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Foreclosures, Short-Sales and REO Properties – Part I

by Mary Bryan Fields

Record numbers of foreclosures and falling home prices have created enticing real estate ownership opportunities. Increasingly, consumers are tempted by pricing on foreclosures and bank-owned properties, which may sell for 30-40% below comparable new homes and re-sales.

While foreclosure prices may be “rock bottom,” prudent purchasers weigh the risks involved before choosing a foreclosure or bank-owned property. Foreclosure is a specialized field. Unless you have foreclosure experience, you need a team of competent professionals to protect your interests in the transaction, including a real estate practitioner with foreclosure experience, attorney, tax advisor, home inspector, appraiser, and a general contractor, if extensive repairs are required.

The Mechanics of Foreclosure

Real estate financing includes two contracts: (1) a promissory note, which is the buyer’s personal promise to pay, and (2) a security instrument, which secures the debt with either the title to the real property or a lien on the title. In Georgia, the lender holds “legal” title to the security property until the note balance is paid fully.

The lender has the power to sell the property if the debtor fails to pay the note as agreed. The lender must publish a required notice of the impending foreclosure sale for four consecutive weeks in the newspaper in the county in which the property is located.

The Short Sale

Prior to the foreclosure sale, the lender may permit the delinquent debtor to sell the property to a third party for an amount less than the note balance.

Application for a short sale reverses the process by which the debtor qualified for the original loan. The debtor must prove to the lender that (1) he has neither the income nor the assets to make the note payments as required, and (2) the property will not sell for at least the amount owed.

Any debtor considering a short sale should seek the guidance of a real estate professional who has successfully closed short sale transactions.

The Foreclosure Sale

Foreclosure sales are conducted on the first Tuesday of each month, between 10AM and 4PM, “at public outcry” on the steps of the courthouse of the County seat where the property is located. During the auction, bids are opened to third-party purchasers. The lender, or his representative, will be present at the sale and will bid for the property if other bidders do not offer at least the amount owed. Interested purchasers may bid against each other and against the lender.

Once the foreclosure sale has been concluded, the debtor’s interest in the property is terminated; Georgia does not provide for redemption of the property following the sale.

Disadvantages of buying property at the foreclosure auction include: (1) not being able to inspect the property or the public records pertaining to the property prior to making the purchase offer, (2) purchasing the property in its present condition without a seller’s disclosure, (3) assumption of unknown liabilities, including unpaid property taxes, and (4) cash or cashier’s check required for payment. All sales are final!

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