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

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.

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 realty that is owned by a bank or lending institution after failing to offer at a foreclosure auction. But to genuinely comprehend REO residential or commercial properties, you first require to comprehend the foreclosure process.

The Foreclosure Process

When a specific with a mortgage stops paying on that for any factor, the foreclosure procedure will start. The mortgage agreement will include language about when the bank can start this procedure. Typically, a lending institution will not begin the foreclosure process until the borrower has actually missed out on 4 successive payments.

Not all residential or commercial properties that enter the foreclosure process are really foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, states, "In many cases, the mortgage is renewed or the lending institution will work out loss mitigation choices to avoid foreclosure. A debtor who files for Chapter 13 personal bankruptcy will likewise halt the foreclosure process."

This process looks various in every state. Underwood discusses, "Alabama is a nonjudicial state. This means that the bank does not have to file a lawsuit against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notices that notifies the mortgagor that they remain in default and provides details about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, require lenders to file a claim against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are also published in the county paper for three weeks. If the bank or lending institution is the high-bidder or just 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 service of keeping these residential or commercial properties. Their objective 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 lending institution sends a recommendation for this residential or commercial property to both a realty brokerage and a title company.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is very similar to noting any other residential or commercial property, with a couple of key differences. There's still a check in the lawn, a listing on the MLS, and images of the residential or commercial property. The broker's objective is to discover a buyer for the residential or commercial property. But rather of a private 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 common home that's market-ready. We had one REO residential or commercial property where the previous owner took everything out of the home, including sinks and banisters. The bank will hire a business to tidy things up and ensure things are working, but buyers won't find a staged, updated home."

Lenders desire to sell REO residential or commercial properties for reasonable market price as rapidly as possible, so prices is determined by obtaining a BPO, or broker price opinion. Two real estate agents will provide their opinion on the marketplace cost of the residential or commercial property, and then these viewpoints are averaged to obtain the sticker price. If the residential or commercial property languishes on the market, the bank will begin dropping the price in incremental percentages to discover a purchaser.

Title Process for REO residential or commercial properties

When the title company gets 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 as with any title search and test, we're looking for any prospective issues so that we can present a clear title to the buyer," Underwood discusses.

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

Common Title Issues with REO Properties

Several common title problems can arise with REO residential or commercial properties. Tax redemption problems are particularly typical. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they're subject to charges and interest. If taxes are still unsettled 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 buy the tax certificate.

Underwood states, "If the county owns the tax certificate, fixing this is a quite uncomplicated procedure. But if it's owned by a 3rd celebration, it can get complicated." To redeem from a private, a bank is required to pay the delinquent taxes, penalty, interest, as well as the worth of any improvements on the residential or commercial property. In some situations, there can be an extended settlement process to eliminate this tax lien.

Encroachment concerns are also common with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly defined, which is why studies are a needed part of the title search and exam. 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, or even part of a house or barn." It can be made complex to clear these problems and in some cases, a quitclaim deed might be needed.

And just like any other residential or commercial property, we can find any variety of other title problems. Missing deeds, deeds in the back chain of title that do not have marital status, and other encumbrances can also be found throughout the title search and examination. Title business experienced with REO residential or commercial properties know precisely which issues to try to find and how to resolve them to present REO purchasers with a clear title.

Owner's title insurance coverage secures property buyers from hidden dangers to their title after purchase. A boosted owner's policy may be advised for individuals who purchase an REO residential or commercial property. But despite the policy, REO residential or commercial property buyers must always know laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or successors of the debtor, can 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 party should pay the quantity of the foreclosure quote, interest, and other charges consisting of taxes, insurance, and repair work."

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

He continues, "Redemptions of foreclosed homes are really unusual, but anyone purchasing an REO residential or commercial property needs to deal with an attorney who understands and comprehends the law." These laws differ from state to state and can alter, 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 period ends requirement to be conscious that owner's title insurance will never supply affirmative protection 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 coverage policy throughout of the redemption duration.

Lenders offering financing for REO purchases will typically need affirmative coverage for the staying redemption period. Options, such as a bond, exist if the loan quantity is up to 30% greater than the foreclosure quote, but buyers need to understand that affirmative coverage for the staying redemption period only safeguards the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in location up until November 2021. As this moratorium has actually lifted, lenders have actually executed loss mitigation treatments to keep individuals in their mortgages and help them keep 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 anticipating to see a boost in these as the year advances. 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 won't resemble it was in 2008, but it will definitely be more than what we're used to seeing."

There's no requirement 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 better equipped to serve their clients.

At South Oak Title and Closing, we like partnering with real estate agents to assist them better serve their clients. Whether you have specific questions 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 invested decades working with banks, lenders, and REO residential or commercial properties through his time leading the REO division at a Birmingham law practice. Jeff is married and has two daughters: one current 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 supply general details about REO residential or commercial properties in Alabama and ought to not be thought about legal guidance. Laws concerning REO residential or commercial properties likewise differ from one state to another. Please consult your regional attorney with questions.
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