I recently had the opportunity to speak to the North Metro Real Estate Investors Association, a group of individuals focused on education in all areas of property investment.

We talked about the dramatic increase in the number of homes going into foreclosure in the metro Atlanta area, a number which has almost tripled in the past six years. On average, we are now seeing more than 3,000 properties advertised each month in legal newspapers in the 13 county metro Atlanta area.

The group had a number of good questions about foreclosure properties, and I wanted to share with you some of the best:

Q: What are the principal reasons that cause a real estate foreclosure?

A: When someone stops making monthly payments on their real estate loan, the lender is, in most cases, entitled to begin the foreclosure process. The basic idea is if you don't pay as agreed, the lender can take control of the property, and sell it to the highest bidder as a way of forcing the loan to be paid off.

Q: Does the lender have to follow certain rules?

A: Yes, if the lender chooses to seek non-judicial foreclosure, it must send proper notice to the borrower allowing a certain period of time to catch the loan up. If the borrower fails to respond, then the lender must advertise the foreclosure auction for four consecutive weeks in the legal newspaper of the county in which the property is located.

Q: During that advertising period, can the borrower try to refinance with
another lender, or can he try to sell the house and pay off the loan?

A: Yes, and that is what most borrowers try to do.

Many owners seek replacement financing, but the fact that they have missed several loan payments makes if difficult to find another lender who will take a chance on them. In addition, the same circumstance which caused them to miss payments on their current loan often created other credit problems, limiting their choices.

Next, many owners try to sell their homes and hope to close in time to pay off the foreclosing lender. In most cases, the borrower has knowledge of the impending foreclosure for at least 90 days, but if the house is in poor condition, it nay be difficult to sell at any price.

Also, many owners facing this type of serious financial problem have a tendency to postpone dealing with the issue, which shortens the amount of time available to market the property.

Q: What if the loan balance is near the value of the property?

A: This is a serious problem for the owner. Even if the house does sell, there may not be enough left over after sales expenses to pay off the lender. And in most cases, lenders will not accept less than the full amount owed. To make matters worse, lenders employ attorneys to handle the foreclosure process, and those attorneys add large legal fees to the amount owed. These additional fees may amount to several thousand dollars or more.

Q: If the borrower is unable or unwilling to sell the house prior to the foreclosure auction, what happens next?

A: The laws in Georgia specify the procedure for the foreclosure auction.

On the first Tuesday of the month following the publication of the advertisements, the property will be sold at public outcry to the highest and best bidder for cash, before the doors of the courthouse in the county where the property is located.

The legal hours of sale are between 10:00 a.m. and 4:00 p.m., and the lender's attorney conducts the auction under a power of sale contained in the borrowers security deed. The opening bid is typically made on behalf of the lender in the amount of the debt. If additional verbal bids are received, the attorney acknowledges them until a high bidder is found.

Q: How does the high bidder pay for the property?

A: The successful bidder is required to pay for the property at the conclusion of the auction in certified funds. That usually means a bank money order or a certified check. Bidders typically know before they attend how much they will be willing to offer, and bring funds for that amount.

Q: What happens if no one bids at the auction?

A: Because so many foreclosed homes today have high loan balances, it is not unusual for an auction to attract no bids. In that case, the winning bid is that of the lender, in the amount of the total debt. At that point, ownership of the property is passed to the lender, who typically tries to resell the property through a traditional real estate agent.

Sometimes these homes are in very poor condition, and agents find it impossible to sell the homes at retail prices. When that happens, the lenders are forced to sell at steep discounts, often to investors who are willing to take on a major renovation project.

Q: How can an investor benefit in the field of foreclosures?

A: I see three opportunities for the real estate investor in this arena: 

First, you can try to buy these houses from the owner before the auction and either reinstate the foreclosing loan or simply pay off the lender entirely.

Second, you can attend the monthly auctions hoping to come across a bargain property.

And finally, you can focus on homes being resold by lenders as "post-foreclosure" properties, hoping that a lender will decide to sell a home at a bargain price in order to be finished with it.

Next week, we'll talk about the pitfalls and opportunities of buying homes before, during, and after the foreclosure process, and uncover some of the reasons for the high rate of foreclosure in Atlanta today.