After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now rising. As an outcome, we can anticipate 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 remained in the business for a while, you probably might utilize a refresher on these bank-owned homes.

Our resident REO expert, Jeff Underwood, shares what real estate 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 lender after stopping working to sell at a foreclosure auction. But to genuinely understand REO residential or commercial properties, you first need to comprehend the foreclosure process.

The Foreclosure Process

When an individual with a mortgage stops paying on that mortgage for any factor, the foreclosure process will begin. The mortgage arrangement will consist of language about when the bank can begin this process. Typically, a loan provider will not start the foreclosure process till the customer has missed four successive payments.

Not all residential or commercial properties that get in the foreclosure procedure are in fact foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, states, "In many cases, the mortgage is reinstated or the lender will exercise loss mitigation alternatives to avoid foreclosure. A debtor who applies for Chapter 13 bankruptcy will likewise halt the foreclosure procedure."

This process looks different in every state. Underwood explains, "Alabama is a nonjudicial state. This means that the bank does not have to submit a suit versus the defaulted mortgagor to foreclose. Instead, the bank sends a series of notices that notifies the mortgagor that they remain in default and offers information about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, require loan providers to file a claim against the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also released 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 "realty owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in the service of keeping these residential or commercial properties. Their objective is to offer the home and recoup 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 lender sends out a recommendation for this residential or commercial property to both a genuine 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 similar to noting any other residential or commercial property, with a couple of essential distinctions. There's still an indication in the backyard, a listing on the MLS, and photos of the residential or commercial property. The broker's goal is to find 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 may 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 house, consisting of sinks and banisters. The bank will hire a business to clean things up and make sure things are working, however purchasers won't discover a staged, updated home."

Lenders want to offer REO residential or commercial properties for fair market value as rapidly as possible, so rates is figured out by obtaining a BPO, or broker price opinion. Two real estate agents will provide their viewpoint on the marketplace price of the residential or commercial property, and then these opinions are balanced to obtain the sticker price. If the residential or commercial property languishes on the marketplace, the bank will start dropping the price in incremental portions to find a purchaser.

Title Process for REO residential or commercial properties

When the title company gets the referral 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 just like any title search and exam, we're searching for any possible problems so that we can provide a clear title to the buyer," Underwood describes.

If the title is clear, this file is all set for when the residential or commercial property goes under agreement. If there are issues that require to be resolved 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 needed is an upgrade to title.

Common Title Issues with REO Properties

Several common title problems can emerge with REO residential or commercial properties. Tax redemption concerns are particularly common. 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 unpaid by April, the county will have a tax sale in May. Most of the times, 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 pretty uncomplicated process. But if it's owned by a 3rd party, it can get complicated." To redeem from a specific, a bank is required to pay the overdue taxes, charge, interest, in addition to the worth of any enhancements on the residential or commercial property. In some circumstances, there can be a prolonged settlement procedure to remove this tax lien.

Encroachment issues are likewise common with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly marked, which is why studies are a needed part of the title search and examination. Underwood discusses, "An encroachment 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 home or barn." It can be complicated to clear these concerns and in many cases, a quitclaim deed might 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 do not have marital status, and other encumbrances can also be found throughout 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 protects property buyers from hidden risks to their title after purchase. An enhanced owner's policy might be suggested for individuals who buy an REO residential or commercial property. But no matter the policy, REO residential or commercial property buyers need to constantly know 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 party needs to pay the quantity of the foreclosure bid, interest, and other charges consisting of taxes, insurance coverage, and repairs."

"Because foreclosure sales can occur relatively quickly in Alabama, the redemption duration is longer than in the majority of states. For mortgages originated before 2016, that redemption duration 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 really unusual, but anybody buying an REO residential or commercial property needs to deal with a lawyer who understands and comprehends the law." These laws vary from state to state and can alter, so constantly consult your closing attorney with concerns about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption period ends requirement to be conscious that owner's title insurance coverage will never ever offer 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 funding for REO purchases will normally need affirmative coverage for the staying redemption period. Options, such as a bond, exist if the loan quantity is up to 30% higher than the foreclosure bid, but purchasers ought to understand that affirmative coverage for the staying redemption duration just safeguards the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location until November 2021. As this moratorium has lifted, loan providers have executed loss mitigation treatments to keep individuals in their mortgages and assist them retain their residential or commercial properties. However, if loss mitigation methods are unsuccessful, the foreclosure process starts.

Underwood says, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see an increase in these as the year progresses. Starting in the third quarter of this year, we'll begin to see a higher-than-normal portion of REO residential or commercial properties on the market. It won't be like 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 daunted 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 purchasing a bank-owned home are better equipped to serve their customers.

At South Oak Title and Closing, we enjoy partnering with real estate agents to help them much better serve their customers. Whether you have particular concerns about dealing with REO residential or commercial properties or simply require an REO expert 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 decades working with banks, lending institutions, and REO residential or commercial properties through his time leading the REO department at a Birmingham law office. Jeff is wed and has two children: one current graduate and one existing trainee at Auburn University.
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Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.

This article is intended to offer general details about REO residential or commercial properties in Alabama and must not be thought about legal suggestions. Laws worrying REO residential or commercial properties likewise differ from state to state. Please consult your regional attorney with questions.