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

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

Our resident REO expert, Jeff Underwood, shares what real estate agents need to learn 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 genuine estate that is owned by a bank or loan provider after stopping working to offer at a foreclosure auction. But to genuinely understand REO residential or commercial properties, you first need to understand the foreclosure process.

The Foreclosure Process

When a specific with a mortgage stops paying on that mortgage for any reason, the foreclosure procedure will start. The mortgage contract will consist of language about when the bank can begin this process. Typically, a will not start the foreclosure procedure till the borrower has actually missed four consecutive payments.

Not all residential or commercial properties that go into the foreclosure process are really foreclosed upon. Jeff Underwood, managing attorney at South Oak Title & Closing in Auburn, says, "Oftentimes, the mortgage is restored or the loan provider will exercise loss mitigation choices to avoid foreclosure. A debtor who declares Chapter 13 bankruptcy will also stop the foreclosure procedure."

This process looks various in every state. Underwood describes, "Alabama is a nonjudicial state. This implies that the bank does not need to submit a lawsuit against 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 details about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need loan providers to file a claim versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also released in the county newspaper for 3 weeks. If the bank or lending institution is the high-bidder or just 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 keeping these residential or commercial properties. Their goal is to offer 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 lending institution 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 extremely similar to noting any other residential or commercial property, with a few key distinctions. There's still an indication in the yard, a listing on the MLS, and pictures of the residential or commercial property. The broker's goal is to discover a purchaser for the residential or commercial property. But rather of an individual customer, the broker represents a lender. On the MLS, this residential or commercial property will be designated as bank-owned.

Underwood says, "These residential or commercial properties may 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, consisting of sinks and banisters. The bank will hire a company to tidy things up and make certain things are working, however purchasers will not find a staged, updated home."

Lenders wish to offer REO residential or commercial properties for reasonable market price as quickly as possible, so pricing is identified by obtaining a BPO, or broker rate viewpoint. Two real estate agents will offer their viewpoint on the marketplace rate of the residential or commercial property, and after that these opinions are averaged to obtain the sale price. If the residential or commercial property suffers on the market, the bank will start dropping the rate in incremental portions to find a buyer.

Title Process for REO residential or commercial properties

When the title company gets the recommendation for an REO residential or commercial property, they will initiate a title search, simply as they would for any other residential or commercial property. "We do this before the residential or commercial property is listed for sale, and just like any title search and test, we're trying to find any possible concerns so that we can provide a clear title to the buyer," Underwood describes.

If the title is clear, this file is prepared for when the residential or commercial property goes under contract. 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 prepared for a future buyer. 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 typical title concerns can occur 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 charges 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 third celebration will buy the tax certificate.

Underwood says, "If the county owns the tax certificate, resolving this is a quite straightforward procedure. But if it's owned by a 3rd party, it can get made complex." To redeem from an individual, a bank is required to pay the delinquent taxes, charge, interest, in addition to the worth of any improvements on the residential or commercial property. In some scenarios, there can be an extended settlement process to eliminate this tax lien.

Encroachment problems are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly delineated, which is why surveys are an essential part of the title search and test. Underwood discusses, "An infringement 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 complicated to clear these issues and sometimes, a quitclaim deed may be needed.

And just like any other residential or commercial property, we can find 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 likewise be discovered during the title search and examination. Title companies experienced with REO residential or commercial properties know precisely which issues to look for and how to address them to present REO purchasers with a clear title.

Owner's title insurance secures homebuyers from concealed dangers to their title after purchase. An enhanced owner's policy might be advised for individuals who acquire an REO residential or commercial property. But despite the policy, REO residential or commercial property buyers must always understand laws concerning the right of redemption.

Right of Redemption Laws
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Individuals, including the foreclosed debtor or heirs of the debtor, deserve to redeem or purchase back a foreclosed residential or commercial property for as much as a year after the foreclosure sale. Underwood discusses, "To redeem a foreclosed residential or commercial property, the redeeming party must pay the quantity of the foreclosure quote, interest, and other charges including taxes, insurance coverage, and repair work."

"Because foreclosure sales can happen fairly rapidly in Alabama, the redemption period is longer than in the majority of states. For mortgages originated 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 very unusual, but anyone buying an REO residential or commercial property needs to work with a lawyer who knows and understands the law." These laws vary from state to state and can alter, so always consult your closing attorney with particular questions about the right of redemption.

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

Lenders providing financing for REO purchases will generally require affirmative protection for the remaining redemption duration. Options, such as a bond, exist if the loan quantity is up to 30% higher than the foreclosure quote, but purchasers should comprehend that affirmative coverage for the staying redemption period only secures the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place until November 2021. As this moratorium has actually lifted, loan providers have carried out loss mitigation treatments to keep individuals in their mortgages and help them keep their residential or commercial properties. However, if loss mitigation methods are unsuccessful, the foreclosure process begins.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see an increase in these as the year progresses. Starting in the third quarter of this year, we'll start to see a higher-than-normal percentage of REO residential or commercial properties on the marketplace. It will not resemble it remained 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 daunted 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 customers.

At South Oak Title and Closing, we enjoy partnering with real estate agents to help them much better serve their clients. Whether you have particular concerns 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 spent years dealing with banks, lending institutions, and REO residential or commercial properties through his time leading the REO department at a Birmingham law office. Jeff is married and has two 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 intended to supply basic details about REO residential or commercial properties in Alabama and ought to not be considered legal recommendations. Laws concerning REO residential or commercial properties also vary from state to state. Please consult your local lawyer with concerns.