After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now rising. As an outcome, we can expect to see a boost in the number of REO residential or commercial properties available on the market in the coming months.

Whether you're a relatively new real estate agent or one who's remained in business for a while, you most likely might utilize a refresher on these bank-owned homes.

Our resident REO expert, Jeff Underwood, shares what real estate agents need to learn about REO residential or commercial properties in Alabama.

What is an REO residential or commercial property?

Basically, 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 genuinely comprehend REO residential or commercial properties, you initially need to understand the foreclosure process.

The Foreclosure Process

When a private with a mortgage stops paying on that mortgage for any reason, the foreclosure procedure will begin. The mortgage contract will include language about when the bank can start this process. Typically, a lender won't begin the foreclosure process till the debtor has missed out on four successive payments.

Not all residential or commercial properties that get in the foreclosure process are really foreclosed upon. Jeff Underwood, managing attorney at South Oak Title & Closing in Auburn, says, "In most cases, the mortgage is reinstated or the loan provider will exercise loss mitigation choices to avoid foreclosure. A debtor who declares Chapter 13 insolvency will also 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 need to submit a claim versus the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that informs the mortgagor that they remain in default and supplies info 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 newspaper for three weeks. If the bank or lending institution is the high-bidder or only buyer 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 retaining these residential or commercial properties. Their goal is to offer 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 loan provider sends out a referral 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 crucial distinctions. There's still an indication in the backyard, a listing on the MLS, and images of the residential or commercial property. The broker's goal is to discover a buyer for the residential or commercial property. But instead of a private customer, the broker represents a loan provider. 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 house, including sinks and banisters. The bank will hire a company to clean things up and ensure things are working, but purchasers won't discover a staged, upgraded home."

Lenders want to sell REO residential or commercial properties for fair market worth as quickly as possible, so prices is figured out by acquiring a BPO, or broker cost opinion. Two real estate agents will give their viewpoint on the marketplace price of the residential or commercial property, and then these viewpoints are balanced to get the list price. If the residential or commercial property suffers on the market, the bank will begin dropping the cost in incremental percentages to find a purchaser.

Title Process for REO residential or commercial properties

When the title business receives the referral for an REO residential or commercial property, they will initiate a title search, simply 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 potential concerns 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 agreement. 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 all set for a future purchaser. Once the residential or commercial property goes under contract, all that's required 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 issues are particularly common. In Alabama, taxes are paid in defaults. If they're not paid by December 31, they're to penalties and interest. If taxes are still overdue 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 celebration will purchase the tax certificate.

Underwood says, "If the county owns the tax certificate, solving this is a quite simple process. But if it's owned by a third celebration, it can get complicated." To redeem from a specific, a bank is required to pay the delinquent taxes, charge, interest, along with the worth 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 concerns are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly delineated, which is why studies are a required part of the title search and examination. Underwood describes, "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 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 lack marital status, and other encumbrances can likewise be found during the title search and test. Title business experienced with REO residential or commercial properties understand precisely which concerns to look for and how to address them to present REO purchasers with a clear title.

Owner's title insurance coverage secures property buyers from surprise 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 purchasers ought to always be mindful of laws worrying the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or beneficiaries of the debtor, deserve to redeem or redeem 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 party should pay the amount of the foreclosure quote, interest, and other charges including taxes, insurance coverage, and repair work."

"Because foreclosure sales can happen fairly quickly in Alabama, the redemption period is longer than in many states. For mortgages came from before 2016, that redemption duration is a year. For mortgages come from after January 1, 2016, the redemption duration is shortened to 180 days."

He continues, "Redemptions of foreclosed homes are very uncommon, but anyone acquiring an REO residential or commercial property needs to deal with an attorney who knows and understands the law." These laws vary from state to state and can change, so constantly consult your closing lawyer with specific concerns about the right of redemption.

Buyers acquiring an REO residential or commercial property before the redemption duration expires requirement to be mindful that owner's title insurance will never ever offer affirmative coverage over the right of redemption. For cash purchasers, this will be listed as an exception in Schedule B-2 of the owner's title insurance policy throughout of the redemption period.

Lenders supplying financing for REO purchases will normally require affirmative coverage for the remaining redemption period. Options, such as a bond, exist if the loan quantity is up to 30% higher than the foreclosure quote, however purchasers ought to understand that affirmative protection for the staying redemption period just secures the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in place until November 2021. As this moratorium has actually lifted, loan providers have actually implemented 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 procedure begins.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see an increase in these as the year advances. Starting in the third quarter of this year, we'll begin to see a higher-than-normal percentage of REO residential or commercial properties on the market. It won't resemble it remained in 2008, but it will certainly be more than what we're used to seeing."

There's no need for real estate agents to be frightened by REO residential or commercial properties. As more of these residential or commercial properties appear in the MLS, real estate agents who understand the subtlety of buying a bank-owned home are much better equipped to serve their clients.

At South Oak Title and Closing, we like partnering with real estate agents to help them better serve their customers. Whether you have specific concerns about dealing with REO residential or commercial properties or just 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 spent years working with banks, lenders, and REO residential or commercial properties through his time leading the REO department at a Birmingham law firm. 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 planned to supply general info about REO residential or commercial properties in Alabama and ought to not be thought about legal advice. Laws worrying REO residential or commercial properties likewise differ from one state to another. Please consult your local lawyer with questions.
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