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After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now on the rise. As an outcome, we can expect to see an increase in the variety of REO residential or commercial properties readily available on the marketplace in the coming months.
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Whether you're a fairly new real estate agent or one who's remained in business for a while, you probably might use 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?

Put simply, an REO residential or commercial property is property that is owned by a bank or lending institution after stopping working to offer at a foreclosure auction. But to truly comprehend REO residential or commercial properties, you first need to comprehend the foreclosure procedure.

The Foreclosure Process

When a specific with a mortgage stops paying on that mortgage for any reason, the foreclosure procedure will begin. The mortgage contract will consist of language about when the bank can begin this procedure. Typically, a loan provider won't start the foreclosure process up until the customer has actually missed 4 successive payments.

Not all residential or commercial properties that go into the foreclosure process are really foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, says, "In many cases, the mortgage is reinstated or the lender will exercise loss mitigation options to prevent foreclosure. A debtor who declares Chapter 13 personal bankruptcy will also halt the foreclosure procedure."

This procedure looks different in every state. Underwood describes, "Alabama is a nonjudicial state. This indicates that the bank does not need to file a claim against 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 info about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, require lending institutions to submit a claim versus the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are also published in the county newspaper for three weeks. If the bank or lender is the high-bidder or only buyer 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 says, "Lenders aren't in business of retaining these residential or commercial properties. Their objective 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 market as an REO residential or commercial property." The lending institution sends 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 comparable to noting any other residential or commercial property, with a few essential distinctions. There's still a check in the lawn, a listing on the MLS, and images 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 lending . 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 company to clean things up and make certain things are working, however buyers will not discover a staged, upgraded home."

Lenders desire to offer REO residential or commercial properties for fair market worth as quickly as possible, so pricing is figured out by getting a BPO, or broker price opinion. Two real estate agents will offer their opinion on the marketplace cost of the residential or commercial property, and after that these opinions are averaged to obtain the sale price. If the residential or commercial property suffers on the marketplace, 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 gets 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 examination, we're searching for any prospective concerns so that we can present a clear title to the purchaser," Underwood discusses.

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 resolved 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 concerns can occur with REO residential or commercial properties. Tax redemption problems are especially common. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they go through charges and interest. If taxes are still unsettled by April, the county will have a tax sale in May. For the most part, the county is the high bidder. But in other cases, a 3rd party will purchase the tax certificate.

Underwood states, "If the county owns the tax certificate, solving this is a pretty straightforward procedure. But if it's owned by a 3rd party, it can get complicated." To redeem from an individual, a bank is needed to pay the overdue taxes, charge, interest, in addition to the worth of any improvements on the residential or commercial property. In some situations, there can be an extended settlement procedure 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 required part of the title search and test. 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, and even part of a house or barn." It can be complicated to clear these concerns 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 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 examination. Title business experienced with REO residential or commercial properties know exactly which concerns to try to find and how to address them to present REO purchasers with a clear title.

Owner's title insurance coverage secures homebuyers from surprise threats to their title after purchase. An improved owner's policy might be suggested for individuals who purchase an REO residential or commercial property. But no matter the policy, REO residential or commercial property buyers need to constantly know laws concerning the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or heirs of the debtor, deserve to redeem or redeem a foreclosed residential or commercial property for approximately a year after the foreclosure sale. Underwood discusses, "To redeem a foreclosed residential or commercial property, the redeeming celebration should pay the quantity of the foreclosure quote, interest, and other charges consisting of taxes, insurance, and repair work."

"Because foreclosure sales can occur reasonably rapidly in Alabama, the redemption period is longer than in many states. For mortgages stemmed before 2016, that redemption duration is a year. For mortgages originated after January 1, 2016, the redemption duration is shortened to 180 days."

He continues, "Redemptions of foreclosed homes are very uncommon, but anyone buying an REO residential or commercial property requires to work with a lawyer who knows and understands the law." These laws vary from state to state and can alter, so always consult your closing attorney with particular concerns about the right of redemption.

Buyers purchasing an REO residential or commercial property before the redemption duration ends requirement to be aware that owner's title insurance coverage will never offer affirmative coverage 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 duration of the redemption period.

Lenders supplying funding for REO purchases will normally require affirmative coverage for the staying redemption period. Options, such as a bond, exist if the loan quantity depends on 30% greater than the foreclosure quote, but buyers need to comprehend that affirmative coverage for the staying redemption period just secures the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place until November 2021. As this moratorium has lifted, lending institutions have implemented loss mitigation procedures 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 states, "Foreclosure starts are up 39% over the last quarter, and we're anticipating to see a boost 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 will not resemble it was in 2008, however it will definitely be more than what we're used to seeing."

There's no need 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 nuance of purchasing a bank-owned home are much better equipped to serve their customers.

At South Oak Title and Closing, we love partnering with real estate agents to help them much better serve their customers. Whether you have particular questions about working with REO residential or commercial properties or simply need an REO specialist 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, loan providers, and REO residential or commercial properties through his time leading the REO department at a Birmingham law firm. Jeff is married and has 2 children: one current graduate and one current trainee at Auburn University.

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

This article is planned to provide general information about REO residential or commercial properties in Alabama and ought to not be thought about legal recommendations. Laws worrying REO residential or commercial properties also vary from state to state. Please consult your regional attorney with questions.