After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now growing. As a result, we can expect to see an increase in the number of REO residential or commercial properties offered 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 been in business for a while, you most likely might utilize a refresher on these bank-owned homes.

Our resident 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 realty that is owned by a bank or loan provider after failing to sell at a foreclosure auction. But to really understand REO residential or commercial properties, you first require to understand the foreclosure procedure.

The Foreclosure Process

When a private with a mortgage stops paying on that mortgage for any reason, the foreclosure procedure will begin. The mortgage arrangement will include language about when the bank can begin this process. Typically, a loan provider won't start the foreclosure procedure till the debtor has missed 4 consecutive payments.

Not all residential or commercial properties that go into the foreclosure process are actually foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, states, "In most cases, the mortgage is renewed or the loan provider will work out loss mitigation alternatives to avoid foreclosure. A debtor who applies for Chapter 13 insolvency will likewise halt the foreclosure process."

This process looks different in every state. Underwood describes, "Alabama is a nonjudicial state. This means that the bank does not need to submit a claim versus the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notices that informs the mortgagor that they remain in default and provides info about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require lenders to file a claim against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are also published in the county paper for 3 weeks. If the bank or lending institution is the high-bidder or only purchaser 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 business of keeping these residential or commercial properties. Their objective 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 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 extremely comparable to listing any other residential or commercial property, with a couple of key distinctions. There's still a check in the backyard, a listing on the MLS, and photos of the residential or commercial property. The broker's objective is to find a purchaser for the residential or commercial property. But instead of a private client, the broker represents a lending institution. 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 house, including sinks and banisters. The bank will work with a company to tidy things up and make certain things are working, however purchasers will not find a staged, updated home."

Lenders wish to offer REO residential or commercial properties for reasonable market value as quickly as possible, so rates is determined by acquiring a BPO, or broker price opinion. Two real estate agents will give their viewpoint on the marketplace cost of the residential or commercial property, and then these viewpoints are balanced to acquire the list cost. If the residential or commercial property suffers on the marketplace, the bank will start dropping the price in incremental percentages to discover a buyer.

Title Process for REO residential or commercial properties

When the title company receives the referral for an REO residential or commercial property, they will start 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 searching for any prospective issues so that we can provide a clear title to the purchaser," Underwood explains.

If the title is clear, this file is prepared for when the residential or commercial property goes under contract. If there are concerns that need to be addressed such as judgments, encumbrances, or liens, the title company will clear the title so that it's ready 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 common title concerns can emerge with REO residential or commercial properties. Tax redemption issues are particularly common. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they undergo 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 3rd party will purchase the tax certificate.

Underwood states, "If the county owns the tax certificate, fixing this is a pretty straightforward procedure. But if it's owned by a 3rd party, it can get made complex." To redeem from an individual, a bank is required to pay the overdue taxes, charge, interest, along with the worth of any enhancements on the residential or commercial property. In some scenarios, there can be an extended settlement procedure to remove this tax lien.

Encroachment problems are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't always plainly delineated, which is why studies are a needed part of the title search and test. 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 house or barn." It can be made complex to clear these issues and sometimes, a quitclaim deed may be required.

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 lack marital status, and other encumbrances can also be discovered throughout the title search and exam. Title business experienced with REO residential or commercial properties know precisely which problems to search for and how to address them to present REO buyers with a clear title.

Owner's title insurance safeguards property buyers from concealed risks to their title after purchase. A boosted owner's policy might be suggested for individuals who buy an REO residential or commercial property. But no matter the policy, REO residential or buyers ought to constantly know laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or heirs of the debtor, have the right to redeem or purchase back 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 needs to pay the quantity of the foreclosure bid, interest, and other charges consisting of taxes, insurance coverage, and repair work."

"Because foreclosure sales can happen fairly rapidly in Alabama, the redemption duration is longer than in many states. For mortgages stemmed before 2016, that redemption period 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 very unusual, but anybody buying an REO residential or commercial property needs to work with a lawyer who understands and understands the law." These laws differ from one state to another and can alter, so constantly consult your closing lawyer with specific questions about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption period ends requirement to be mindful that owner's title insurance coverage will never provide 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 throughout of the redemption duration.

Lenders supplying funding for REO purchases will normally require affirmative coverage for the remaining redemption duration. Options, such as a bond, exist if the loan quantity is up to 30% greater than the foreclosure quote, but purchasers must understand that affirmative protection for the remaining redemption duration just safeguards the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in place up until November 2021. As this moratorium has actually raised, lenders have carried out loss mitigation procedures to keep individuals in their mortgages and assist them retain their residential or commercial properties. However, if loss mitigation techniques are unsuccessful, the foreclosure process begins.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're anticipating 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 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 utilized to seeing."

There's no need 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 comprehend the nuance of buying a bank-owned home are better equipped to serve their customers.

At South Oak Title and Closing, we like partnering with real estate agents to assist them much better serve their clients. Whether you have particular concerns about working with REO residential or commercial properties or just 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 decades dealing with banks, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law practice. Jeff is wed 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 post is intended to offer general information about REO residential or commercial properties in Alabama and need to not be thought about legal advice. Laws concerning REO residential or commercial properties likewise vary from one state to another. Please consult your local attorney with questions.
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