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After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now growing. As an outcome, we can anticipate to see an increase in the number 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 might utilize a refresher on these bank-owned homes.

Our resident REO expert, 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 lender after failing to cost a foreclosure auction. But to genuinely comprehend REO residential or commercial properties, you initially need to comprehend the foreclosure procedure.
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The Foreclosure Process

When an individual with a mortgage stops making payments on that mortgage for any reason, the foreclosure process will begin. The mortgage arrangement will include language about when the bank can start this procedure. Typically, a lending institution won't begin the foreclosure procedure until the borrower has missed out on 4 consecutive payments.

Not all residential or commercial properties that enter the foreclosure procedure are in fact foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, states, "Oftentimes, the mortgage is restored or the lender will work out loss mitigation options to prevent foreclosure. A debtor who declares Chapter 13 bankruptcy will also halt the foreclosure process."

This process looks different in every state. Underwood describes, "Alabama is a nonjudicial state. This suggests that the bank does not need to submit a lawsuit against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notices 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 lenders to file a suit against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are also released in the county paper for three 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 says, "Lenders aren't in the service of maintaining these residential or commercial properties. Their objective is to offer 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 referral for this residential or commercial property to both a property brokerage and a title company.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is really 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 photos of the residential or commercial property. The broker's goal is to find a buyer for the residential or commercial property. But rather of a specific 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 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, including sinks and banisters. The bank will hire a business to clean things up and ensure things are working, however buyers will not find a staged, upgraded home."

Lenders wish to sell REO residential or commercial properties for fair market price as quickly as possible, so pricing is figured out by obtaining 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 after that these opinions are averaged to acquire the sale price. If the residential or commercial property languishes on the market, the bank will begin dropping the rate in incremental percentages to find a purchaser.

Title Process for REO residential or commercial properties

When the title business receives the recommendation for an REO residential or commercial property, they will start 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 as with any title search and test, we're trying to find any potential 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 issues that require to be dealt with 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 contract, all that's needed is an upgrade to title.

Common Title Issues with REO Properties

Several common title concerns can arise with REO residential or commercial properties. Tax redemption issues are particularly typical. In Alabama, taxes are paid in defaults. If they're not paid by December 31, they undergo charges and interest. If taxes are still overdue 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 acquire the tax certificate.

Underwood states, "If the county owns the tax certificate, resolving this is a pretty uncomplicated procedure. But if it's owned by a 3rd party, it can get made complex." To redeem from an individual, a bank is needed to pay the delinquent taxes, penalty, interest, in addition to the value 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 issues are likewise common with REO residential or commercial properties. Residential or commercial property lines aren't always plainly delineated, which is why surveys are an essential part of the title search and examination. Underwood explains, "An infringement 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 issues and in some cases, a quitclaim deed may be needed.

And as with any other residential or commercial property, we can discover any number of other title concerns. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can likewise be discovered during the title search and exam. Title business experienced with REO residential or commercial properties know exactly which concerns to search for and how to resolve them to present REO purchasers with a clear title.

Owner's title insurance secures property buyers from concealed dangers to their title after purchase. An improved owner's policy may be suggested for who buy an REO residential or commercial property. But no matter the policy, REO residential or commercial property buyers should constantly be mindful of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or beneficiaries of the debtor, deserve to redeem or redeem a foreclosed residential or commercial property for as much as 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 bid, interest, and other charges consisting of taxes, insurance coverage, and repairs."

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

He continues, "Redemptions of foreclosed homes are very uncommon, however anybody acquiring an REO residential or commercial property needs to work with an attorney who understands and comprehends the law." These laws vary from state to state and can change, so constantly consult your closing lawyer with specific questions about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption duration ends need to be mindful that owner's title insurance will never offer affirmative coverage over the right of redemption. For cash purchasers, this will be listed as an exception in Schedule B-2 of the owner's title insurance policy throughout of the redemption duration.

Lenders providing financing for REO purchases will normally require affirmative coverage for the remaining redemption duration. Options, such as a bond, exist if the loan quantity is up to 30% higher than the foreclosure bid, however purchasers must understand that affirmative protection for the remaining redemption period just secures the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place till November 2021. As this moratorium has lifted, lending institutions have actually 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 procedure starts.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're anticipating to see an increase 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 market. It won't resemble it remained in 2008, but it will certainly be more than what we're utilized to seeing."

There's no requirement 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 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 better serve their customers. Whether you have specific questions about working with REO residential or commercial properties or just need 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 working with banks, lending institutions, and REO residential or commercial properties through his time leading the REO division at a Birmingham law office. Jeff is married and has 2 daughters: one recent graduate and one present student at Auburn University.

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

This article is planned to supply basic details 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 vary from state to state. Please consult your local attorney with questions.
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