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

Whether you're a reasonably new real estate agent or one who's remained in the organization for a while, you most likely 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?

Simply put, 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 really understand REO residential or commercial properties, you initially require to understand the foreclosure procedure.

The Foreclosure Process

When an individual with a mortgage stops paying 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 procedure. Typically, a lender will not start the foreclosure process until the debtor has actually missed out on four successive payments.

Not all residential or commercial properties that get in the foreclosure procedure are in fact foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, states, "In most cases, the mortgage is reinstated or the lender will exercise loss mitigation choices to prevent foreclosure. A debtor who applies for Chapter 13 insolvency will likewise halt 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 file a suit versus the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that informs the mortgagor that they are in default and provides information about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need to submit a claim against the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also published in the county paper for three weeks. If the bank or lending institution is the high-bidder or just purchaser at the foreclosure sale, this residential or commercial property becomes "realty owned", or an REO residential or commercial property.
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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 sell 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 lender sends out a referral for this residential or commercial property to both a real estate 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 differences. There's still a check in the yard, a listing on the MLS, and photos of the residential or commercial property. The broker's objective is to discover a buyer for the residential or commercial property. But instead of a private customer, the broker represents a lender. 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 common home that's market-ready. We had one REO residential or commercial property where the previous owner took whatever out of the house, including sinks and banisters. The bank will employ a company to clean things up and make certain things are working, however buyers won't find a staged, upgraded home."

Lenders wish to sell REO residential or commercial properties for fair market worth as rapidly as possible, so rates is identified by acquiring a BPO, or broker rate opinion. Two real estate agents will give their opinion on the marketplace cost of the residential or commercial property, and then these viewpoints are balanced to obtain the market price. If the residential or commercial property suffers on the marketplace, the bank will begin dropping the price in incremental portions to discover a purchaser.

Title Process for REO residential or commercial properties

When the title business 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 as with any title search and exam, we're looking for any possible concerns so that we can provide 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 agreement. If there are concerns that require to be addressed 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 required is an upgrade to title.

Common Title Issues with REO Properties

Several common title concerns can occur with REO residential or commercial properties. Tax redemption issues are especially common. In Alabama, taxes are paid in defaults. If they're not paid by December 31, they go through penalties and interest. If taxes are still overdue 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 third party will buy the tax certificate.

Underwood states, "If the county owns the tax certificate, resolving this is a quite uncomplicated process. But if it's owned by a 3rd party, it can get made complex." To redeem from an individual, a bank is needed to pay the delinquent taxes, charge, interest, as well as the worth of any enhancements on the residential or commercial property. In some scenarios, there can be a prolonged settlement procedure to eliminate this tax lien.

Encroachment issues are also typical with REO residential or commercial properties. Residential or commercial property lines aren't always clearly delineated, which is why surveys are a required part of the title search and exam. Underwood explains, "An infringement is any structure that exists on a next-door neighbor's land or residential or commercial property - a fence, a shed, a mobile home, and even part of a home or barn." It can be made complex to clear these problems and in many cases, a quitclaim deed may be needed.

And as with any other residential or commercial property, we can find any variety of other title issues. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can also be found during the title search and test. Title companies experienced with REO residential or commercial properties understand exactly which problems to try to find and how to address them to present REO purchasers with a clear title.

Owner's title insurance coverage safeguards property buyers from covert dangers to their title after purchase. An enhanced owner's policy might be advised for individuals who buy an REO residential or commercial property. But no matter the policy, REO residential or commercial property purchasers should constantly be aware of laws worrying the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or successors of the debtor, can redeem or buy back 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 celebration should pay the amount of the foreclosure bid, interest, and other charges consisting of taxes, insurance, and repairs."

"Because foreclosure sales can happen fairly quickly in Alabama, the redemption period is longer than in a lot of 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 rare, however anyone purchasing an REO residential or commercial property requires to deal with a lawyer who understands and understands the law." These laws differ from one state to another and can alter, so always consult your closing attorney with specific questions about the right of redemption.

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

Lenders supplying financing for REO purchases will usually need affirmative protection for the staying redemption duration. Options, such as a bond, exist if the loan amount depends on 30% higher than the foreclosure bid, but purchasers should understand that affirmative protection for the remaining redemption period only protects the lending institution.

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, loan providers have implemented loss mitigation treatments to keep individuals in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation methods are not successful, the foreclosure procedure begins.

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 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 won't be like it was in 2008, but it will definitely be more than what we're utilized to seeing."

There's no requirement for real estate agents to be intimidated 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 much better geared up to serve their clients.

At South Oak Title and Closing, we enjoy partnering with real estate agents to assist them better serve their clients. Whether you have specific 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 questions today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has actually spent decades working with banks, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law office. Jeff is married and has 2 children: one current graduate and one existing trainee at Auburn University.

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

This post is planned to offer general details about REO residential or commercial properties in Alabama and must not be considered legal recommendations. Laws concerning REO residential or commercial properties likewise differ from state to state. Please consult your local lawyer with concerns.