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 available on the market in the coming months.

Whether you're a relatively brand-new real estate agent or one who's remained in the organization for a while, you most likely could 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 lending institution after failing to cost a foreclosure auction. But to really comprehend REO residential or commercial properties, you first require to understand the foreclosure procedure.

The Foreclosure Process

When a specific with a mortgage stops paying on that mortgage for any factor, the foreclosure process will begin. The mortgage arrangement will include language about when the bank can start this process. Typically, a lender will not begin the foreclosure procedure till the debtor has missed out on 4 consecutive payments.

Not all residential or commercial properties that enter the foreclosure process are really foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, says, "In a lot of cases, the mortgage is restored or the loan provider will exercise loss mitigation choices to avoid foreclosure. A debtor who applies for Chapter 13 insolvency will likewise halt the foreclosure process."

This procedure looks different in every state. Underwood explains, "Alabama is a nonjudicial state. This implies that the bank does not need to file a suit versus the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that notifies the mortgagor that they remain in default and offers 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 versus the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are likewise released in the county paper for three weeks. If the bank or lender is the high-bidder or only buyer at the foreclosure sale, this residential or commercial property becomes "realty 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 goal is to offer 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 recommendation for this residential or commercial property to both a genuine estate 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 noting any other residential or commercial property, with a few crucial 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 instead 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 typical home that's market-ready. We had one REO residential or commercial property where the previous owner took everything out of the house, including sinks and banisters. The bank will employ a company to clean things up and make certain things are working, but purchasers won't find a staged, updated home."

Lenders wish to sell REO residential or commercial properties for reasonable market price as quickly as possible, so pricing is figured out by acquiring a BPO, or broker cost opinion. Two real estate agents will provide their viewpoint on the market rate of the residential or commercial property, and then these opinions are averaged 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 find a buyer.

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, 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 as with any title search and exam, we're trying to find any potential problems so that we can provide a clear title to the buyer," Underwood discusses.

If the title is clear, this file is ready for when the residential or commercial property goes under agreement. If there are issues that require to be resolved such as judgments, encumbrances, or liens, the title business 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 upgrade to title.

Common Title Issues with REO Properties

Several common title problems can develop with REO residential or commercial properties. Tax redemption problems are particularly common. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they undergo charges and interest. If taxes are still unsettled 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 purchase the tax certificate.

Underwood says, "If the county owns the tax certificate, resolving this is a quite uncomplicated procedure. But if it's owned by a 3rd celebration, it can get complicated." To redeem from a specific, a bank is needed to pay the delinquent taxes, charge, interest, along with the value of any enhancements on the residential or commercial property. In some situations, there can be a prolonged settlement procedure to eliminate this tax lien.

Encroachment concerns are likewise common with REO residential or commercial properties. Residential or commercial property lines aren't always plainly marked, which is why surveys are a necessary 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 concerns and in many cases, a quitclaim deed may be needed.

And just like any other residential or commercial property, we can find any variety 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 discovered throughout the title search and examination. Title business experienced with REO residential or commercial properties understand exactly which concerns to try to find and how to resolve them to present REO buyers with a clear title.

Owner's title insurance protects homebuyers from covert dangers to their title after purchase. An improved owner's policy might be advised for individuals who buy an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers ought to always be aware 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 buy back 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 needs to pay the amount of the foreclosure bid, interest, and other charges consisting of taxes, insurance coverage, and repair work."

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

He continues, "Redemptions of foreclosed homes are extremely unusual, however anyone purchasing an REO residential or commercial property requires to work with an attorney who knows and comprehends the law." These laws vary from state to state and can change, so constantly consult your closing attorney with specific concerns about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption period ends requirement to be mindful that owner's title insurance will never ever 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 coverage throughout of the redemption period.

Lenders offering financing for REO purchases will usually require affirmative coverage for the remaining redemption duration. Options, such as a bond, exist if the loan quantity depends on 30% greater than the foreclosure quote, but buyers ought to that affirmative coverage for the staying redemption period just safeguards the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place up until November 2021. As this moratorium has lifted, loan providers have executed loss mitigation procedures to keep people in their mortgages and assist them keep their residential or commercial properties. However, if loss mitigation techniques are unsuccessful, 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 advances. Starting in the third quarter of this year, we'll start to see a higher-than-normal percentage of REO residential or commercial properties on the marketplace. It won't resemble it remained in 2008, but it will certainly be more than what we're used 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 understand the subtlety of buying a bank-owned home are much 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 particular questions about working with REO residential or commercial properties or simply need an REO expert 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, lenders, and REO residential or commercial properties through his time leading the REO division at a Birmingham law firm. Jeff is married and has 2 daughters: one recent graduate and one existing student at Auburn University.

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

This post is meant to supply general details about REO residential or commercial properties in Alabama and must not be thought about legal suggestions. Laws concerning REO residential or commercial properties also differ from one state to another. Please consult your regional attorney with concerns.
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