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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 a boost in the variety of REO residential or commercial properties offered on the marketplace in the coming months.

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

Our resident REO professional, Jeff Underwood, shares what real estate agents need to understand 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 lender after failing to cost a foreclosure auction. But to really comprehend REO residential or commercial properties, you initially need to comprehend the foreclosure process.

The Foreclosure Process

When a specific with a mortgage stops paying on that mortgage for any factor, the foreclosure process will start. The mortgage contract will consist of language about when the bank can start this procedure. Typically, a lending institution will not begin the foreclosure procedure till the borrower has missed 4 successive payments.

Not all residential or commercial properties that enter the foreclosure process are in fact foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, says, "In most cases, the mortgage is restored or the loan provider will exercise loss mitigation alternatives to avoid foreclosure. A debtor who declares Chapter 13 personal bankruptcy will likewise stop the foreclosure procedure."

This process looks various in every state. Underwood discusses, "Alabama is a nonjudicial state. This indicates that the bank does not need to submit a lawsuit against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that informs the mortgagor that they remain in default and offers details about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require lenders to submit a lawsuit versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also 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 "property owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in the organization of retaining 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 lender 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 really comparable to noting any other residential or commercial property, with a couple of key differences. 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 discover a buyer for the residential or commercial property. But instead of a private client, 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 may not look like a normal 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 company to clean things up and ensure things are working, however buyers won't discover a staged, upgraded home."

Lenders want to offer REO residential or commercial properties for fair market price as rapidly as possible, so prices is determined by getting a BPO, or broker price viewpoint. Two real estate agents will give their opinion on the market rate of the residential or commercial property, and then these opinions are averaged to get the market price. If the residential or commercial property languishes on the marketplace, the bank will start dropping the rate in incremental portions to discover 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, 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 test, we're looking for any prospective issues so that we can provide a clear title to the buyer," Underwood describes.

If the title is clear, this file is prepared for when the residential or commercial property goes under contract. If there are problems that require to be dealt with such as judgments, encumbrances, or liens, the title business will clear the title so that it's all set for a future buyer. Once the residential or commercial property goes under agreement, all that's required is an upgrade to title.

Common Title Issues with REO Properties

Several typical title issues can arise with REO residential or commercial properties. Tax redemption problems are particularly typical. In Alabama, taxes are paid in arrears. If they're not paid by December 31, they undergo charges and interest. If taxes are still unpaid by April, the county will have a in May. For the most part, the county is the high bidder. But in other cases, a third 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 party, it can get made complex." To redeem from a private, a bank is required to pay the overdue taxes, penalty, interest, as well as the worth of any enhancements on the residential or commercial property. In some situations, there can be a prolonged settlement process to eliminate this tax lien.

Encroachment concerns are also common with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly delineated, which is why surveys are a necessary part of the title search and examination. Underwood discusses, "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 home or barn." It can be made complex to clear these issues 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 do not have marital status, and other encumbrances can also be discovered during the title search and test. Title business experienced with REO residential or commercial properties understand precisely which concerns to try to find and how to address them to present REO buyers with a clear title.

Owner's title insurance coverage protects homebuyers from hidden risks to their title after purchase. An improved owner's policy may be suggested for people who purchase an REO residential or commercial property. But no matter the policy, REO residential or commercial property buyers ought to constantly 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 up to a year after the foreclosure sale. Underwood describes, "To redeem a foreclosed residential or commercial property, the redeeming celebration should pay the quantity of the foreclosure bid, interest, and other charges including taxes, insurance, and repair work."

"Because foreclosure sales can occur fairly quickly in Alabama, the redemption period is longer than in a lot of states. For mortgages originated 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 unusual, however anyone buying an REO residential or commercial property needs to work with an attorney who understands and understands the law." These laws differ from state to state and can alter, so constantly consult your closing attorney with particular concerns about the right of redemption.

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

Lenders offering funding for REO purchases will usually need affirmative protection for the staying redemption period. Options, such as a bond, exist if the loan quantity is up to 30% higher than the foreclosure bid, however buyers must comprehend that affirmative coverage for the remaining redemption period only secures the loan provider.

The Future of REO Properties

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

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 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 requirement for real estate agents to be daunted 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 buying a bank-owned home are better geared up to serve their clients.

At South Oak Title and Closing, we enjoy partnering with real estate agents to help them better serve their customers. Whether you have specific concerns 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 spent decades dealing 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 children: 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 intended to offer basic info about REO residential or commercial properties in Alabama and must not be thought about legal guidance. Laws worrying REO residential or commercial properties likewise differ from one state to another. Please consult your local lawyer with questions.