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

Whether you're a fairly new real estate agent or one who's been in business for a while, you most likely might use a refresher on these bank-owned homes.
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Our resident REO expert, 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?

Simply put, an REO residential or commercial property is genuine estate that is owned by a bank or lender after stopping working to sell at a foreclosure auction. But to truly understand REO residential or commercial properties, you first require to comprehend the foreclosure process.

The Foreclosure Process

When an individual with a mortgage stops paying on that mortgage for any reason, the foreclosure procedure will start. The mortgage arrangement will consist of language about when the bank can begin this process. Typically, a lending institution will not start the foreclosure procedure until the debtor has actually missed 4 successive payments.

Not all residential or commercial properties that go into the foreclosure process are in fact foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, states, "In a lot of cases, the mortgage is reinstated or the lending institution will exercise loss mitigation choices to avoid foreclosure. A debtor who declares Chapter 13 personal bankruptcy will likewise halt the foreclosure procedure."

This process looks various in every state. Underwood explains, "Alabama is a nonjudicial state. This implies that the bank does not have to submit a claim against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that notifies the mortgagor that they remain in default and offers info about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need lending institutions 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 paper for 3 weeks. If the bank or lender is the high-bidder or only buyer at the foreclosure sale, this residential or commercial property becomes "genuine estate owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in business 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 marketplace as an REO residential or commercial property." The lender sends a recommendation 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 very similar to noting any other residential or commercial property, with a few . 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 purchaser for the residential or commercial property. But instead of an individual customer, the broker represents a lending institution. 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 everything out of the home, including sinks and banisters. The bank will employ a company to clean things up and make sure things are working, but buyers will not discover a staged, updated home."

Lenders want to offer REO residential or commercial properties for fair market value as rapidly as possible, so pricing is determined by acquiring a BPO, or broker price viewpoint. Two real estate agents will provide their viewpoint on the market price of the residential or commercial property, and after that these opinions are averaged to obtain the sticker price. If the residential or commercial property suffers on the market, the bank will begin dropping the cost 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 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 as with any title search and examination, we're trying to find any potential concerns so that we can present a clear title to the buyer," Underwood describes.

If the title is clear, this file is ready 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 business will clear the title so that it's prepared 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 typical title problems 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 penalties and interest. If taxes are still overdue 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 purchase the tax certificate.

Underwood says, "If the county owns the tax certificate, fixing this is a quite uncomplicated procedure. But if it's owned by a 3rd party, it can get made complex." To redeem from a private, a bank is required to pay the overdue taxes, penalty, interest, along with the value of any enhancements on the residential or commercial property. In some circumstances, there can be a prolonged settlement process to remove this tax lien.

Encroachment concerns are likewise common with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly defined, which is why surveys are a necessary part of the title search and exam. Underwood discusses, "An encroachment 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 house or barn." It can be made complex to clear these concerns and in many cases, a quitclaim deed may be needed.

And similar to any other residential or commercial property, we can discover any variety of other title problems. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can also be discovered during the title search and exam. Title business experienced with REO residential or commercial properties understand exactly which problems to look for and how to address them to present REO buyers with a clear title.

Owner's title insurance coverage protects homebuyers from hidden dangers to their title after purchase. A boosted owner's policy may be recommended for individuals who buy an REO residential or commercial property. But no matter the policy, REO residential or commercial property purchasers need to always know laws concerning the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or heirs of the debtor, can redeem or redeem a foreclosed residential or commercial property for approximately a year after the foreclosure sale. Underwood explains, "To redeem a foreclosed residential or commercial property, the redeeming celebration must pay the quantity of the foreclosure quote, interest, and other charges consisting of taxes, insurance, and repairs."

"Because foreclosure sales can take place reasonably quickly in Alabama, the redemption duration is longer than in most states. For mortgages came from before 2016, that redemption period 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 really uncommon, but anyone buying an REO residential or commercial property needs to work with an attorney who knows and understands the law." These laws differ from one state to another 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 duration expires need to be aware that owner's title insurance coverage will never ever offer 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 providing financing for REO purchases will usually require affirmative protection for the staying redemption duration. Options, such as a bond, exist if the loan amount is up to 30% higher than the foreclosure quote, however buyers ought to understand that affirmative protection for the staying redemption period just secures the loan provider.

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 procedures to keep people in their mortgages and assist them retain their residential or commercial properties. However, if loss mitigation methods are unsuccessful, the foreclosure procedure starts.

Underwood says, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see a boost 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 won't be like it was in 2008, but it will certainly be more than what we're utilized 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 geared up to serve their clients.

At South Oak Title and Closing, we love partnering with real estate agents to assist them much better serve their clients. Whether you have particular questions about dealing with REO residential or commercial properties or simply need an REO expert 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 decades working with banks, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law practice. Jeff is wed and has two daughters: one recent graduate and one present 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 meant to offer general info about REO residential or commercial properties in Alabama and must not be considered legal guidance. Laws worrying REO residential or commercial properties likewise differ from state to state. Please consult your regional attorney with questions.