer on a foreclosure, make sure that you have provided all information that your loan officer requires for desktop underwriting approval subject only to the appraisal.   Most foreclosure sellers will not accept an FHA or VA contract, because FHA and VA require that the condition of the property meets certain standards.  Since foreclosures as sold "AS IS" with no repairs, this would cause a stalemate on many foreclosed homes. 

Do not proceed into any Purchase and Sale Agreement without a Good Faith Estimate from your lender, detailing  your approved loan amount, interest rate, required down payment, and costs of closing.  Will you need cash  reserves at closing?  If all information you provide in your loan application is correct, can your lender reasonably assure you of loan approval? 

Be sure to have a frank discussion with your lender about the foreclosure property you are considering, along with your assessment of the condition of the property.

Your earnest money may be at risk if you  are unable to obtain the loan.

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THE OFFER

Sellers vary  in how they prefer to handle foreclosure transactions. In some cases, the lender may refuse to pay any closing costs, provide a home warranty or termite letter. In other cases, the lender may be willing to pay some closing costs or provide a warranty.

Make your offer based on the condition of the property and fair market value for that house in that neighborhood. Ask for what you want in the initial offer, because there will be no negotiating after the offer is accepted. You must have  have funds in place for closing,  a pre-approval letter from your loan originator, and earnest money of approximately 1% to 3% of the offer price.  However, many sellers suggest earnest money of no less than $1,500 for homes under $100,000.   Earnest money is held by the assets manager for the bank, and at closing, it is applied toward your down payment.   Many banks will require that you be pre-qualified with their lender even if you use your own lender for your purchase.

In the past, all lender disclosures were attached to the initial offer. Lately, it seems more common for the seller disclosures and exhibits to be attached after the acceptance. Keep in mind that the seller does not have any knowledge of the history of repairs or incidents which might affect the condition of the property.  The disclosures state that the seller has no liability.   Sometimes, the seller will agree to a termite treatment if active infestation is discovered by the buyer's inspector.

You are likely to be bidding against other buyers, and the seller will respond only to the strongest offer. It is the seller's proragative to collect bids over a period of time and consider multiple offers.

 In considering several offers, the seller will pay attention to (1) Owner Occupant vs. Investor, (2) Offer Price, (3) Amount of Earnest Money, (4) Amount of Down Payment, (5) Loan Pre-Approval, (6) Closing Date.  Foreclosures sometimes sell for more than the list price. Even after acceptance, it may take up to seven calendar days before the seller signs and returns a copy of the contract (“Binding Agreement”).  There may be special incentives for owner-occupant buyers which are not available to investors.

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INSPECTIONS IF THE CONTRACT INCLUDES A "DUE DILIGENCE" CLAUSE

Many sellers expect the buyer to have inspected the property prior to making an offer, and will not allow a "Due Diligence" period after the Binding Agreement Date for  buyer inspections and loan approval. . Depending on seller requirements, you may  be given a short time (5-10 calendar days) to conduct all inspections at your expense, including an independent home inspection, termite inspection, air quality inspections such as radon,  lead paint testing, and research of the neighborhood and area conditions that might affect future property value.

In many foreclosures, the utilities have been disconnected by the seller, and it may be your responsibility to order and pay any fees required to have the utilities turned on. Some sellers charge charge the buyer a fee ($100-$125), and the seller’s representative causes the utilities to be turned on for the inspections. In other cases, you may be required to make application and pay a deposit directly to the utility companies. In every case, it is the buyer’s responsibility to pay a fee to the seller or to the utility companies and have the utilities turned on if desired for an inspection.

The inspections should give you the information you need to (1) Decide whether or not to proceed with the transaction, and (2) Evaluate what repairs and  replacements are needed after closing.

If you choose not to proceed with the transaction, you should execute a Termination and Release Agreement within your “Due Diligence” period.  If your contract includes a "Due Diligence" clause, and you terminate within the deadline period, you are entitled to a refund of your earnest money.  HOWEVER,  expect up to 30 days for the processing of the refund.

If there is no Due Diligence period, you are expected to have inspected the property prior to making an offer.  If you fail to close because of the condition of the property, you may be found in default and your earnest money may be at risk.

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THE CLOSING

In a normal sale, the closing attorney represents your lender. With a foreclosure, the attorney represents the seller, and in many cases, it is an office that deals only in foreclosures. The closing will not take place until the seller signs off on the final HUD1 (Settlement Statement), and many will take up to two business days. Be sure that you and your lender budget at least 48 hours after the final HUD1 is approved by your lender for closing. Everything takes more time when dealing with banks and assets managers, especially those who are out of state, so don’t be surprised if your closing is delayed.

Georgia allows the buyer to choose the closing attorney in a foreclosure or short sale situation, but  often the sellers are not cooperative.

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MY ADVICE

1. If you are planning to live in the home,  consider a well maintained individually owned home before looking at foreclosures.  There are plenty of sellers out there who want or need to sell, and have the equity to be flexible on price. 

2.  If you are determined to buy a foreclosure, be patient and resilient. Develop a thick skin. You are not dealing with a nail biting husband and wife who are anxious to close and move on. You’re playing on the seller’s field and by the seller’s rules. Aside from your initial offer and the information you provide to your loan officer, you don’t have a lot of control over this process. Expect obstacles, glitches, and delays. Expect the process  to seem unfair sometimes.  Expect not to close on time. 

3. Think like an investor, and be prepared to walk away if the inspection reveals more than you are prepared to handle. 

4. Buy Owner’s Title Insurance.   Foreclosures have very messy histories.

5. Make sure that your hazard insurance company has seen the property BEFORE closing!  Many companies will issue a provisional policy for closing, and then visit in person after closing.  New owners may be threatened with policy cancellation if repairs are not made immediately, and this can mean anything from a new roof to the removal of dead trees. 

6. If you are a first time investor, do your homework on rental prices in your area.  Be prepared to carry the mortgage payment  if you have a lag between tenants.

7. Be prepared for property tax to be prorated at closing, and it may be based on a much higher assessed value than the sale price.  If the tax bill for the current year is not out (it usually comes out in July), prorated taxes will be based on last year's tax bill.  If the tax bill is out when you close, the proration  will be based on the current bill.  Certainly, you may appeal the assessment after closing, but appeals are not always successful (or, at least, not on the first try). 

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BEFORE YOU BEGIN LOOKING AT HOUSES you must complete  these steps: