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

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

Our resident REO expert, 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?

Put simply, an REO residential or commercial property is realty that is owned by a bank or loan provider after stopping working to sell at a foreclosure auction. But to truly understand REO residential or commercial properties, you first require to understand the foreclosure process.

The Foreclosure Process

When an individual with a mortgage stops making payments on that mortgage for any factor, the foreclosure procedure will begin. The mortgage arrangement will include language about when the bank can begin this process. Typically, a lending institution won't start the foreclosure process till the customer has missed four consecutive payments.

Not all residential or commercial properties that go into the foreclosure procedure are actually foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, says, "Oftentimes, the mortgage is renewed or the lender will exercise loss mitigation options to prevent foreclosure. A debtor who declares Chapter 13 bankruptcy will also halt the foreclosure procedure."

This process looks different in every state. Underwood discusses, "Alabama is a nonjudicial state. This indicates that the bank does not need to submit a suit against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notices that notifies 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 lending institutions to file a claim versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also released in the county paper for 3 weeks. If the bank or loan provider is the high-bidder or only buyer at the foreclosure sale, this residential or commercial property ends up being "realty owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood states, "Lenders aren't in the business of retaining these residential or commercial properties. Their objective is to sell the home and recover 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 loan provider 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 couple of essential differences. There's still a check in the lawn, a listing on the MLS, and images of the residential or commercial property. The broker's objective is to find a purchaser 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 states, "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 house, consisting of sinks and banisters. The bank will work with a business to tidy things up and make sure things are working, however buyers will not discover a staged, updated home."

Lenders want to sell REO residential or commercial properties for fair market worth as quickly as possible, so rates is figured out by obtaining a BPO, or broker price viewpoint. Two real estate agents will offer their viewpoint on the market price of the residential or commercial property, and after that these opinions are balanced to acquire the list cost. If the residential or commercial property suffers on the marketplace, the bank will start dropping the price in incremental portions to discover 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 similar to any title search and examination, we're trying to find any possible issues so that we can present a clear title to the purchaser," Underwood discusses.

If the title is clear, this file is all set for when the residential or commercial property goes under agreement. If there are issues that require to be addressed 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 agreement, all that's needed is an update to title.

Common Title Issues with REO Properties

Several common title concerns 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 penalties 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 party will purchase the tax certificate.

Underwood says, "If the county owns the tax certificate, fixing this is a quite simple process. But if it's owned by a 3rd party, it can get made complex." To redeem from an individual, a bank is required to pay the delinquent taxes, charge, interest, in addition to 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 problems are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly marked, which is why studies are a required part of the title search and exam. Underwood explains, "An advancement 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 perhaps part of a home or barn." It can be made complex to clear these issues and in some cases, a quitclaim deed may 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 discovered during the title search and examination. Title companies experienced with REO residential or commercial properties understand precisely which problems to look for and how to resolve them to present REO buyers with a clear title.

Owner's title insurance coverage protects property buyers from concealed dangers to their title after purchase. An improved owner's policy may be recommended for individuals who purchase an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers ought to constantly be aware of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or heirs of the debtor, have the right to 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 party must pay the quantity of the foreclosure bid, interest, and other charges consisting of taxes, insurance coverage, and repairs."

"Because foreclosure sales can take place fairly rapidly in Alabama, the redemption duration 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 period is reduced to 180 days."

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

Buyers purchasing an REO residential or commercial property before the redemption duration expires need to be mindful that owner's title insurance will never provide affirmative coverage over the right of redemption. For cash 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 funding for REO purchases will generally require affirmative coverage for the staying redemption duration. Options, such as a bond, exist if the loan amount depends on 30% higher than the foreclosure quote, but purchasers should comprehend that affirmative coverage for the staying redemption period just safeguards the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in place till November 2021. As this moratorium has lifted, lenders have carried out loss mitigation procedures to keep people in their mortgages and help them retain their residential or commercial properties. However, if loss mitigation strategies are not successful, the foreclosure process 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 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 definitely 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 understand the nuance of purchasing 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 assist them much better serve their clients. Whether you have specific concerns about dealing with REO residential or commercial properties or simply require an REO specialist 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 dealing with banks, lenders, and REO residential or commercial properties through his time leading the REO department at a Birmingham law firm. Jeff is married and has 2 children: one current graduate and one present trainee at Auburn University.

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

This short article is planned to offer general info about REO residential or commercial properties in Alabama and need to not be considered legal recommendations. Laws worrying REO residential or commercial properties likewise vary from state to state. Please consult your regional lawyer with concerns.