After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now on the rise. As a result, we can anticipate to see an increase in the number of REO residential or commercial properties available on the marketplace in the coming months.
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Whether you're a reasonably new real estate agent or one who's been in business for a while, you probably could use a refresher on these bank-owned homes.
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Our resident REO specialist, Jeff Underwood, shares what real estate agents require 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 failing to cost a foreclosure auction. But to truly comprehend REO residential or commercial properties, you first require to understand the foreclosure process.

The Foreclosure Process

When an individual with a mortgage stops making payments on that mortgage for any factor, the foreclosure process will start. The mortgage arrangement will consist of language about when the bank can start this procedure. Typically, a lending institution won't start the foreclosure process up until the debtor has actually missed out on 4 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, says, "Oftentimes, the mortgage is restored or the loan provider will exercise loss mitigation choices to avoid foreclosure. A debtor who declares Chapter 13 insolvency will likewise stop the foreclosure procedure."

This process looks various in every state. Underwood discusses, "Alabama is a nonjudicial state. This indicates that the bank does not need to submit a lawsuit versus the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notices that informs the mortgagor that they are in default and offers details about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need loan providers to submit a suit against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are likewise published in the county paper for three weeks. If the bank or lender is the high-bidder or only buyer at the foreclosure sale, this residential or commercial property ends up being "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 retaining these residential or commercial properties. Their goal 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 lender sends a referral for this residential or commercial property to both a property 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 few key distinctions. There's still a check in the lawn, 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 a specific 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 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, including sinks and banisters. The bank will employ a company to clean things up and ensure things are working, but purchasers will not discover a staged, updated home."

Lenders desire to sell REO residential or commercial properties for fair market price as rapidly as possible, so pricing is identified by acquiring a BPO, or broker cost opinion. Two real estate agents will give their opinion on the marketplace price of the residential or commercial property, and after that these viewpoints are balanced to acquire the list price. If the residential or commercial property languishes on the market, the bank will start dropping the price in incremental portions to find 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 start a title search, simply 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 examination, we're trying to find any potential concerns so that we can present a clear title to the buyer," Underwood describes.

If the title is clear, this file is ready for when the residential or commercial property goes under agreement. If there are problems 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 contract, all that's needed 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 concerns are especially typical. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they undergo charges and interest. If taxes are still unpaid 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 3rd party will acquire the tax certificate.

Underwood states, "If the county owns the tax certificate, resolving this is a quite uncomplicated procedure. But if it's owned by a third party, it can get made complex." To redeem from a specific, a bank is required to pay the overdue taxes, penalty, interest, in addition to the value of any improvements on the residential or commercial property. In some scenarios, there can be an extended settlement process to remove this tax lien.

Encroachment issues are also common with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly defined, which is why studies are an essential part of the title search and exam. Underwood discusses, "An encroachment 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 problems and sometimes, a quitclaim deed may be needed.

And as with 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 companies experienced with REO residential or commercial properties understand precisely which concerns to search for and how to resolve them to present REO buyers with a clear title.

Owner's title insurance protects property buyers from hidden threats to their title after purchase. An improved owner's policy may be suggested for people who purchase an REO residential or commercial property. But regardless of the policy, REO residential or commercial property buyers should always know laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or successors of the debtor, have the right to redeem or buy back 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 quote, interest, and other charges including taxes, insurance coverage, and repairs."

"Because foreclosure sales can happen fairly quickly in Alabama, the redemption duration is longer than in most states. For mortgages stemmed 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 very unusual, however anyone purchasing an REO residential or commercial property needs to deal with an attorney who knows and comprehends the law." These laws differ from one state to another and can alter, so always consult your closing lawyer with particular questions about the right of redemption.

Buyers acquiring an REO residential or commercial property before the redemption duration expires requirement to be conscious that owner's title insurance coverage will never provide affirmative coverage 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 coverage throughout of the redemption duration.

Lenders providing funding for REO purchases will generally need affirmative protection for the remaining redemption duration. Options, such as a bond, exist if the loan quantity is up to 30% greater than the foreclosure quote, however purchasers must understand that affirmative coverage for the staying redemption period only protects 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 raised, loan providers have carried out loss mitigation procedures to keep people in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation techniques are not successful, the foreclosure process 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 3rd quarter of this year, we'll start to see a higher-than-normal portion of REO residential or commercial properties on the marketplace. It won't resemble it remained in 2008, however it will definitely 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 clients.

At South Oak Title and Closing, we enjoy partnering with agents to assist them much better serve their clients. Whether you have specific questions about working with REO residential or commercial properties or simply need 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 invested years dealing with banks, lenders, and REO residential or commercial properties through his time leading the REO division at a Birmingham law practice. Jeff is wed and has 2 children: one current graduate and one existing trainee at Auburn University.

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

This post is planned to offer general details about REO residential or commercial properties in Alabama and ought to not be thought about legal guidance. Laws worrying REO residential or commercial properties likewise vary from one state to another. Please consult your local attorney with concerns.