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 variety of REO residential or commercial properties readily available on the marketplace in the coming months.

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

Our resident REO specialist, 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?

Simply put, an REO residential or commercial property is realty that is owned by a bank or lending institution after failing to offer at a foreclosure auction. But to truly understand 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 factor, the foreclosure procedure 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 until the borrower has actually missed out on 4 consecutive payments.

Not all residential or commercial properties that enter the foreclosure process are actually foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, states, "In most cases, the mortgage is renewed or the lender will exercise loss mitigation choices to avoid foreclosure. A debtor who applies for Chapter 13 insolvency will likewise stop the foreclosure process."

This process looks various in every state. Underwood discusses, "Alabama is a nonjudicial state. This means that the bank does not need to submit a suit versus the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notices that informs the mortgagor that they remain in default and offers information about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need lenders to file a claim versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are likewise published in the county paper for 3 weeks. If the bank or lender is the high-bidder or only purchaser at the foreclosure sale, this residential or commercial property becomes "property owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood states, "Lenders aren't in the company of keeping 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 lending institution sends a recommendation for this residential or commercial property to both a realty brokerage and a title business.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is extremely comparable to listing any other residential or commercial property, with a few essential distinctions. There's still a check in the yard, a listing on the MLS, and images of the residential or commercial property. The broker's goal is to discover a purchaser for the residential or commercial property. But instead of a private 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 might not look like a normal 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 employ a company to tidy things up and make sure things are working, however purchasers won't discover a staged, upgraded home."

Lenders wish to sell REO residential or commercial properties for fair market value as quickly as possible, so rates is determined by acquiring a BPO, or broker cost opinion. Two real estate agents will give their viewpoint on the market rate of the residential or commercial property, and then these viewpoints are balanced to obtain the list cost. If the residential or commercial property languishes on the marketplace, the bank will begin dropping the price in incremental percentages to find a buyer.

Title Process for REO residential or commercial properties

When the title company receives the referral 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 noted for sale, and just like any title search and examination, we're searching for any potential problems so that we can present a clear title to the buyer," Underwood describes.

If the title is clear, this file is all set for when the residential or commercial property goes under agreement. If there are issues 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 buyer. Once the residential or commercial property goes under contract, all that's needed 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 especially typical. In Alabama, taxes are paid in defaults. If they're not paid by December 31, they're subject to penalties and interest. If taxes are still unpaid 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 buy the tax certificate.

Underwood states, "If the county owns the tax certificate, solving this is a pretty simple procedure. But if it's owned by a 3rd party, it can get made complex." To redeem from a specific, a bank is needed to pay the delinquent taxes, charge, interest, along with the worth of any enhancements on the residential or commercial property. In some circumstances, there can be an extended settlement procedure to remove this tax lien.

Encroachment problems are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't always plainly defined, which is why studies are a necessary part of the title search and test. Underwood explains, "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, and even part of a house or barn." It can be complicated to clear these concerns and in some cases, a quitclaim deed may be needed.

And similar to any other residential or commercial property, we can find any number of other title concerns. 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 exam. Title companies experienced with REO residential or commercial properties know precisely which concerns to try to find and how to address them to present REO buyers with a clear title.

Owner's title insurance coverage secures homebuyers from surprise risks to their title after purchase. An improved owner's policy might be advised for people who acquire an REO residential or commercial property. But regardless of the policy, REO residential or commercial property buyers should always know laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or successors of the debtor, can redeem or redeem 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 must pay the quantity of the foreclosure quote, interest, and other charges including taxes, insurance, and repair work."

"Because foreclosure sales can occur reasonably quickly in Alabama, the redemption duration is longer than in most 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 very rare, however anyone purchasing an REO residential or commercial property requires to work with a lawyer who knows and understands the law." These laws differ from one state to another and can change, so always consult your closing attorney with specific questions about the right of redemption.

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

Lenders supplying funding for REO purchases will normally 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 bid, but purchasers should comprehend that affirmative coverage for the staying redemption duration only safeguards the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place up until November 2021. As this moratorium has lifted, lending institutions have carried out loss mitigation procedures to keep individuals in their mortgages and assist them keep their residential or commercial properties. However, if loss mitigation methods are not successful, the foreclosure process begins.

Underwood states, "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 percentage of REO residential or commercial properties on the marketplace. It will not resemble it was in 2008, however it will definitely be more than what we're utilized 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 comprehend the nuance of purchasing a bank-owned home are much better equipped to serve their clients.

At South Oak Title and Closing, we like partnering with real estate agents to help them better serve their customers. Whether you have specific questions about dealing 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 actually 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 2 children: one current 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 intended to supply general details about REO residential or commercial properties in Alabama and must not be thought about legal suggestions. Laws concerning REO residential or commercial properties also differ from one state to another. Please consult your regional attorney with questions.