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

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

Our resident REO expert, Jeff Underwood, shares what real estate agents need to know about REO residential or commercial properties in Alabama.

What is an REO residential or commercial property?

Put simply, an REO residential or commercial property is real estate that is owned by a bank or lending institution after failing to cost a foreclosure auction. But to genuinely understand REO residential or commercial properties, you initially require to understand the foreclosure procedure.

The Foreclosure Process

When a specific with a mortgage stops making payments on that mortgage for any reason, the foreclosure process will start. The mortgage agreement will consist of language about when the bank can begin this procedure. Typically, a lending institution will not begin the foreclosure procedure until the customer has missed out on four consecutive payments.

Not all residential or commercial properties that get in the foreclosure procedure are really foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, states, "In numerous cases, the mortgage is restored or the lending institution will exercise loss mitigation options to avoid foreclosure. A debtor who applies for Chapter 13 bankruptcy will also stop the foreclosure process."

This procedure looks various in every state. Underwood explains, "Alabama is a nonjudicial state. This suggests that the bank does not have to submit a claim versus the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that notifies the mortgagor that they are in default and supplies details about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need loan providers to file a claim 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 loan provider is the high-bidder or only buyer at the foreclosure sale, this residential or commercial property ends up being "genuine estate owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in the business of retaining these residential or commercial properties. Their objective is to sell the home and recover 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 loan provider sends a referral for this residential or commercial property to both a realty brokerage and a title company.

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 couple of crucial distinctions. There's still a sign in the yard, a listing on the MLS, and photos of the residential or commercial property. The broker's goal is to discover a purchaser for the residential or commercial property. But rather of an individual 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 typical 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 company to clean things up and ensure things are working, but purchasers won't discover a staged, upgraded home."

Lenders wish to offer REO residential or commercial properties for reasonable market value as rapidly as possible, so rates is determined by getting a BPO, or broker cost opinion. Two real estate agents will offer their viewpoint on the marketplace price of the residential or commercial property, and after that these opinions are balanced to obtain the list price. If the residential or commercial property suffers on the market, the bank will begin dropping the rate in incremental portions to discover a purchaser.

Title Process for REO residential or commercial properties

When the title company receives the recommendation for an REO residential or commercial property, they will initiate 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 as with any title search and exam, we're looking for any possible concerns so that we can present a clear title to the purchaser," Underwood explains.

If the title is clear, this file is prepared for when the residential or commercial property goes under agreement. If there are problems that need 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 contract, all that's needed is an update to title.

Common Title Issues with REO Properties

Several typical title issues can occur with REO residential or commercial properties. Tax redemption concerns are especially common. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they go through charges 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 purchase the tax certificate.

Underwood says, "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 private, a bank is needed to pay the overdue taxes, penalty, interest, in addition to the value of any improvements on the residential or commercial property. In some circumstances, there can be a prolonged settlement process to eliminate this tax lien.

Encroachment problems are also typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly marked, which is why surveys are a necessary part of the title search and examination. Underwood explains, "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, and even part of a home or barn." It can be complicated to clear these issues and in many cases, a quitclaim deed may be required.

And similar to any other residential or commercial property, we can discover any variety 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 found throughout the title search and examination. Title business experienced with REO residential or commercial properties know precisely which problems to try to find and how to address them to present REO buyers with a clear title.

Owner's title insurance secures homebuyers from concealed dangers to their title after purchase. An enhanced owner's policy might be recommended for people who buy an REO residential or commercial property. But regardless of the policy, REO residential or commercial property purchasers need to constantly understand laws worrying the right of redemption.

Right of Redemption Laws

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

"Because foreclosure sales can take place relatively quickly in Alabama, the redemption period is longer than in the majority of states. For mortgages originated 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 extremely unusual, however anyone acquiring an REO residential or commercial property requires to work with a lawyer who understands and comprehends the law." These laws differ from state to state and can alter, so always consult your closing lawyer with particular questions about the right of redemption.

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

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

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place up until November 2021. As this moratorium has actually raised, loan providers have carried out loss mitigation procedures to keep people in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation methods are not successful, the foreclosure procedure starts.

Underwood says, "Foreclosure starts are up 39% over the last quarter, and we're anticipating to see a boost in these as the year progresses. Starting in the third quarter of this year, we'll start to see a higher-than-normal portion of REO residential or commercial properties on the market. It won't resemble it was in 2008, but it will certainly be more than what we're used to seeing."

There's no requirement 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 better equipped to serve their customers.

At South Oak Title and Closing, we love partnering with real estate agents to assist them better serve their clients. Whether you have particular concerns about dealing with REO residential or commercial properties or just require an REO expert in your corner, we're here for you. Contact us with your today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has invested decades dealing with banks, loan providers, and REO residential or commercial properties through his time leading the REO department at a Birmingham law company. Jeff is wed and has 2 daughters: one recent graduate and one current trainee at Auburn University.

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

This short article is meant to provide basic info about REO residential or commercial properties in Alabama and should not be thought about legal recommendations. Laws worrying REO residential or commercial properties also vary from state to state. Please consult your local lawyer with questions.
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