After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now increasing. As a result, we can anticipate to see an increase in the number of REO residential or commercial properties available on the marketplace in the coming months.
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Whether you're a fairly brand-new real estate agent or one who's remained in business for a while, you most likely could utilize a refresher on these bank-owned homes.

Our resident REO specialist, Jeff Underwood, shares what real estate agents need to understand about REO residential or commercial properties in Alabama.

What is an REO residential or commercial property?

Simply put, an REO residential or commercial property is realty that is owned by a bank or lender after stopping working to cost a foreclosure auction. But to genuinely comprehend REO residential or commercial properties, you initially need to comprehend the foreclosure procedure.

The Foreclosure Process

When an individual with a mortgage stops paying on that mortgage for any factor, the foreclosure process will begin. The mortgage contract will consist of language about when the bank can start this procedure. Typically, a loan provider won't start the foreclosure procedure up until the debtor has missed out on 4 successive payments.

Not all residential or commercial properties that go into the foreclosure process are in fact foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, says, "Oftentimes, the mortgage is restored or the lending institution will work out loss mitigation options to prevent foreclosure. A debtor who applies for Chapter 13 personal bankruptcy will also stop the foreclosure process."

This procedure looks different in every state. Underwood discusses, "Alabama is a nonjudicial state. This means that the bank does not have to submit a claim versus the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notices that informs the mortgagor that they are in default and offers info about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, require loan providers to submit a suit against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are likewise published in the county paper for 3 weeks. If the bank or lending institution is the high-bidder or just purchaser at the foreclosure sale, this residential or commercial property becomes "genuine estate owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in business of retaining these residential or commercial properties. Their objective is to sell the home and recover their losses from the foreclosure. After the foreclosure sale, the residential or commercial property will go on the marketplace as an REO residential or commercial property." The loan provider sends a referral for this residential or commercial property to both a property brokerage and a title business.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is really comparable to noting any other residential or commercial property, with a couple of key differences. There's still a check in the lawn, a listing on the MLS, and photos of the residential or commercial property. The broker's objective is to find a buyer for the residential or commercial property. But instead of a specific customer, the broker represents a lender. On the MLS, this residential or commercial property will be designated as bank-owned.

Underwood states, "These residential or commercial properties might not look like a typical home that's market-ready. We had one REO residential or commercial property where the previous owner took whatever out of the home, consisting of sinks and banisters. The bank will hire a company to tidy things up and make certain things are working, but buyers will not find a staged, updated home."

Lenders wish to sell REO residential or commercial properties for reasonable market value as quickly as possible, so rates is identified by acquiring a BPO, or broker price viewpoint. Two real estate agents will offer their viewpoint on the marketplace price of the residential or commercial property, and after that these viewpoints are balanced to acquire the list cost. If the residential or commercial property languishes on the marketplace, the bank will begin dropping the rate in incremental portions to find a buyer.

Title Process for REO residential or commercial properties

When the title business gets the recommendation for an REO residential or commercial property, they will start a title search, just as they would for any other residential or commercial property. "We do this before the residential or commercial property is listed for sale, and similar to any title search and test, we're looking for any prospective concerns so that we can provide a clear title to the buyer," Underwood discusses.

If the title is clear, this file is ready for when the residential or commercial property goes under agreement. If there are issues that need to be attended to such as judgments, encumbrances, or liens, the title business will clear the title so that it's prepared for a future buyer. Once the residential or commercial property goes under contract, all that's required is an upgrade to title.

Common Title Issues with REO Properties

Several typical title problems can emerge with REO residential or commercial properties. Tax redemption problems are particularly typical. In Alabama, taxes are paid in arrears. If they're not paid by December 31, they're subject to penalties and interest. If taxes are still unpaid by April, the county will have a tax sale in May. For the most part, the county is the high bidder. But in other cases, a 3rd party will buy the tax certificate.

Underwood says, "If the county owns the tax certificate, fixing this is a quite uncomplicated process. But if it's owned by a 3rd party, it can get made complex." To redeem from a private, a bank is needed to pay the overdue taxes, penalty, interest, along with the worth of any enhancements on the residential or commercial property. In some situations, there can be a prolonged settlement process to remove this tax lien.

Encroachment concerns are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't always clearly marked, which is why studies are an essential part of the title search and examination. Underwood explains, "An infringement is any structure that exists on a next-door neighbor's land or residential or commercial property - a fence, a shed, a mobile home, or even part of a home or barn." It can be complicated to clear these problems and in many cases, a quitclaim deed may be needed.

And just like any other residential or commercial property, we can discover any variety of other title issues. Missing deeds, deeds in the back chain of title that do not have marital status, and other encumbrances can also be found during the title search and examination. Title companies experienced with REO residential or commercial properties know precisely which problems to look for and how to resolve them to present REO purchasers with a clear title.

Owner's title insurance coverage safeguards property buyers from surprise risks to their title after purchase. An enhanced owner's policy might be suggested for individuals who acquire an REO residential or commercial property. But no matter the policy, REO residential or commercial property buyers should always know laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or heirs of the debtor, deserve to redeem or buy back a foreclosed residential or commercial property for approximately a year after the foreclosure sale. Underwood discusses, "To redeem a foreclosed residential or commercial property, the redeeming party should pay the amount of the foreclosure bid, interest, and other charges including taxes, insurance coverage, and repairs."

"Because foreclosure sales can take place relatively rapidly in Alabama, the redemption period is longer than in the majority of states. For mortgages stemmed before 2016, that redemption duration is a year. For mortgages come from after January 1, 2016, the redemption duration is shortened to 180 days."

He continues, "Redemptions of foreclosed homes are extremely unusual, but anyone buying an REO residential or commercial property requires to work with a lawyer who knows and understands the law." These laws differ from state to state and can alter, so always consult your closing lawyer with particular concerns about the right of redemption.

Buyers purchasing an REO residential or commercial property before the redemption period ends requirement to be aware that owner's title insurance coverage will never ever offer affirmative protection over the right of redemption. For money buyers, this will be listed as an exception in Schedule B-2 of the owner's title insurance coverage for the duration of the redemption duration.

Lenders supplying funding for REO purchases will normally need affirmative protection for the remaining redemption duration. Options, such as a bond, exist if the loan amount depends on 30% greater than the foreclosure quote, however buyers must understand that affirmative coverage for the staying redemption duration just protects the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location until November 2021. As this moratorium has actually lifted, lenders have actually implemented loss mitigation procedures to keep individuals in their mortgages and help them their residential or commercial properties. However, if loss mitigation techniques are not successful, the foreclosure procedure starts.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see a boost in these as the year advances. Starting in the 3rd quarter of this year, we'll begin to see a higher-than-normal portion of REO residential or commercial properties on the market. It will not resemble it was in 2008, however it will certainly be more than what we're utilized to seeing."

There's no need for real estate agents to be frightened by REO residential or commercial properties. As more of these residential or commercial properties appear in the MLS, real estate agents who understand the nuance of purchasing a bank-owned home are much better geared up to serve their customers.

At South Oak Title and Closing, we like partnering with real estate agents to assist them better serve their customers. Whether you have particular concerns about working with REO residential or commercial properties or just need an REO professional in your corner, we're here for you. Contact us with your concerns today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has invested decades dealing with banks, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law firm. Jeff is wed and has 2 daughters: one current graduate and one existing student at Auburn University.

Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.

This short article is meant to supply basic information about REO residential or commercial properties in Alabama and should not be considered legal advice. Laws concerning REO residential or commercial properties likewise differ from state to state. Please consult your local lawyer with concerns.