After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now growing. As an outcome, we can expect to see an increase in the number of REO residential or commercial properties readily available on the market in the coming months.
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Whether you're a relatively brand-new real estate agent or one who's remained in the business for a while, you probably might utilize a refresher on these bank-owned homes.

Our REO specialist, 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?

Simply put, an REO residential or commercial property is real estate that is owned by a bank or lending institution after failing to cost a foreclosure auction. But to genuinely understand REO residential or commercial properties, you initially require to comprehend the foreclosure procedure.

The Foreclosure Process

When an individual with a mortgage stops making payments on that mortgage for any factor, the foreclosure process will begin. The mortgage arrangement will consist of language about when the bank can start this process. Typically, a loan provider will not begin the foreclosure process until the borrower has missed 4 consecutive payments.

Not all residential or commercial properties that get in the foreclosure process are actually foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, states, "Oftentimes, the mortgage is restored or the loan provider will work out loss mitigation choices to avoid foreclosure. A debtor who applies for Chapter 13 bankruptcy will likewise stop the foreclosure procedure."

This process looks different in every state. Underwood discusses, "Alabama is a nonjudicial state. This suggests that the bank does not have to submit a lawsuit against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that informs the mortgagor that they are in default and offers information about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need lenders to file a suit against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are also published in the county paper for three weeks. If the bank or loan provider is the high-bidder or just purchaser at the foreclosure sale, this residential or commercial property becomes "real estate owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in business of retaining these residential or commercial properties. Their goal 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 out 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 few essential distinctions. There's still a sign in the yard, a listing on the MLS, and photos of the residential or commercial property. The broker's goal is to discover a purchaser for the residential or commercial property. But instead of a specific 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 might not look like a typical home that's market-ready. We had one REO residential or commercial property where the previous owner took everything out of the home, including sinks and banisters. The bank will employ a company to clean things up and make sure things are working, but purchasers will not discover a staged, upgraded home."

Lenders desire to offer REO residential or commercial properties for fair market price as rapidly as possible, so pricing is figured out by obtaining a BPO, or broker price opinion. Two real estate agents will offer their viewpoint on the marketplace price of the residential or commercial property, and then these viewpoints are averaged to acquire the sale price. If the residential or commercial property languishes on the marketplace, the bank will start dropping the price in incremental portions to find a buyer.

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 trying to find any potential concerns so that we can provide a clear title to the purchaser," Underwood explains.

If the title is clear, this file is ready 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 buyer. Once the residential or commercial property goes under contract, all that's needed is an update to title.

Common Title Issues with REO Properties

Several typical title problems can occur with REO residential or commercial properties. Tax redemption concerns are particularly typical. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they go through charges and interest. If taxes are still unsettled 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 buy the tax certificate.

Underwood says, "If the county owns the tax certificate, solving this is a quite simple 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 delinquent taxes, penalty, interest, as well as the value of any improvements on the residential or commercial property. In some situations, there can be an extended 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 always clearly delineated, which is why surveys are a needed part of the title search and examination. Underwood discusses, "An advancement is any structure that exists on a neighbor's land or residential or commercial property - a fence, a shed, a mobile home, and even part of a house or barn." It can be complicated to clear these problems and in some cases, a quitclaim deed might be required.

And just like any other residential or commercial property, we can discover any variety 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 exam. Title companies experienced with REO residential or commercial properties know 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 surprise threats to their title after purchase. An improved owner's policy may be suggested for people who acquire an REO residential or commercial property. But despite the policy, REO residential or commercial property buyers should always be mindful of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or beneficiaries 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 must pay the amount of the foreclosure quote, interest, and other charges including taxes, insurance coverage, and repairs."

"Because foreclosure sales can occur reasonably quickly 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 stemmed after January 1, 2016, the redemption duration is reduced to 180 days."

He continues, "Redemptions of foreclosed homes are very unusual, but anybody acquiring an REO residential or commercial property needs to deal with an attorney who understands and understands the law." These laws vary from state to state and can alter, so always consult your closing lawyer with specific questions about the right of redemption.

Buyers acquiring an REO residential or commercial property before the redemption duration expires requirement to be conscious that owner's title insurance coverage will never ever provide 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 for the duration of the redemption duration.

Lenders supplying financing for REO purchases will generally require affirmative coverage for the staying redemption duration. Options, such as a bond, exist if the loan amount is up to 30% greater than the foreclosure bid, but buyers should comprehend that affirmative protection for the staying redemption period only safeguards the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place till November 2021. As this moratorium has actually lifted, lenders have actually implemented loss mitigation treatments to keep people in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation techniques are not successful, the foreclosure process starts.

Underwood states, "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 portion 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 need 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 subtlety of buying a bank-owned home are much better geared up to serve their clients.

At South Oak Title and Closing, we like partnering with real estate agents to help them much better serve their clients. Whether you have specific concerns about working with REO residential or commercial properties or simply need an REO specialist in your corner, we're here for you. Contact us with your questions today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has invested years working with banks, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law firm. Jeff is wed and has 2 daughters: one current graduate and one existing trainee at Auburn University.

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

This short article is planned to offer basic information about REO residential or commercial properties in Alabama and need to not be thought about legal guidance. Laws worrying REO residential or commercial properties likewise differ from state to state. Please consult your regional attorney with questions.