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

Whether you're a fairly brand-new real estate agent or one who's been in the organization for a while, you probably might use a refresher on these bank-owned homes.

Our resident REO professional, 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 property that is owned by a bank or lending institution after failing to sell at a foreclosure auction. But to genuinely understand REO residential or commercial properties, you initially need to comprehend the foreclosure procedure.

The Foreclosure Process

When a private with a mortgage stops paying on that mortgage for any reason, the foreclosure process will start. The mortgage contract will consist of language about when the bank can begin this procedure. Typically, a lender will not begin the foreclosure procedure up until the debtor has actually missed out on 4 consecutive payments.

Not all residential or commercial properties that go into the are actually foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, states, "In a lot of cases, the mortgage is renewed or the loan provider will work out loss mitigation choices to avoid foreclosure. A debtor who submits for Chapter 13 bankruptcy will also stop the foreclosure procedure."

This process looks different in every state. Underwood discusses, "Alabama is a nonjudicial state. This indicates that the bank does not have to submit a suit versus the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that informs the mortgagor that they are in default and supplies info about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need lending institutions to submit a claim versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are likewise published in the county newspaper for three weeks. If the bank or lender is the high-bidder or just buyer at the foreclosure sale, this residential or commercial property becomes "real estate owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood states, "Lenders aren't in business of maintaining these residential or commercial properties. Their objective 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 lender sends 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 really similar to listing any other residential or commercial property, with a couple of essential differences. There's still a check in the backyard, a listing on the MLS, and images of the residential or commercial property. The broker's objective is to find a buyer for the residential or commercial property. But rather 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 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 house, consisting of sinks and banisters. The bank will hire a business to tidy things up and make sure things are working, but buyers won't find a staged, upgraded home."

Lenders wish to offer REO residential or commercial properties for reasonable market price as rapidly as possible, so prices is identified by obtaining a BPO, or broker cost opinion. Two real estate agents will offer their opinion on the market price of the residential or commercial property, and then these opinions are balanced to obtain the sale price. If the residential or commercial property languishes on the market, the bank will start dropping the price in incremental percentages to find 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 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 noted for sale, and just like any title search and examination, we're searching for any possible problems so that we can present a clear title to the purchaser," Underwood discusses.

If the title is clear, this file is ready for when the residential or commercial property goes under agreement. If there are problems that require to be resolved such as judgments, encumbrances, or liens, the title company will clear the title so that it's ready 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 issues can emerge with REO residential or commercial properties. Tax redemption problems are particularly common. In Alabama, taxes are paid in defaults. If they're not paid by December 31, they undergo 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 complicated." To redeem from a private, a bank is needed to pay the overdue taxes, penalty, interest, as well as the worth of any enhancements on the residential or commercial property. In some situations, there can be an extended settlement procedure to remove this tax lien.

Encroachment problems are also common with REO residential or commercial properties. Residential or commercial property lines aren't always plainly defined, which is why studies are a required part of the title search and test. Underwood explains, "An advancement is any structure that exists on a 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 made complex to clear these problems and in some cases, a quitclaim deed may be needed.

And similar to 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 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 address them to present REO purchasers with a clear title.

Owner's title insurance coverage safeguards property buyers from hidden dangers to their title after purchase. A boosted owner's policy may be suggested for individuals who purchase an REO residential or commercial property. But no matter the policy, REO residential or commercial property buyers must always be conscious of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or heirs of the debtor, deserve to redeem or redeem 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 needs to pay the amount of the foreclosure bid, interest, and other charges including taxes, insurance coverage, and repair work."

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

He continues, "Redemptions of foreclosed homes are very rare, but anybody purchasing an REO residential or commercial property needs to deal with an attorney who understands and understands the law." These laws differ from state to state and can alter, so always consult your closing attorney with specific questions about the right of redemption.

Buyers acquiring an REO residential or commercial property before the redemption period expires need to be conscious that owner's title insurance will never ever provide affirmative coverage over the right of redemption. For cash buyers, this will be noted as an exception in Schedule B-2 of the owner's title insurance plan throughout of the redemption period.

Lenders supplying funding for REO purchases will usually require affirmative protection for the remaining redemption duration. Options, such as a bond, exist if the loan quantity depends on 30% greater than the foreclosure bid, but buyers must understand that affirmative coverage for the remaining redemption period just protects the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location till November 2021. As this moratorium has actually lifted, lenders have actually carried out loss mitigation treatments to keep people in their mortgages and assist them retain their residential or commercial properties. However, if loss mitigation strategies are unsuccessful, 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 progresses. 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 market. It won't be like it remained in 2008, but it will definitely be more than what we're utilized to seeing."

There's no requirement 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 understand the subtlety of buying a bank-owned home are much better equipped to serve their customers.

At South Oak Title and Closing, we like partnering with real estate agents to help them much 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 questions today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has actually invested years working with banks, loan providers, and REO residential or commercial properties through his time leading the REO department at a Birmingham law practice. Jeff is married and has two children: one recent graduate and one current student at Auburn University.
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Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.

This short article is intended to offer basic info about REO residential or commercial properties in Alabama and ought to not be thought about legal advice. Laws worrying REO residential or commercial properties likewise differ from one state to another. Please consult your local lawyer with concerns.
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