After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now increasing. As an outcome, we can anticipate to see a boost in the number of REO residential or commercial properties readily available on the market in the coming months.

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

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

What is an REO residential or commercial property?
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Basically, an REO residential or commercial property is property that is owned by a bank or lending institution after failing to cost a foreclosure auction. But to really 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 procedure will start. The mortgage contract will consist of language about when the bank can start this procedure. Typically, a lending institution won't start the foreclosure process till the customer has missed 4 successive payments.

Not all residential or commercial properties that get in the foreclosure procedure are in fact foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, states, "In most cases, the mortgage is renewed or the lender will work out loss mitigation choices to prevent foreclosure. A debtor who applies for Chapter 13 bankruptcy will also halt the foreclosure procedure."

This process looks different in every state. Underwood describes, "Alabama is a nonjudicial state. This means that the bank does not have to submit 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 info about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need lenders to submit a suit versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also published in the county newspaper for three weeks. If the bank or lending institution is the high-bidder or just purchaser at the foreclosure sale, this residential or commercial property becomes "real 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 offer 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 lending institution sends out a recommendation 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 really comparable to noting any other residential or commercial property, with a couple of essential differences. There's still an indication in the yard, a listing on the MLS, and pictures of the residential or commercial property. The broker's objective is to discover a buyer for the residential or commercial property. But rather of an individual customer, the broker represents a loan provider. 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 whatever out of the house, consisting of sinks and banisters. The bank will employ a company to clean things up and ensure things are working, however purchasers won't find a staged, upgraded home."

Lenders desire to sell REO residential or commercial properties for fair market price as rapidly as possible, so prices is determined by obtaining a BPO, or broker price viewpoint. Two agents will provide their opinion on the market price of the residential or commercial property, and then these viewpoints are averaged to obtain the sale price. If the residential or commercial property languishes on the market, the bank will begin dropping the cost in incremental portions to find a purchaser.

Title Process for REO residential or commercial properties

When the title company gets 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 trying to find any potential problems so that we can present a clear title to the buyer," 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 resolved such as judgments, encumbrances, or liens, the title business will clear the title so that it's prepared for a future buyer. Once the residential or commercial property goes under agreement, all that's required is an update to title.

Common Title Issues with REO Properties
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Several typical title issues can arise with REO residential or commercial properties. Tax redemption issues are especially typical. In Alabama, taxes are paid in defaults. If they're not paid by December 31, they're subject to charges and interest. If taxes are still unsettled by April, the county will have a tax sale in May. For the most part, the county is the high bidder. But in other cases, a 3rd party will purchase the tax certificate.

Underwood states, "If the county owns the tax certificate, resolving this is a pretty straightforward process. 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, charge, interest, along with the worth of any improvements on the residential or commercial property. In some circumstances, there can be a prolonged settlement procedure to remove this tax lien.

Encroachment problems are likewise common with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly delineated, which is why studies are a necessary part of the title search and examination. 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 concerns and sometimes, a quitclaim deed might be needed.

And just like any other residential or commercial property, we can discover any number of other title issues. Missing deeds, deeds in the back chain of title that do not have marital status, and other encumbrances can also be found throughout the title search and examination. Title companies experienced with REO residential or commercial properties know exactly which issues to search for and how to resolve them to present REO purchasers with a clear title.

Owner's title insurance coverage protects property buyers from hidden threats to their title after purchase. An improved owner's policy might be suggested for people who buy an REO residential or commercial property. But no matter the policy, REO residential or commercial property buyers should constantly be aware of 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 explains, "To redeem a foreclosed residential or commercial property, the redeeming celebration should pay the amount of the foreclosure quote, interest, and other charges including taxes, insurance, and repairs."

"Because foreclosure sales can occur reasonably rapidly in Alabama, the redemption period is longer than in the majority of states. For mortgages came from before 2016, that redemption period is a year. For mortgages originated after January 1, 2016, the redemption duration is shortened to 180 days."

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

Buyers buying an REO residential or commercial property before the redemption period expires need to be aware that owner's title insurance will never provide affirmative coverage 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 policy throughout of the redemption period.

Lenders providing financing for REO purchases will generally need affirmative protection for the staying redemption duration. Options, such as a bond, exist if the loan quantity is up to 30% higher than the foreclosure bid, however buyers should comprehend that affirmative protection for the staying redemption period just safeguards the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place till November 2021. As this moratorium has lifted, loan providers have implemented loss mitigation treatments to keep people in their mortgages and assist them maintain 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 advances. Starting in the 3rd 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 be like it was in 2008, however it will certainly be more than what we're utilized to seeing."

There's no requirement 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 understand the subtlety of buying a bank-owned home are much better geared up to serve their clients.

At South Oak Title and Closing, we like partnering with real estate agents to help them better serve their clients. Whether you have specific questions about working with REO residential or commercial properties or simply require an REO professional in your corner, we're here for you. Contact us with your concerns 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 firm. Jeff is married and has two daughters: one current graduate and one current trainee at Auburn University.

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

This article is planned to offer general information about REO residential or commercial properties in Alabama and must not be thought about legal advice. Laws concerning REO residential or commercial properties likewise differ from one state to another. Please consult your local attorney with concerns.