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

Our resident REO professional, 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?

Put simply, an REO residential or commercial property is genuine estate that is owned by a bank or lending institution after stopping working to cost a foreclosure auction. But to truly understand REO residential or commercial properties, you first need to understand the foreclosure procedure.

The Foreclosure Process

When a specific with a mortgage stops making payments on that mortgage for any reason, the foreclosure procedure will start. The mortgage contract will consist of language about when the bank can begin this process. Typically, a lending institution will not start the foreclosure procedure until the customer has actually missed out on 4 successive 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, says, "Oftentimes, the mortgage is restored or the lending institution will work out loss mitigation alternatives to avoid foreclosure. A debtor who declares Chapter 13 personal bankruptcy will also halt the foreclosure procedure."

This procedure looks different in every state. Underwood explains, "Alabama is a nonjudicial state. This implies that the bank does not need to file a claim against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that notifies the mortgagor that they are in default and supplies details about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require lenders to file a claim 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 only buyer 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 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 business.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is really comparable to listing any other residential or commercial property, with a couple of crucial differences. There's still a check in the backyard, a listing on the MLS, and pictures of the residential or commercial property. The broker's goal is to find a buyer for the residential or commercial property. But rather of a specific 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 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, consisting of sinks and banisters. The bank will work with a business to clean things up and make sure things are working, however buyers will not find a staged, upgraded home."

Lenders wish to offer REO residential or commercial properties for reasonable market worth as quickly as possible, so prices is figured out by getting a BPO, or broker price opinion. Two real estate agents will give their viewpoint on the marketplace rate of the residential or commercial property, and after that these viewpoints are averaged to obtain the market price. If the residential or commercial property languishes on the market, the bank will begin dropping the price in incremental percentages to discover a purchaser.

Title Process for REO residential or commercial properties

When the title company receives the referral for an REO residential or commercial property, they will initiate a title search, simply 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 exam, we're searching for any possible concerns 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 concerns that require to be resolved such as judgments, encumbrances, or liens, the title business will clear the title so that it's ready for a future purchaser. 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 issues 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 overdue 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 acquire the tax certificate.

Underwood states, "If the county owns the tax certificate, solving this is a quite straightforward procedure. But if it's owned by a 3rd party, it can get made complex." To redeem from a private, a bank is needed to pay the overdue taxes, charge, interest, in addition to the worth of any enhancements on the residential or commercial property. In some situations, there can be an extended 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 constantly clearly defined, which is why surveys are a required part of the title search and test. 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 even part of a house or barn." It can be made complex to clear these issues and sometimes, a quitclaim deed might be needed.

And just like any other residential or commercial property, we can discover any variety of other title problems. 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 companies experienced with REO residential or commercial properties understand exactly which concerns to look for and how to resolve them to present REO purchasers with a clear title.

Owner's title insurance coverage protects property buyers from surprise risks to their title after purchase. A boosted owner's policy may be advised for individuals who purchase an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers should always know laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or successors of the debtor, deserve to redeem or buy back a foreclosed residential or commercial property for approximately a year after the foreclosure sale. Underwood discusses, "To redeem a foreclosed residential or commercial property, the redeeming party should pay the amount of the foreclosure bid, interest, and other charges including taxes, insurance coverage, and repairs."

"Because foreclosure sales can happen reasonably quickly in Alabama, the redemption period is longer than in most states. For mortgages stemmed before 2016, that redemption period is a year. For mortgages originated after January 1, 2016, the redemption period is shortened to 180 days."

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

Buyers acquiring an REO residential or commercial property before the redemption duration ends requirement to be conscious that owner's title insurance coverage will never ever provide affirmative coverage over the right of redemption. For money purchasers, this will be listed as an exception in Schedule B-2 of the owner's title insurance policy for the period of the redemption duration.

Lenders offering funding for REO purchases will usually require affirmative protection for the staying redemption period. Options, such as a bond, exist if the loan quantity is up to 30% greater than the foreclosure quote, but buyers ought to comprehend that affirmative protection for the staying redemption duration just secures the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in location up until November 2021. As this moratorium has raised, lenders have actually executed loss mitigation procedures to keep individuals in their mortgages and help them retain their residential or commercial properties. However, if loss mitigation strategies are unsuccessful, the foreclosure process starts.

Underwood states, "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 start to see a higher-than-normal percentage of REO residential or commercial properties on the market. It will not resemble it was 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 understand the subtlety of buying a bank-owned home are better equipped to serve their clients.

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

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has actually spent decades dealing 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 current graduate and one existing student at Auburn University.

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

This article is planned to provide general information about REO residential or commercial properties in Alabama and should not be thought about legal guidance. Laws worrying REO residential or commercial properties also differ from one state to another. Please consult your regional attorney with concerns.
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