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

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

Our resident REO specialist, Jeff Underwood, shares what agents require 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 realty that is owned by a bank or lending institution after failing to cost a foreclosure auction. But to truly comprehend REO residential or commercial properties, you first need to comprehend the foreclosure procedure.

The Foreclosure Process

When a specific with a mortgage stops paying on that mortgage for any factor, the foreclosure process will begin. The mortgage contract will include language about when the bank can start this process. Typically, a lending institution won't start the foreclosure process till the borrower has missed out on four successive payments.

Not all residential or commercial properties that go into the foreclosure procedure are actually foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, states, "In most cases, the mortgage is renewed or the loan provider will exercise loss mitigation options to avoid foreclosure. A debtor who files for Chapter 13 personal bankruptcy will also halt the foreclosure procedure."

This process looks various in every state. Underwood describes, "Alabama is a nonjudicial state. This suggests that the bank does not have to file a claim against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notices that notifies the mortgagor that they are in default and provides info about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need loan providers to submit a suit versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also released in the county paper for 3 weeks. If the bank or loan provider is the high-bidder or just buyer at the foreclosure sale, this residential or commercial property ends up being "real estate 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 marketplace as an REO residential or commercial property." The lending institution sends out a referral 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 very comparable to noting any other residential or commercial property, with a few crucial differences. There's still a sign 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 customer, 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 common home that's market-ready. We had one REO residential or commercial property where the previous owner took whatever out of the home, including sinks and banisters. The bank will hire a company to clean things up and make sure things are working, however purchasers will not find a staged, upgraded home."

Lenders wish to sell REO residential or commercial properties for fair market price as rapidly as possible, so pricing is identified by getting a BPO, or broker rate opinion. Two real estate agents will offer their opinion on the marketplace rate of the residential or commercial property, and then these viewpoints are balanced to acquire the sale price. If the residential or commercial property languishes on the market, the bank will begin dropping the cost in incremental portions to find a purchaser.

Title Process for REO residential or commercial properties

When the title business receives the recommendation 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 similar to any title search and exam, we're searching for any possible problems so that we can present a clear title to the buyer," Underwood discusses.

If the title is clear, this file is ready for when the residential or commercial property goes under contract. 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 ready for a future purchaser. Once the residential or commercial property goes under contract, all that's required is an update to title.

Common Title Issues with REO Properties

Several typical title concerns can develop with REO residential or commercial properties. Tax redemption issues are especially typical. In Alabama, taxes are paid in arrears. If they're not paid by December 31, they're subject to penalties and interest. If taxes are still unpaid 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 celebration will acquire the tax certificate.

Underwood states, "If the county owns the tax certificate, solving this is a quite simple process. But if it's owned by a 3rd party, it can get complicated." To redeem from a specific, a bank is needed to pay the overdue taxes, penalty, interest, as well as the worth of any enhancements on the residential or commercial property. In some circumstances, there can be an extended settlement procedure to remove this tax lien.

Encroachment concerns are also common with REO residential or commercial properties. Residential or commercial property lines aren't always clearly marked, which is why surveys are a required part of the title search and examination. 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, and even part of a home or barn." It can be made complex to clear these concerns and in many cases, a quitclaim deed might be needed.

And similar to any other residential or commercial property, we can discover any number of other title issues. Missing deeds, deeds in the back chain of title that do not have marital status, and other encumbrances can likewise be discovered during the title search and exam. Title business experienced with REO residential or commercial properties know exactly which problems to try to find and how to resolve them to present REO purchasers with a clear title.

Owner's title insurance coverage protects homebuyers from hidden dangers to their title after purchase. An improved owner's policy may be advised for people who buy an REO residential or commercial property. But no matter the policy, REO residential or commercial property buyers ought to always be conscious of 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 approximately a year after the foreclosure sale. Underwood describes, "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 occur fairly quickly in Alabama, the redemption duration is longer than in the majority of 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 uncommon, but anyone acquiring 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 change, so constantly consult your closing attorney with particular questions about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption duration ends need to be mindful that owner's title insurance coverage will never ever offer affirmative protection 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 coverage for the period of the redemption duration.

Lenders supplying funding for REO purchases will generally need affirmative coverage for the staying redemption duration. Options, such as a bond, exist if the loan amount depends on 30% higher than the foreclosure quote, but buyers ought to comprehend that affirmative protection for the staying redemption duration only safeguards the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in location till November 2021. As this moratorium has actually lifted, lenders have actually implemented loss mitigation procedures to keep individuals in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation methods are unsuccessful, the foreclosure procedure 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 third quarter of this year, we'll start to see a higher-than-normal portion of REO residential or commercial properties on the market. It will not be like it was in 2008, but 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 subtlety of buying a bank-owned home are better geared up to serve their clients.

At South Oak Title and Closing, we love partnering with real estate agents to assist them much better serve their clients. Whether you have specific questions about dealing with REO residential or commercial properties or simply require 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 dealing 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 recent 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 supply general details about REO residential or commercial properties in Alabama and must not be considered legal recommendations. Laws worrying REO residential or commercial properties likewise vary from state to state. Please consult your regional lawyer with concerns.
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