After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now increasing. As a result, 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 relatively brand-new real estate agent or one who's been in business for a while, you most likely could use a refresher on these bank-owned homes.

Our resident REO expert, Jeff Underwood, shares what real estate agents need to understand 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 cost a foreclosure auction. But to truly understand REO residential or commercial properties, you initially require to comprehend the foreclosure process.

The Foreclosure Process

When a specific with a mortgage stops paying on that mortgage for any reason, the foreclosure process will begin. The mortgage agreement will consist of language about when the bank can start this process. Typically, a loan provider will not begin the foreclosure process until the borrower has actually missed out on 4 successive payments.

Not all residential or commercial properties that go into the foreclosure process are actually foreclosed upon. Jeff Underwood, managing attorney at South Oak Title & Closing in Auburn, states, "Oftentimes, the mortgage is reinstated or the loan provider will exercise loss mitigation alternatives to prevent foreclosure. A debtor who applies for Chapter 13 insolvency will also stop the foreclosure procedure."

This procedure looks different in every state. Underwood describes, "Alabama is a nonjudicial state. This means that the bank does not have to file a claim against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notices that notifies the mortgagor that they are in default and offers info about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need lenders to file a claim versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are likewise released in the county newspaper for three weeks. If the bank or loan provider is the high-bidder or only purchaser at the foreclosure sale, this residential or commercial property becomes "genuine 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 recoup their losses from the foreclosure. After the foreclosure sale, the residential or commercial property will go on the market as an REO residential or commercial property." The loan provider sends out a referral for this residential or commercial property to both a realty 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 lawn, a listing on the MLS, and images of the residential or commercial property. The broker's objective is to discover a purchaser for the residential or commercial property. But rather of a specific customer, the broker represents a loan provider. 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 everything out of the house, consisting of sinks and banisters. The bank will hire a business to clean things up and make certain things are working, but purchasers will not discover a staged, upgraded home."

Lenders wish to sell REO residential or commercial properties for reasonable market price as quickly as possible, so pricing is determined by getting 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 after that these opinions are averaged to acquire the market price. If the residential or commercial property languishes on the marketplace, the bank will start dropping the cost in incremental portions to find a buyer.

Title Process for REO residential or commercial properties

When the title business receives the recommendation for an REO residential or commercial property, they will start 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 as with any title search and exam, we're searching for any prospective problems so that we can present a clear title to the purchaser," Underwood describes.

If the title is clear, this file is prepared for when the residential or commercial property goes under contract. If there are concerns that need to be attended to such as judgments, encumbrances, or liens, the title business will clear the title so that it's prepared for a future purchaser. Once the residential or commercial property goes under agreement, all that's needed is an upgrade to title.

Common Title Issues with REO Properties

Several typical title concerns can develop with REO residential or commercial properties. Tax redemption issues are particularly 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 unsettled by April, the county will have a tax sale in May. In a lot of cases, the county is the high bidder. But in other cases, a 3rd party will buy the tax certificate.

Underwood states, "If the county owns the tax certificate, fixing this is a pretty uncomplicated process. But if it's owned by a third party, it can get complicated." To redeem from a specific, a bank is needed to pay the overdue taxes, charge, interest, along with the value of any enhancements on the residential or commercial property. In some circumstances, there can be a prolonged settlement process to remove this tax lien.

Encroachment problems 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 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 perhaps part of a house or barn." It can be made complex to clear these concerns and in some cases, a quitclaim deed may be needed.

And as with any other residential or commercial property, we can find any number of other title concerns. Missing deeds, deeds in the back chain of title that do not have marital status, and other encumbrances can likewise be discovered throughout the title search and exam. Title business experienced with REO residential or commercial properties know precisely which issues to try to find and how to address them to present REO buyers with a clear title.

Owner's title insurance coverage safeguards property buyers from covert dangers to their title after purchase. An enhanced owner's policy may be recommended for individuals who purchase an REO residential or commercial property. But despite the policy, REO residential or commercial property buyers need to constantly understand laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or heirs 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 celebration needs to pay the amount of the foreclosure quote, interest, and other charges including taxes, insurance coverage, and repair work."

"Because foreclosure sales can occur reasonably quickly in Alabama, the redemption period is longer than in the majority of states. For mortgages stemmed before 2016, that redemption period is a year. For mortgages come from after January 1, 2016, the redemption period is reduced to 180 days."

He continues, "Redemptions of foreclosed homes are extremely rare, however anybody purchasing an REO residential or commercial property requires to work with an attorney who knows and understands the law." These laws vary from state to state and can change, so always consult your closing lawyer with particular questions about the right of redemption.

Buyers purchasing an REO residential or commercial property before the redemption duration expires need to be conscious that owner's title insurance will never ever offer affirmative protection over the right of redemption. For money purchasers, 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.

providing financing for REO purchases will typically need affirmative protection for the staying redemption period. Options, such as a bond, exist if the loan amount is up to 30% greater than the foreclosure bid, but buyers ought to understand that affirmative protection for the staying redemption period only protects 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 actually lifted, lending institutions have carried out loss mitigation procedures to keep individuals in their mortgages and help them keep their residential or commercial properties. However, if loss mitigation strategies are unsuccessful, the foreclosure procedure starts.

Underwood states, "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 start to see a higher-than-normal portion of REO residential or commercial properties on the market. It won't be like it remained in 2008, however it will definitely be more than what we're utilized 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 clients.

At South Oak Title and Closing, we like partnering with real estate agents to assist them much better serve their customers. Whether you have specific questions about dealing 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 actually invested years working with banks, lending institutions, and REO residential or commercial properties through his time leading the REO department at a Birmingham law firm. Jeff is married and has two children: one recent graduate and one existing trainee at Auburn University.

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

This article is intended to provide general details about REO residential or commercial properties in Alabama and need to not be thought about legal guidance. Laws concerning REO residential or commercial properties likewise vary from state to state. Please consult your local lawyer with concerns.
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