Last week we looked at the flood of foreclosures in Georgia, and saw how opportunities for home buyers might arise.  This week, I will answer some of the most often asked questions about traps in the foreclosure purchase, and examine why there are so many foreclosures in Georgia today.

Q: If a buyer wanted to find a bargain in the foreclosure process, are there any pitfalls to watch out for?

A: Unfortunately, homes available for sale during the foreclosure process can be full of problems, so I need to divide the answer into three parts:

* First, homes are often offered for sale during the pre-foreclosure period. This period lasts 4 consecutive weeks while the auction is being advertised in the county legal newspaper.

Because the borrower becomes most motivated to sell during the final remaining days before an auction, there is often little time to perform an inspection or even consult an attorney for a title search.  Even so, it is vitally important that any buyer during this time period know exactly what he is buying, because the seller probably has no financial resources.  In other words, what you see is what you get.

Additionally, sellers in distress situations frequently fail to mention other suits, liens, or judgements which may exist against their property. If you buy the house and fail to obtain full coverage of owner's title insurance, you may become legally responsible for the repayment of those obligations. These debts can include past due property taxes, IRS liens, second mortgages, and medical bill judgements.

* Next, when bidding to purchase a home at the monthly foreclosure auction, there are several traps that need to be avoided.

While it is true that junior liens are typically wiped out at the auction, there are certain obligations that survive a foreclosure sale.  Among them are IRS liens, back property taxes, and senior encumbrances.

So it is important to work with your real estate attorney to make sure that it is safe to proceed with the bidding on any house you may consider buying.

In addition, if you are the successful bidder, you will need to obtain insurance on the property right away, even though you may not receive the deed for another 30 days.  This 30 day waiting period, dubbed the "McCalla Raymer Relief Act" by some investors, may make it difficult to obtain coverage or even to take possession of the property until the deed is delivered.

* Finally, if you are attempting to buy a house from a lender during the "post-foreclosure" period, it is important to recognize that the lender has little or no knowledge of the house you are buying.  They obtained it through foreclosure, and have never lived there. So if there are any defects in the property, you are not safe to rely on their disclosure.

In fact, lenders will always stipulate in the sales agreement for these houses that the sale is made without any guarantee whatsoever, and that the buyer is put on notice that the seller is selling the house as is and where is. 

This is in contrast to buying a home from a builder or an owner-occupant who is required to disclose any defects of which they are aware.

Q: Of the three opportunities to buy foreclosure homes, which is the safest?

A: Probably buying a foreclosed home from a lender at the end of the process.  In that situation, you could protect yourself by having a complete home inspection, even buying a home warranty if you wanted to, and by having your own attorney perform a title inspection and providing owner's title insurance to you at closing.

Q: If a buyer wants to get a good deal on a foreclosure property, what do you recommend?

A: Work with an experienced real estate professional who knows how to promote and protect the interests of the buyer, and make sure you utilize the advice of an experienced real estate attorney.

Unless you are an experienced investor, I would recommend that you restrict yourself to post-foreclosure offerings, as these most resemble the traditional real estate purchase process and offer you the most protections.

Q: What are the reasons that have contributed to the dramatic increase in foreclosure homes in the metro Atlanta area?

First, we must recognize that foreclosures typically follow population, and Atlanta has experienced a substantial increase in population since the Olympics.  But there are other reasons.

In an effort to expand the opportunity for home ownership, lenders over the past decade have:

* decreased the percentage of purchase price that a buyer must provide from savings for a down-payment. In years past, buyers typically came to the closing table with a 10% or even 20% down payment.  Today, it is relatively easy to obtain financing with no down payment whatsoever, even for a first-time buyer;

* relaxed underwriting guidelines.  Prior to the last decade, lenders focused more heavily on mathematical income to expense ratios, setting limits on how much borrowers could borrow. Today, the desktop underwriting process relies more heavily on credit scoring and computerized formulas that claim to predict loan repayment patterns;

* introduced more and more exotic loan programs in which the payments during the initial years of the loan are far below the amount needed to repay the debt over the life of the loan.  These loans are designed to adjust the payment amount based on current interest rates, and those rates have risen sharply in the past couple of years.  As the payment amounts reset, borrowers may be caught unable to make the financial adjustment.

These changes are in stark contrast to the traditional 30 year fixed rate loan in which monthly payments of principal and interest are fixed for the life of the loan, and borrowers can easily budget their ownership expenses.

Q: What can be done to stem the tide of foreclosures?

A: In my opinion, the answer lies in education.  I believe that the real estate industry, both lender and broker, has an obligation to better educate first-time buyers on the responsibilities of home ownership.  In addition, follow-up financial counseling should be required for any borrower who is late on any payment during the first year of their loan, typically a vulnerable period in the life of a loan.