After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now on the rise. As an outcome, we can anticipate to see an increase in the number of REO residential or commercial properties offered on the market in the coming months.

Whether you're a fairly new real estate agent or one who's remained in business for a while, you most likely might utilize a refresher on these bank-owned homes.

Our resident REO expert, Jeff Underwood, shares what real estate agents require to learn about REO residential or commercial properties in Alabama.

What is an REO residential or commercial property?
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Put simply, an REO residential or commercial property is property that is owned by a bank or lending institution after failing to cost a foreclosure auction. But to really REO residential or commercial properties, you initially need to comprehend the foreclosure process.

The Foreclosure Process

When an individual with a mortgage stops paying on that mortgage for any reason, the foreclosure procedure will start. The mortgage agreement will include language about when the bank can begin this procedure. Typically, a loan provider won't begin the foreclosure procedure up until the borrower has actually missed out on 4 consecutive payments.

Not all residential or commercial properties that enter the foreclosure process are really foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, says, "Oftentimes, the mortgage is reinstated or the lender will work out loss mitigation alternatives to avoid foreclosure. A debtor who submits for Chapter 13 insolvency will likewise halt the foreclosure process."

This process looks different in every state. Underwood explains, "Alabama is a nonjudicial state. This suggests that the bank does not have to file a lawsuit against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that notifies the mortgagor that they remain in default and supplies details about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need lenders to submit a claim against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are likewise released in the county newspaper for 3 weeks. If the bank or lender is the high-bidder or only buyer at the foreclosure sale, this residential or commercial property ends up being "property owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

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

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is very comparable to noting any other residential or commercial property, with a few crucial differences. There's still a sign in the backyard, 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 an individual customer, the broker represents a lending institution. 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 common home that's market-ready. We had one REO residential or commercial property where the previous owner took whatever out of the home, including sinks and banisters. The bank will hire a business to clean things up and ensure things are working, but purchasers won't find a staged, upgraded home."

Lenders wish to offer REO residential or commercial properties for fair market price as rapidly as possible, so rates is determined by acquiring a BPO, or broker cost viewpoint. Two real estate agents will provide their viewpoint on the market cost of the residential or commercial property, and then these viewpoints are balanced to obtain the sale price. If the residential or commercial property suffers on the marketplace, the bank will start dropping the rate in incremental percentages to find a purchaser.

Title Process for REO residential or commercial properties

When the title company receives the referral for an REO residential or commercial property, they will start a title search, simply as they would for any other residential or commercial property. "We do this before the residential or commercial property is noted for sale, and as with any title search and examination, we're searching for any possible problems 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 concerns that need to be addressed such as judgments, encumbrances, or liens, the title business will clear the title so that it's all set for a future purchaser. Once the residential or commercial property goes under agreement, all that's required is an update to title.

Common Title Issues with REO Properties

Several common title problems can emerge with REO residential or commercial properties. Tax redemption issues are especially common. In Alabama, taxes are paid in defaults. If they're not paid by December 31, they're subject to charges and interest. If taxes are still unsettled by April, the county will have a tax sale in May. In many cases, the county is the high bidder. But in other cases, a 3rd party will purchase the tax certificate.

Underwood states, "If the county owns the tax certificate, fixing this is a pretty straightforward process. But if it's owned by a 3rd party, it can get made complex." To redeem from a private, a bank is required to pay the overdue taxes, charge, interest, as well as the worth of any improvements on the residential or commercial property. In some circumstances, there can be a prolonged settlement process to remove this tax lien.

Encroachment concerns are also typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly defined, which is why surveys are an essential part of the title search and exam. Underwood describes, "An advancement is any structure that exists on a neighbor's land or residential or commercial property - a fence, a shed, a mobile home, and even part of a home or barn." It can be made complex to clear these issues and in many cases, a quitclaim deed might be required.

And as with any other residential or commercial property, we can find any number of other title problems. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can likewise be discovered throughout the title search and examination. Title business experienced with REO residential or commercial properties know exactly which concerns to try to find and how to resolve them to present REO buyers with a clear title.

Owner's title insurance coverage protects property buyers from hidden threats to their title after purchase. An improved owner's policy might be suggested for individuals who purchase an REO residential or commercial property. But regardless of the policy, REO residential or commercial property purchasers should always understand laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or beneficiaries of the debtor, have the right to redeem or purchase back a foreclosed residential or commercial property for up to a year after the foreclosure sale. Underwood discusses, "To redeem a foreclosed residential or commercial property, the redeeming celebration should pay the quantity of the foreclosure bid, interest, and other charges consisting of taxes, insurance coverage, and repair work."

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

He continues, "Redemptions of foreclosed homes are really uncommon, but anybody purchasing an REO residential or commercial property requires to work with an attorney who knows and comprehends the law." These laws vary from one state to another and can alter, so always consult your closing attorney with particular concerns about the right of redemption.

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

Lenders providing financing for REO purchases will usually require affirmative protection for the remaining redemption duration. Options, such as a bond, exist if the loan amount is up to 30% higher than the foreclosure quote, but purchasers need to comprehend that affirmative protection for the staying redemption duration only secures the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location till November 2021. As this moratorium has actually raised, lenders have implemented loss mitigation treatments to keep people in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation techniques are not successful, the foreclosure procedure starts.

Underwood says, "Foreclosure starts are up 39% over the last quarter, and we're anticipating to see an increase in these as the year advances. Starting in the third quarter of this year, we'll begin to see a higher-than-normal portion of REO residential or commercial properties on the marketplace. It won't be like it was in 2008, but it will definitely be more than what we're utilized to seeing."

There's no need for real estate agents to be intimidated by REO residential or commercial properties. As more of these residential or commercial properties appear in the MLS, real estate agents who comprehend the nuance of buying a bank-owned home are better equipped to serve their clients.

At South Oak Title and Closing, we enjoy partnering with real estate agents to assist them much better serve their clients. Whether you have specific questions about working with REO residential or commercial properties or simply require an REO specialist in your corner, we're here for you. Contact us with your questions today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has invested decades working with banks, lenders, and REO residential or commercial properties through his time leading the REO department at a Birmingham law company. Jeff is married and has 2 daughters: one recent graduate and one current trainee at Auburn University.

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

This short article is meant to supply basic details about REO residential or commercial properties in Alabama and should not be thought about legal suggestions. Laws concerning REO residential or commercial properties likewise differ from one state to another. Please consult your regional lawyer with concerns.