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After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now growing. As a result, we can anticipate to see a boost in the variety of REO residential or commercial properties available on the marketplace in the coming months.

Whether you're a reasonably new real estate agent or one who's been in the business for a while, you probably could use a refresher on these bank-owned homes.
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Our resident REO expert, Jeff Underwood, shares what real estate agents require to understand about REO residential or commercial properties in Alabama.

What is an REO residential or commercial property?

Basically, an REO residential or commercial property is realty that is owned by a bank or lender after stopping working to sell at a foreclosure auction. But to truly understand REO residential or commercial properties, you initially require to comprehend the foreclosure process.

The Foreclosure Process

When a specific 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 begin this process. Typically, a loan provider will not start the foreclosure process till the has actually missed four consecutive payments.

Not all residential or commercial properties that go into the foreclosure procedure are in fact foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, states, "Oftentimes, the mortgage is restored or the loan provider will exercise loss mitigation choices to avoid foreclosure. A debtor who applies for Chapter 13 insolvency will likewise stop the foreclosure procedure."

This procedure looks different in every state. Underwood discusses, "Alabama is a nonjudicial state. This implies that the bank does not need to file a claim versus the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that informs the mortgagor that they remain in default and provides info about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need lending institutions to file a lawsuit against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are likewise published in the county newspaper 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 ends up being "property owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in the business of maintaining 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 lender sends out a referral for this residential or commercial property to both a real estate brokerage and a title company.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is very similar to noting any other residential or commercial property, with a few key distinctions. There's still a check in the lawn, a listing on the MLS, and images of the residential or commercial property. The broker's objective is to discover a purchaser for the residential or commercial property. But instead of an individual client, the broker represents a loan provider. 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 everything out of the home, consisting of sinks and banisters. The bank will hire a business to clean things up and make sure things are working, but purchasers won't find a staged, updated home."

Lenders desire to offer REO residential or commercial properties for reasonable market price as rapidly as possible, so pricing is identified by getting a BPO, or broker rate viewpoint. Two real estate agents will offer their opinion on the marketplace price of the residential or commercial property, and then these opinions are averaged to get the list rate. If the residential or commercial property languishes on the market, the bank will begin dropping the rate in incremental percentages to discover a buyer.

Title Process for REO residential or commercial properties

When the title company gets the referral for an REO residential or commercial property, they will initiate a title search, just as they would for any other residential or commercial property. "We do this before the residential or commercial property is noted for sale, and just like any title search and exam, we're searching for any prospective problems so that we can provide a clear title to the buyer," Underwood explains.

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

Common Title Issues with REO Properties

Several typical title problems can occur with REO residential or commercial properties. Tax redemption concerns 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 overdue 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 celebration will buy the tax certificate.

Underwood states, "If the county owns the tax certificate, solving this is a pretty uncomplicated procedure. But if it's owned by a third party, it can get made complex." To redeem from a private, a bank is needed to pay the delinquent taxes, charge, interest, in addition to the value of any enhancements on the residential or commercial property. In some situations, there can be an extended 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 constantly clearly defined, which is why studies are a needed part of the title search and test. Underwood discusses, "An encroachment is any structure that exists on a neighbor's land or residential or commercial property - a fence, a shed, a mobile home, or perhaps part of a house or barn." It can be complicated to clear these concerns and in some cases, a quitclaim deed might be needed.

And as with any other residential or commercial property, we can discover any variety of other title problems. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can also be discovered throughout the title search and examination. Title companies experienced with REO residential or commercial properties understand exactly which concerns to look for and how to resolve them to present REO purchasers with a clear title.

Owner's title insurance coverage secures property buyers from hidden risks to their title after purchase. A boosted owner's policy may be advised for individuals who acquire an REO residential or commercial property. But regardless of the policy, REO residential or commercial property purchasers ought to constantly be conscious of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or beneficiaries of the debtor, can redeem or redeem a foreclosed residential or commercial property for up to a year after the foreclosure sale. Underwood describes, "To redeem a foreclosed residential or commercial property, the redeeming celebration should pay the amount of the foreclosure bid, interest, and other charges consisting of taxes, insurance coverage, and repair work."

"Because foreclosure sales can take place fairly quickly in Alabama, the redemption duration is longer than in the majority of states. For mortgages stemmed before 2016, that redemption duration is a year. For mortgages originated after January 1, 2016, the redemption period is reduced to 180 days."

He continues, "Redemptions of foreclosed homes are extremely unusual, however anyone acquiring an REO residential or commercial property requires to work with an attorney who knows and comprehends the law." These laws vary from state to state and can alter, so always consult your closing lawyer with particular questions about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption period ends requirement to be mindful that owner's title insurance coverage will never provide affirmative coverage over the right of redemption. For money buyers, this will be noted as an exception in Schedule B-2 of the owner's title insurance plan for the duration of the redemption period.

Lenders offering financing for REO purchases will normally 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 buyers should comprehend that affirmative protection for the remaining redemption period only safeguards the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place till November 2021. As this moratorium has actually raised, lenders have carried out loss mitigation procedures to keep people in their mortgages and assist them retain their residential or commercial properties. However, if loss mitigation methods are not successful, the foreclosure process starts.

Underwood says, "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 third quarter of this year, we'll begin to see a higher-than-normal percentage of REO residential or commercial properties on the marketplace. It won't resemble it was in 2008, however it will definitely be more than what we're used 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 buying a bank-owned home are much better geared up to serve their clients.

At South Oak Title and Closing, we love partnering with real estate agents to assist them much better serve their customers. Whether you have particular questions about dealing with REO residential or commercial properties or just require an REO specialist 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 spent years working with banks, lenders, and REO residential or commercial properties through his time leading the REO division at a Birmingham law company. Jeff is married and has two daughters: one recent graduate and one present trainee at Auburn University.

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

This short article is meant to offer basic information about REO residential or commercial properties in Alabama and ought to not be considered legal suggestions. Laws worrying REO residential or commercial properties likewise vary from state to state. Please consult your local attorney with questions.