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

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

Our resident REO expert, Jeff Underwood, shares what real estate agents need 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 property that is owned by a bank or loan provider after stopping working to cost a foreclosure auction. But to genuinely comprehend REO residential or commercial properties, you initially need 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 procedure will start. The mortgage arrangement will consist of language about when the bank can begin this process. Typically, a loan provider will not begin the up until the borrower has actually missed out on four successive payments.

Not all residential or commercial properties that enter the foreclosure procedure are in fact foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, says, "In lots of cases, the mortgage is renewed or the lending institution will work out loss mitigation options to prevent foreclosure. A debtor who files for Chapter 13 personal bankruptcy will also stop the foreclosure procedure."

This process looks various in every state. Underwood discusses, "Alabama is a nonjudicial state. This means that the bank does not need to file a suit against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that notifies the mortgagor that they remain in default and supplies details about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need lending institutions to submit a suit against the mortgagor in state court to foreclose.
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In Alabama, notices about the upcoming foreclosure sale are likewise published in the county newspaper for 3 weeks. If the bank or loan provider is the high-bidder or just 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 states, "Lenders aren't in the service of keeping these residential or commercial properties. Their objective 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 referral for this residential or commercial property to both a genuine estate brokerage and a title business.

Listing Process for REO residential or commercial properties
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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 check in the yard, a listing on the MLS, and pictures of the residential or commercial property. The broker's goal is to discover a purchaser for the residential or commercial property. But rather of a private client, the broker represents a lending institution. On the MLS, this residential or commercial property will be designated as bank-owned.

Underwood states, "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 whatever out of the house, consisting of sinks and banisters. The bank will employ a company to clean things up and make sure things are working, but purchasers won't discover a staged, updated home."

Lenders wish to offer REO residential or commercial properties for reasonable market price as quickly as possible, so prices is determined by obtaining a BPO, or broker rate opinion. Two real estate agents will provide their viewpoint on the marketplace rate of the residential or commercial property, and after that these viewpoints are balanced to acquire the sticker 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 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 just like any title search and exam, we're looking for any prospective issues so that we can present a clear title to the purchaser," Underwood explains.

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

Common Title Issues with REO Properties

Several typical title problems can develop with REO residential or commercial properties. Tax redemption concerns are particularly common. In Alabama, taxes are paid in arrears. If they're not paid by December 31, they undergo penalties and interest. If taxes are still overdue 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 third party will buy the tax certificate.

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

Encroachment concerns are also typical with REO residential or commercial properties. Residential or commercial property lines aren't always plainly delineated, which is why studies are a necessary part of the title search and exam. 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 problems and in many cases, a quitclaim deed might 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 lack marital status, and other encumbrances can likewise be discovered during the title search and exam. Title companies experienced with REO residential or commercial properties know precisely which concerns to search for and how to address them to present REO purchasers with a clear title.

Owner's title insurance safeguards property buyers from hidden threats to their title after purchase. A boosted owner's policy might be suggested for people who purchase an REO residential or commercial property. But no matter the policy, REO residential or commercial property purchasers ought to always understand laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or successors of the debtor, have the right 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 should pay the quantity of the foreclosure quote, interest, and other charges including taxes, insurance, and repair work."

"Because foreclosure sales can take place reasonably rapidly in Alabama, the redemption duration is longer than in most 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 really unusual, but anybody purchasing an REO residential or commercial property needs to deal with a lawyer who knows and understands the law." These laws differ from one state to another and can alter, so always 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 need to be aware that owner's title insurance coverage will never provide 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 normally require affirmative protection for the remaining redemption period. Options, such as a bond, exist if the loan amount depends on 30% higher than the foreclosure quote, however purchasers should understand that affirmative protection for the remaining redemption period only protects the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place until November 2021. As this moratorium has actually lifted, lending institutions have actually carried out loss mitigation procedures to keep people in their mortgages and help 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 an increase in these as the year progresses. Starting in the 3rd 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 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 subtlety of buying a bank-owned home are better equipped 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 questions about working with REO residential or commercial properties or just 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 actually spent decades working with banks, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law practice. Jeff is married and has two daughters: one current graduate and one present trainee at Auburn University.

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

This post is meant to provide general info about REO residential or commercial properties in Alabama and ought to not be considered legal recommendations. Laws concerning REO residential or commercial properties likewise vary from state to state. Please consult your local attorney with concerns.