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

Whether you're a fairly new real estate agent or one who's been in the 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 need 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 lender after stopping working to cost a foreclosure auction. But to genuinely comprehend REO residential or commercial properties, you initially need to understand 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 arrangement will include language about when the bank can start this procedure. Typically, a lending institution won't start the foreclosure process till the borrower has missed four successive payments.

Not all residential or commercial properties that get in the foreclosure procedure are in fact foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, states, "Oftentimes, the mortgage is reinstated or the lending institution will work out loss mitigation alternatives to avoid foreclosure. A debtor who submits for Chapter 13 personal bankruptcy will also stop the foreclosure procedure."

This process looks various in every state. Underwood describes, "Alabama is a nonjudicial state. This implies that the bank does not have to file a lawsuit versus the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notices that informs the mortgagor that they remain in default and offers info about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require loan providers to submit a lawsuit versus the mortgagor in state court to foreclose.

In Alabama, notices 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 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 keeping 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 marketplace as an REO residential or commercial property." The lending institution sends a recommendation 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 extremely comparable to listing any other residential or commercial property, with a couple of crucial differences. There's still a check in the lawn, a listing on the MLS, and photos of the residential or commercial property. The broker's objective is to discover a buyer for the residential or commercial property. But rather of an individual client, 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 may not look like a normal 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 employ a business to tidy things up and make sure things are working, however purchasers won't discover a staged, updated home."

Lenders wish to offer REO residential or commercial properties for fair market value as rapidly as possible, so pricing is determined by obtaining a BPO, or broker cost viewpoint. Two real estate agents will offer their viewpoint on the marketplace rate of the residential or commercial property, and after that these opinions are balanced to get the sticker price. If the residential or commercial property languishes on the market, the bank will start dropping the price in incremental portions to discover a buyer.

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, just as they would for any other residential or commercial property. "We do this before the residential or commercial property is listed for sale, and as with any title search and examination, we're searching for 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 contract. If there are concerns that require to be resolved such as judgments, encumbrances, or liens, the title company will clear the title so that it's ready for a future purchaser. Once the residential or commercial property goes under agreement, all that's required is an upgrade to title.

Common Title Issues with REO Properties

Several common title concerns can emerge with REO residential or commercial properties. Tax redemption problems are especially common. In Alabama, taxes are paid in defaults. If they're not paid by December 31, they're subject to 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 celebration will acquire the tax certificate.

Underwood says, "If the county owns the tax certificate, fixing this is a quite uncomplicated procedure. But if it's owned by a third celebration, it can get complicated." To redeem from an individual, a bank is needed to pay the delinquent taxes, charge, interest, along with the value of any enhancements on the residential or commercial property. In some scenarios, there can be a prolonged settlement process to eliminate this tax lien.

Encroachment concerns are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't always clearly defined, which is why surveys are an essential part of the title search and test. Underwood explains, "An infringement is any structure that exists on a next-door 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 required.

And similar to 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 business experienced with REO residential or commercial properties understand exactly which problems to try to find and how to address them to present REO purchasers with a clear title.

Owner's title insurance secures property buyers from covert threats to their title after purchase. An improved owner's policy might be advised for individuals who buy an REO residential or commercial property. But despite the policy, REO residential or commercial property buyers need to always know laws worrying the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or beneficiaries of the debtor, can redeem or buy back a foreclosed residential or commercial property for as much as a year after the foreclosure sale. Underwood describes, "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 fairly rapidly in Alabama, the redemption duration is longer than in the majority of states. For mortgages originated before 2016, that redemption duration is a year. For mortgages originated after January 1, 2016, the redemption period is reduced to 180 days."

He continues, "Redemptions of foreclosed homes are very uncommon, however anyone purchasing an REO residential or commercial property requires to work with an attorney who understands and comprehends the law." These laws vary from one state to another and can alter, so constantly consult your closing attorney with specific questions about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption period ends requirement to be mindful that owner's title insurance will never ever provide affirmative coverage over the right of redemption. For cash buyers, this will be listed as an exception in Schedule B-2 of the owner's title insurance policy for the period of the redemption period.

Lenders supplying funding for REO purchases will normally need affirmative coverage for the remaining redemption period. Options, such as a bond, exist if the loan amount depends on 30% higher than the foreclosure bid, but purchasers should understand that affirmative protection for the staying redemption period only safeguards the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location till November 2021. As this moratorium has actually lifted, lenders have actually implemented loss mitigation procedures to keep individuals in their mortgages and help them retain their residential or commercial properties. However, if loss mitigation strategies are unsuccessful, the foreclosure process begins.

Underwood says, "Foreclosure starts are up 39% over the last quarter, and we're anticipating to see an increase in these as the year progresses. Starting in the 3rd quarter of this year, we'll begin to see a higher-than-normal portion of REO residential or commercial properties on the market. It will not be like it was in 2008, but 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 . As more of these residential or commercial properties appear in the MLS, real estate agents who understand the subtlety of purchasing a bank-owned home are much better geared up to serve their customers.

At South Oak Title and Closing, we enjoy partnering with real estate agents to help them much better serve their clients. Whether you have particular concerns about working with REO residential or commercial properties or just require 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 spent decades working with banks, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law practice. Jeff is married and has 2 daughters: one current graduate and one present trainee at Auburn University.

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

This post is meant to provide general details about REO residential or commercial properties in Alabama and must not be considered legal advice. Laws worrying REO residential or commercial properties likewise differ from state to state. Please consult your local attorney with concerns.
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