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

Whether you're a fairly brand-new real estate agent or one who's been in the service for a while, you most likely could utilize a refresher on these bank-owned homes.

Our resident REO specialist, Jeff Underwood, shares what real estate agents need to know 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 property that is owned by a bank or lending institution after stopping working to offer at a foreclosure auction. But to truly understand REO residential or commercial properties, you first need to understand the foreclosure process.

The Foreclosure Process

When a specific with a mortgage stops paying on that mortgage for any factor, the foreclosure procedure will start. The mortgage agreement will include language about when the bank can start this procedure. Typically, a lending institution will not start the foreclosure process until the customer has missed four successive 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, states, "In a lot of cases, the mortgage is reinstated or the lender will exercise loss mitigation options to avoid foreclosure. A debtor who declares Chapter 13 insolvency will also stop the foreclosure process."

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

In Alabama, notifications about the upcoming foreclosure sale are also published in the county newspaper for 3 weeks. If the bank or lender is the high-bidder or just purchaser at the foreclosure sale, this residential or commercial property becomes "property owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in business of maintaining 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 out a recommendation for this residential or commercial property to both a realty 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 listing any other residential or commercial property, with a couple of essential differences. There's still an indication in the yard, a listing on the MLS, and images of the residential or commercial property. The broker's objective is to discover a buyer for the residential or commercial property. But instead of an individual 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 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 employ a business to tidy things up and ensure things are working, however buyers will not find a staged, upgraded home."

Lenders wish to sell REO residential or commercial properties for reasonable market worth as rapidly as possible, so rates is figured out by acquiring a BPO, or broker cost opinion. Two real estate agents will provide their opinion on the marketplace cost of the residential or commercial property, and after that these opinions are averaged to obtain the sale price. If the residential or commercial property languishes on the market, the bank will start dropping the rate in incremental portions to discover a purchaser.

Title Process for REO residential or commercial properties

When the 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 just like any title search and test, we're trying to find any prospective issues so that we can present a clear title to the buyer," Underwood discusses.
sitenets.co.nz
If the title is clear, this file is ready for when the residential or commercial property goes under contract. If there are concerns that need to be dealt with such as judgments, encumbrances, or liens, the title business will clear the title so that it's ready 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 issues can arise with REO residential or commercial properties. Tax redemption problems are particularly typical. 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 unpaid by April, the county will have a tax sale in May. In most cases, the county is the high bidder. But in other cases, a 3rd party will buy the tax certificate.

Underwood states, "If the county owns the tax certificate, solving this is a pretty simple procedure. 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, along with the worth of any enhancements on the residential or commercial property. In some situations, there can be a prolonged settlement process to eliminate this tax lien.

Encroachment issues are also common with REO residential or commercial properties. Residential or commercial property lines aren't always plainly defined, which is why studies are an essential part of the title search and test. Underwood explains, "An advancement 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 home or barn." It can be complicated to clear these concerns and in many cases, a quitclaim deed may be needed.

And just like any other residential or commercial property, we can find any number of other title problems. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can likewise be discovered during the title search and test. Title business experienced with REO residential or commercial properties know exactly which concerns to try to find and how to address them to present REO purchasers with a clear title.

Owner's title insurance safeguards homebuyers from concealed risks to their title after purchase. An improved owner's policy might be recommended for individuals who acquire an REO residential or commercial property. But regardless of the policy, REO residential or commercial property purchasers need to constantly 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 redeem a foreclosed residential or commercial property for as much as a year after the foreclosure sale. Underwood discusses, "To redeem a foreclosed residential or commercial property, the redeeming celebration should pay the quantity of the foreclosure bid, interest, and other charges consisting of taxes, insurance, and repair work."

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

He continues, "Redemptions of foreclosed homes are extremely unusual, however anyone buying an REO residential or commercial property needs to deal with a lawyer who knows and understands the law." These laws vary from state to state and can alter, so always consult your closing lawyer with specific concerns about the right of redemption.

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

Lenders providing financing for REO purchases will usually need affirmative coverage for the staying redemption period. Options, such as a bond, exist if the loan amount is up to 30% higher than the foreclosure bid, however buyers should comprehend that affirmative protection for the remaining redemption duration only safeguards the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in place until November 2021. As this moratorium has raised, lending institutions have implemented 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 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 3rd quarter of this year, we'll start to see a higher-than-normal percentage of REO residential or commercial properties on the marketplace. It won't resemble it was 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 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 help them much better serve their clients. Whether you have specific concerns about dealing with REO residential or commercial properties or simply need an REO specialist 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 dealing with banks, lending institutions, and REO residential or commercial properties through his time leading the REO division at a Birmingham law firm. Jeff is wed and has two children: one current graduate and one current student at Auburn University.

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

This post is meant to provide general info about REO residential or commercial properties in Alabama and need to not be considered legal suggestions. Laws concerning REO residential or commercial properties likewise vary from one state to another. Please consult your regional attorney with questions.