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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 number of REO residential or commercial properties available on the market in the coming months.

Whether you're a relatively brand-new real estate agent or one who's been in business for a while, you most likely could utilize a refresher on these bank-owned homes.
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Our resident REO professional, 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?

Basically, an REO residential or commercial property is genuine estate that is owned by a bank or loan provider after failing to sell at a foreclosure auction. But to truly comprehend REO residential or commercial properties, you initially require to comprehend the foreclosure process.

The Foreclosure Process

When a private with a mortgage stops making payments on that mortgage for any reason, the foreclosure process will begin. The mortgage contract will consist of language about when the bank can start this procedure. Typically, a lender will not start the foreclosure procedure up until the customer has missed out on 4 successive payments.

Not all residential or commercial properties that get in the foreclosure procedure are really foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, states, "Oftentimes, the mortgage is renewed or the lending institution will exercise loss mitigation alternatives to prevent foreclosure. A debtor who files 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 implies that the bank does not need to file a claim against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that informs the mortgagor that they remain in default and provides info about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require lending institutions to submit a lawsuit against the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are likewise published in the county newspaper for 3 weeks. If the bank or lender is the high-bidder or only buyer at the foreclosure sale, this residential or commercial property ends up being "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 goal 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 realty brokerage and a title business.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is very similar to listing any other residential or commercial property, with a few essential distinctions. There's still a sign in the backyard, a listing on the MLS, and photos of the residential or commercial property. The broker's objective is to find a buyer for the residential or commercial property. But rather of a specific customer, 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 might not look like a typical home that's market-ready. We had one REO residential or commercial property where the previous owner took everything out of the home, consisting of sinks and banisters. The bank will employ a business to clean things up and make sure things are working, however buyers won't discover a staged, updated home."

Lenders want to sell REO residential or commercial properties for reasonable market value as rapidly as possible, so pricing is identified by getting a BPO, or broker price viewpoint. Two real estate agents will offer their opinion on the marketplace cost of the residential or commercial property, and after that these viewpoints are balanced to get the list price. If the residential or commercial property languishes on the marketplace, the bank will begin dropping the rate in incremental percentages to discover a purchaser.

Title Process for REO residential or commercial properties

When the title company receives the referral for an REO residential or commercial property, they will start a title search, just as they would for any other residential or commercial property. "We do this before the residential or commercial property is listed for sale, and similar to any title search and exam, we're searching for any possible concerns so that we can provide a clear title to the purchaser," Underwood describes.

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 company 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 issues can emerge with REO residential or commercial properties. Tax redemption problems are especially typical. In Alabama, taxes are paid in arrears. If they're not paid by December 31, they go through charges and interest. If taxes are still unsettled 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 celebration will buy the tax certificate.

Underwood states, "If the county owns the tax certificate, resolving this is a quite straightforward process. But if it's owned by a third celebration, it can get made complex." To redeem from a private, a bank is needed to pay the overdue taxes, penalty, interest, along with the worth of any improvements on the residential or commercial property. In some circumstances, there can be an extended settlement procedure to eliminate this tax lien.

Encroachment issues are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't always clearly defined, which is why studies are a required part of the title search and test. Underwood explains, "An advancement is any structure that exists on a 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 made complex to clear these problems and sometimes, a quitclaim deed may be needed.

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

Owner's title insurance coverage safeguards property buyers from covert threats to their title after purchase. An enhanced owner's policy might be suggested for people who buy an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers ought to constantly be conscious of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or successors of the debtor, deserve to 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 party should pay the amount of the foreclosure bid, interest, and other charges consisting of taxes, insurance, and repair work."

"Because foreclosure sales can occur reasonably rapidly in Alabama, the redemption period is longer than in most states. For mortgages stemmed before 2016, that redemption duration 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 extremely rare, however anybody buying an REO residential or commercial property requires to deal with an attorney who understands and comprehends the law." These laws vary from state to state and can alter, so always consult your closing lawyer with particular 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 supply 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 need affirmative protection for the staying redemption period. Options, such as a bond, exist if the loan quantity depends on 30% higher than the foreclosure bid, however buyers should comprehend that affirmative protection for the staying redemption duration just safeguards the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in location until November 2021. As this moratorium has actually raised, lenders have executed loss mitigation treatments to keep people in their mortgages and assist them keep their residential or commercial properties. However, if loss mitigation are not successful, the foreclosure process starts.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see an increase in these as the year progresses. Starting in the 3rd quarter of this year, we'll begin to see a higher-than-normal portion of REO residential or commercial properties on the market. It will not be like it remained in 2008, however 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 understand the nuance of purchasing a bank-owned home are 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 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 working with banks, lending institutions, and REO residential or commercial properties through his time leading the REO division at a Birmingham law firm. Jeff is wed and has two children: one recent graduate and one existing student at Auburn University.

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

This short article is intended to provide general details about REO residential or commercial properties in Alabama and need to not be considered legal guidance. Laws concerning REO residential or commercial properties also vary from state to state. Please consult your local attorney with questions.