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After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now rising. As an outcome, we can anticipate to see an increase in the number of REO residential or commercial properties readily available on the marketplace in the coming months.
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Whether you're a fairly brand-new real estate agent or one who's been in business for a while, you probably could utilize a refresher on these bank-owned homes.

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

The Foreclosure Process

When an individual with a mortgage stops paying on that mortgage for any factor, the foreclosure process will begin. The mortgage agreement will include language about when the bank can begin this process. Typically, a lender will not begin the foreclosure procedure till the customer has actually missed out on four successive payments.

Not all residential or commercial properties that enter the foreclosure procedure are really foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, states, "In lots of cases, the mortgage is restored or the lending institution will exercise loss mitigation options to prevent foreclosure. A debtor who applies for Chapter 13 bankruptcy will also halt the foreclosure process."

This process looks various in every state. Underwood explains, "Alabama is a nonjudicial state. This implies that the bank does not have to submit a claim versus the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that notifies the mortgagor that they are in default and provides information about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need lenders to file a claim versus 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 buyer at the foreclosure sale, this residential or commercial property ends up being "genuine estate owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in the company of maintaining these residential or commercial properties. Their objective 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 marketplace as an REO residential or commercial property." The lending institution sends a referral for this residential or commercial property to both a genuine estate brokerage and a title company.

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 couple of key distinctions. There's still a sign 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 rather 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 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 everything out of the house, including sinks and banisters. The bank will work with a business to tidy things up and ensure things are working, however buyers won't discover a staged, upgraded home."

Lenders desire to offer REO residential or commercial properties for fair market price as rapidly as possible, so prices is determined by acquiring a BPO, or broker price viewpoint. Two real estate agents will provide their opinion on the marketplace price of the residential or commercial property, and then these viewpoints are to get the sale price. If the residential or commercial property suffers on the market, the bank will start dropping the cost in incremental percentages to discover a buyer.

Title Process for REO residential or commercial properties

When the title company 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 noted for sale, and just like any title search and test, we're looking for any prospective concerns so that we can present 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 contract. If there are problems that need 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 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 issues can develop 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. In many cases, the county is the high bidder. But in other cases, a third celebration will purchase the tax certificate.

Underwood says, "If the county owns the tax certificate, fixing this is a pretty uncomplicated process. But if it's owned by a 3rd party, it can get complicated." To redeem from a private, a bank is required to pay the overdue taxes, charge, interest, in addition to the value of any enhancements on the residential or commercial property. In some circumstances, there can be a prolonged settlement process to eliminate this tax lien.

Encroachment problems are likewise common 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 examination. 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 even part of a home or barn." It can be made complex to clear these problems and sometimes, a quitclaim deed may be required.

And similar to any other residential or commercial property, we can discover any variety of other title issues. Missing deeds, deeds in the back chain of title that do not have marital status, and other encumbrances can also be found during the title search and exam. Title business experienced with REO residential or commercial properties know precisely which problems to look for and how to address them to present REO purchasers with a clear title.

Owner's title insurance safeguards homebuyers from hidden threats to their title after purchase. A boosted owner's policy may be recommended for people who buy an REO residential or commercial property. But no matter the policy, REO residential or commercial property purchasers ought to always know laws worrying the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or beneficiaries of the debtor, have the right to redeem or purchase back a foreclosed residential or commercial property for up to a year after the foreclosure sale. Underwood discusses, "To redeem a foreclosed residential or commercial property, the redeeming celebration must pay the amount of the foreclosure quote, interest, and other charges including taxes, insurance, and repair work."

"Because foreclosure sales can take place fairly rapidly in Alabama, the redemption period is longer than in the majority of states. For mortgages came from before 2016, that redemption duration 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 extremely uncommon, however anyone buying an REO residential or commercial property needs to deal with a lawyer who knows and comprehends the law." These laws differ from one state to another and can alter, so constantly consult your closing lawyer with specific concerns about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption duration expires need to be mindful that owner's title insurance will never supply affirmative protection over the right of redemption. For cash buyers, this will be noted as an exception in Schedule B-2 of the owner's title insurance plan for the period of the redemption duration.

Lenders supplying funding for REO purchases will generally need affirmative coverage for the remaining redemption period. Options, such as a bond, exist if the loan amount is up to 30% greater than the foreclosure quote, but purchasers should understand that affirmative protection for the remaining redemption period only secures the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place till November 2021. As this moratorium has actually raised, loan providers have actually implemented loss mitigation treatments to keep people in their mortgages and assist them retain 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 anticipating 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 will not 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 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 geared up to serve their customers.

At South Oak Title and Closing, we like partnering with real estate agents to assist them much better serve their customers. Whether you have particular concerns about working with REO residential or commercial properties or simply require 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 spent decades dealing 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 daughters: one current graduate and one current student at Auburn University.

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

This article is meant to offer basic details about REO residential or commercial properties in Alabama and ought to not be considered legal guidance. Laws worrying REO residential or commercial properties likewise vary from state to state. Please consult your regional lawyer with concerns.