John Adams: Distressed home sales keep resale market alive

By John Adams

For the AJC

There's one part of the real estate market that's alive and well, although we should take little joy in it. It's the area of distressed sales, and it accounts for about a third of all transactions in metro Atlanta, according to the experts.

Each of its components can present an opportunity to the savvy home buyer, but there are potential pitfalls along the way.

The first opportunity is in the area of foreclosures, and it has been fueled by two distinct events. First, the mortgage industry lost touch with reality and began lending to anyone who asked for a loan. And second, the subsequent recession has slowed economic growth to such a degree that unemployment remains painfully high.

A foreclosure occurs when the borrower stops making payments as agreed, whatever the reason. The lender tries to get the borrower back on track; but if no plan for regular payments is presented, the lender begins the legal procedure to seize the house. It is hoped that the house can be sold for enough to cover the amount of the outstanding debt.

Unfortunately, most homes in Georgia are now worth less than they were a year ago, even though we have seen several months of improvement this year. So when the home is sold at a public foreclosure auction, the high bidder is almost always the lender, and the ownership of the house is transferred to the bank, which then wants to sell it for cash.

Because of the severity of the recession and the extent of unemployment, banks are currently flooded with these foreclosure homes, referred to as REO properties. Bank regulators are demanding that banks sell off these non-performing assets at whatever price they can obtain, so that the bank can get back to the business of lending money.

Rather than trying to buy directly from the banks, I recommend working with a real estate professional who specializes in bank-owned homes. More and more agents are gaining experience in the field. Ask your broker or banker for a recommendation.

Know that banks will try to sell these homes in "as is" condition.

They feel there is no use in putting additional money into what was a bad investment for them. In most cases, a bank would rather accept a greatly lowered sales price than invest the money necessary to clean up a home and get it properly ready for sale.

In addition, banks routinely refuse to disclose anything about the condition of the property, regardless of what they know. Their position is that, since no one at the bank actually lived in the house, they can't be expected to know much about it. That's why it's all the more important to have a thorough professional home inspection performed once you get the property under contract.

Next week, we'll look at short sales and how they work.

John Adams is an author, broadcaster and investor. He answers real estate questions on radio station WGKA (920am) every Saturday at noon. For more real estate information or to comment, visit www.money99.com.