After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now rising. As an outcome, we can expect to see a boost in the variety of REO residential or commercial properties readily available on the marketplace in the coming months.
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Whether you're a relatively brand-new real estate agent or one who's remained 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 genuine estate that is owned by a bank or lending institution after stopping working to offer at a foreclosure auction. But to really understand REO residential or commercial properties, you initially need to understand 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 arrangement will consist of language about when the bank can start this procedure. Typically, a loan provider won't begin the foreclosure process till the customer has actually missed four consecutive payments.

Not all residential or commercial properties that enter the foreclosure process are actually foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, says, "In most cases, the mortgage is restored or the lending institution will exercise loss mitigation choices to prevent foreclosure. A debtor who applies for Chapter 13 personal bankruptcy will likewise halt the foreclosure process."

This process looks various in every state. Underwood discusses, "Alabama is a nonjudicial state. This suggests that the bank does not need to file a lawsuit versus the defaulted mortgagor to foreclose. Instead, the bank sends a series of notices that informs the mortgagor that they are in default and provides information about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require lending institutions to submit a lawsuit versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also published 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 says, "Lenders aren't in business of retaining these residential or commercial properties. Their goal 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 lending institution sends out 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 crucial distinctions. There's still an indication in the backyard, a on the MLS, and photos of the residential or commercial property. The broker's goal is to discover a buyer for the residential or commercial property. But rather of a specific customer, 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 may not look like a common home that's market-ready. We had one REO residential or commercial property where the previous owner took everything out of the house, including sinks and banisters. The bank will hire a company to tidy things up and ensure things are working, but buyers will not find a staged, upgraded home."

Lenders desire to offer REO residential or commercial properties for fair market price as rapidly as possible, so pricing is identified by getting a BPO, or broker rate viewpoint. Two real estate agents will give their opinion on the market cost of the residential or commercial property, and after that these viewpoints are averaged to obtain the list rate. If the residential or commercial property suffers on the market, the bank will start dropping the price in incremental portions to discover a purchaser.

Title Process for REO residential or commercial properties

When the title business receives 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 listed for sale, and similar to any title search and examination, we're trying to find any possible problems so that we can present a clear title to the purchaser," Underwood describes.

If the title is clear, this file is all set for when the residential or commercial property goes under contract. If there are issues that require to be addressed such as judgments, encumbrances, or liens, the title company 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 needed is an update to title.

Common Title Issues with REO Properties

Several common title issues can arise with REO residential or commercial properties. Tax redemption problems are especially typical. In Alabama, taxes are paid in arrears. 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. In most cases, 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 straightforward procedure. But if it's owned by a 3rd party, it can get complicated." To redeem from an individual, a bank is needed to pay the overdue taxes, penalty, interest, in addition to the worth of any enhancements on the residential or commercial property. In some scenarios, there can be a prolonged settlement procedure to eliminate this tax lien.

Encroachment problems are likewise common with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly delineated, which is why studies are a required part of the title search and exam. Underwood describes, "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 issues and sometimes, a quitclaim deed may be needed.

And as with 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 found during the title search and test. 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 protects homebuyers from covert risks to their title after purchase. An enhanced owner's policy might be advised for people who acquire an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers ought to constantly be mindful of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or successors of the debtor, deserve to redeem or buy back a foreclosed residential or commercial property for approximately a year after the foreclosure sale. Underwood describes, "To redeem a foreclosed residential or commercial property, the redeeming celebration needs to pay the amount of the foreclosure quote, interest, and other charges including taxes, insurance coverage, and repair work."

"Because foreclosure sales can occur reasonably quickly in Alabama, the redemption period is longer than in a lot of states. For mortgages originated before 2016, that redemption period 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 very rare, but anybody buying an REO residential or commercial property needs to deal with a lawyer who understands 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 purchasing an REO residential or commercial property before the redemption period ends need to be mindful that owner's title insurance will never ever supply affirmative coverage over the right of redemption. For money purchasers, this will be noted as an exception in Schedule B-2 of the owner's title insurance coverage throughout of the redemption duration.

Lenders offering funding for REO purchases will typically need affirmative coverage for the staying redemption period. Options, such as a bond, exist if the loan quantity is up to 30% greater than the foreclosure bid, however purchasers should comprehend that affirmative coverage for the remaining redemption period just protects the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in location till November 2021. As this moratorium has actually lifted, lenders have actually executed loss mitigation procedures to keep people in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation strategies are unsuccessful, the foreclosure process begins.

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 3rd quarter of this year, we'll start to see a higher-than-normal portion of REO residential or commercial properties on the market. It will not be like 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 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 subtlety of purchasing a bank-owned home are better equipped to serve their customers.

At South Oak Title and Closing, we like partnering with real estate agents to assist them much better serve their customers. Whether you have specific questions about working with REO residential or commercial properties or just 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 actually invested years dealing with banks, lending institutions, and REO residential or commercial properties through his time leading the REO division at a Birmingham law practice. Jeff is wed and has two children: one recent graduate and one current student at Auburn University.

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

This article is meant to supply general information about REO residential or commercial properties in Alabama and must not be considered legal suggestions. Laws concerning REO residential or commercial properties also vary from one state to another. Please consult your regional attorney with concerns.
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