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 offered on the market in the coming months.

Whether you're a fairly new real estate agent or one who's been in business for a while, you probably could utilize a refresher on these bank-owned homes.
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Our resident REO professional, 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 sell at a foreclosure auction. But to truly understand REO residential or commercial properties, you initially require to understand the foreclosure procedure.

The Foreclosure Process

When an individual with a mortgage stops making payments on that mortgage for any reason, the foreclosure procedure will start. The mortgage arrangement will include language about when the bank can begin this procedure. Typically, a lending institution won't begin the foreclosure process until the customer has actually missed out on 4 consecutive payments.

Not all residential or commercial properties that enter the foreclosure process are in fact foreclosed upon. Jeff Underwood, handling 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 alternatives to avoid foreclosure. A debtor who declares Chapter 13 bankruptcy will likewise halt the foreclosure procedure."

This process looks various in every state. Underwood explains, "Alabama is a nonjudicial state. This means that the bank does not have to file a suit against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notices that informs the mortgagor that they remain in default and provides details about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, require loan providers to file a suit versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also published in the county newspaper for three weeks. If the bank or loan provider is the high-bidder or just 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 states, "Lenders aren't in the service of retaining these residential or commercial properties. Their objective is to sell 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 lending institution sends a recommendation 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 extremely comparable to noting any other residential or commercial property, with a few key distinctions. There's still an indication in the yard, a listing on the MLS, and images of the residential or commercial property. The broker's goal is to discover a purchaser 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 whatever out of the home, consisting of sinks and banisters. The bank will work with a business to tidy things up and ensure things are working, however purchasers won't discover a staged, upgraded home."

Lenders want to offer REO residential or commercial properties for reasonable market price as rapidly as possible, so rates is determined by acquiring a BPO, or broker cost viewpoint. Two real estate agents will give their opinion on the market rate of the residential or commercial property, and after that these opinions are balanced to obtain the list price. If the residential or commercial property languishes on the marketplace, the bank will begin dropping the rate in incremental percentages to discover a purchaser.

Title Process for REO residential or commercial properties

When the title business 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 noted for sale, and as with any title search and examination, we're looking for any prospective concerns so that we can present a clear title to the purchaser," Underwood describes.

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 attended to such as judgments, encumbrances, or liens, the title company will clear the title so that it's prepared for a future purchaser. Once the residential or commercial property goes under agreement, all that's required is an update to title.

Common Title Issues with REO Properties

Several common title concerns can develop with REO residential or commercial properties. Tax redemption problems are especially common. 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 tax sale in May. For the most part, 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 straightforward procedure. But if it's owned by a 3rd celebration, it can get complicated." To redeem from a private, a bank is required to pay the delinquent taxes, penalty, interest, as well as the worth of any improvements on the residential or commercial property. In some situations, there can be an extended settlement procedure to remove this tax lien.

Encroachment problems are also common with REO residential or commercial properties. Residential or commercial property lines aren't always clearly marked, which is why studies are a necessary part of the title search and test. Underwood describes, "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 even part of a house or barn." It can be made complex to clear these issues and in some cases, a quitclaim deed might be needed.

And as with any other residential or commercial property, we can find any variety of other title concerns. Missing deeds, deeds in the back chain of title that do not have marital status, and other encumbrances can also be found 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 coverage safeguards homebuyers from hidden risks to their title after purchase. An enhanced 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 constantly know laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or beneficiaries of the debtor, deserve 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 amount of the foreclosure bid, interest, and other charges including taxes, insurance coverage, and repair work."

"Because foreclosure sales can take place reasonably rapidly in Alabama, the redemption duration is longer than in many states. For mortgages came from before 2016, that redemption duration 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 uncommon, however anyone acquiring an REO residential or commercial property requires to deal with an attorney who knows and understands the law." These laws vary from state to state and can change, so constantly consult your closing attorney with specific questions about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption period expires requirement to be aware that owner's title insurance will never provide affirmative protection 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 for the period of the redemption duration.

Lenders providing financing for REO purchases will usually need affirmative coverage for the staying redemption duration. Options, such as a bond, exist if the loan quantity is up to 30% greater than the foreclosure quote, but buyers must comprehend that affirmative coverage for the remaining redemption period only 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 actually raised, lenders have actually carried out loss mitigation procedures to keep individuals in their mortgages and assist them keep their residential or commercial properties. However, if loss mitigation methods are not successful, the foreclosure process begins.

Underwood says, "Foreclosure starts are up 39% over the last quarter, and we're anticipating to see an increase in these as the year advances. Starting in the third quarter of this year, we'll begin to see a higher-than-normal percentage of REO residential or commercial properties on the market. It will not be like it remained in 2008, but it will certainly be more than what we're utilized 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 comprehend the nuance of purchasing a bank-owned home are much better geared up to serve their customers.

At South Oak Title and Closing, we enjoy partnering with real estate agents to assist them much better serve their clients. Whether you have particular questions about working with REO residential or commercial properties or simply require 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 actually invested 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 married and has two children: one recent graduate and one present trainee at Auburn University.

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

This article is meant to supply general information about REO residential or commercial in Alabama and must not be thought about legal suggestions. Laws worrying REO residential or commercial properties likewise differ from one state to another. Please consult your local attorney with questions.
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