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

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

Our resident REO expert, Jeff Underwood, shares what real estate agents require 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 property that is owned by a bank or lender after stopping working to sell at a foreclosure auction. But to genuinely comprehend REO residential or commercial properties, you initially require to comprehend the foreclosure process.

The Foreclosure Process

When an individual with a mortgage stops paying on that mortgage for any reason, the foreclosure process will start. The mortgage contract will include language about when the bank can begin this process. Typically, a lending institution will not begin the foreclosure procedure until the debtor has actually missed 4 consecutive payments.

Not all residential or commercial properties that get in the foreclosure procedure are really foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, says, "In many cases, the mortgage is reinstated or the loan provider will work out loss mitigation options to prevent foreclosure. A debtor who submits for Chapter 13 bankruptcy will also stop the foreclosure procedure."

This procedure looks various in every state. Underwood explains, "Alabama is a nonjudicial state. This indicates that the bank does not have to submit a claim against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that notifies the mortgagor that they are in default and offers info about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need lenders to submit a claim versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also released in the county newspaper for three weeks. If the bank or lender is the high-bidder or only purchaser 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 states, "Lenders aren't in the business 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 out a referral for this residential or commercial property to both a property brokerage and a title company.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is very comparable to listing any other residential or commercial property, with a few crucial distinctions. There's still a check in the backyard, a listing on the MLS, and photos of the residential or commercial property. The broker's objective is to discover a purchaser for the residential or commercial property. But rather of a private 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 whatever out of the home, including sinks and banisters. The bank will hire a business to clean things up and make certain things are working, however buyers won't find a staged, updated home."

Lenders want to sell REO residential or commercial properties for fair market value as quickly as possible, so rates is determined by getting a BPO, or broker price opinion. Two real estate agents will provide their viewpoint on the marketplace price of the residential or commercial property, and after that these opinions are averaged to acquire the market price. If the residential or commercial property suffers on the marketplace, the bank will start dropping the cost in incremental percentages 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 noted for sale, and just like any title search and examination, we're trying to find any prospective problems so that we can present a clear title to the buyer," Underwood explains.

If the title is clear, this file is prepared for when the residential or commercial property goes under agreement. 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 needed is an upgrade to title.

Common Title Issues with REO Properties

Several typical title problems can arise with REO residential or commercial properties. Tax redemption problems are especially typical. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they're subject to charges and interest. If taxes are still unsettled by April, the county will have a tax sale in May. Most of the times, the county is the high bidder. But in other cases, a 3rd party will acquire the tax certificate.

Underwood says, "If the county owns the tax certificate, resolving this is a quite simple process. But if it's owned by a third party, it can get complicated." To redeem from a private, a bank is needed to pay the delinquent taxes, charge, interest, as well as the value of any enhancements on the residential or commercial property. In some scenarios, there can be a prolonged settlement process 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 defined, which is why studies 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 issues and sometimes, a quitclaim deed may be required.

And just like any other residential or commercial property, we can discover 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 during the title search and test. Title companies experienced with REO residential or commercial properties understand exactly which problems to look for and how to address them to present REO purchasers with a clear title.

Owner's title insurance safeguards homebuyers from hidden risks to their title after purchase. A boosted owner's policy might be advised for individuals who acquire an REO residential or commercial property. But regardless of the policy, REO residential or commercial property purchasers need to constantly understand laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or successors of the debtor, have the right to redeem or redeem a foreclosed residential or commercial property for as much as 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 fairly rapidly in Alabama, the redemption period is longer than in many states. For mortgages originated before 2016, that redemption period is a year. For mortgages originated after January 1, 2016, the redemption duration is reduced to 180 days."

He continues, "Redemptions of foreclosed homes are really uncommon, but anybody buying an REO residential or commercial property needs to work with an attorney who understands and understands the law." These laws differ from one state to another and can change, so always consult your closing attorney with specific concerns about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption duration expires requirement to be mindful that owner's title insurance coverage will never supply affirmative coverage over the right of redemption. For cash buyers, this will be noted as an exception in Schedule B-2 of the owner's title insurance coverage policy for the period of the redemption period.

Lenders supplying funding for REO purchases will typically 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, but purchasers should understand that affirmative protection for the staying redemption period only secures the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place until November 2021. As this moratorium has raised, loan providers have implemented loss mitigation treatments to keep people in their mortgages and help them retain their residential or commercial properties. However, if loss mitigation techniques are unsuccessful, the foreclosure procedure begins.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see an increase 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 market. It won't resemble 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 subtlety of purchasing a bank-owned home are much better equipped to serve their customers.

At South Oak Title and Closing, we love partnering with real estate agents to help them much better serve their customers. Whether you have particular concerns about dealing with REO residential or commercial properties or just need 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 spent years working with banks, lending institutions, and REO residential or commercial properties through his time leading the REO department at a Birmingham law firm. Jeff is wed and has 2 daughters: one recent and one current student at Auburn University.
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Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.

This short article is meant to supply general information about REO residential or commercial properties in Alabama and ought to not be considered legal suggestions. Laws worrying REO residential or commercial properties likewise differ from one state to another. Please consult your regional attorney with concerns.