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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 anticipate to see a boost in the variety of REO residential or commercial properties readily available on the market in the coming months.
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Whether you're a fairly brand-new real estate agent or one who's remained in business for a while, you most likely could utilize 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 realty that is owned by a bank or loan provider after stopping working to cost a foreclosure auction. But to genuinely understand REO residential or commercial properties, you initially require to comprehend the foreclosure process.

The Foreclosure Process

When a private with a mortgage stops making payments on that mortgage for any factor, the foreclosure process will begin. The mortgage arrangement will include language about when the bank can start this process. Typically, a lender will not begin the foreclosure procedure till the debtor has actually missed out on four successive payments.

Not all residential or commercial properties that enter the foreclosure procedure are in fact foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, says, "In numerous cases, the mortgage is renewed or the lender will exercise loss mitigation options to prevent foreclosure. A debtor who declares Chapter 13 insolvency will likewise stop the foreclosure process."

This process looks various in every state. Underwood explains, "Alabama is a nonjudicial state. This means that the bank does not need to file a claim versus the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that notifies the mortgagor that they are in default and offers information about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need lenders to file a suit versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are likewise released in the county paper for three weeks. If the bank or lender is the high-bidder or just buyer at the foreclosure sale, this residential or commercial property ends up being "real 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 lender sends out 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 listing any other residential or commercial property, with a couple of key distinctions. There's still a check in the yard, a listing on the MLS, and photos of the residential or commercial property. The broker's objective is to find a buyer for the residential or commercial property. But rather of a specific client, the broker represents a lender. 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 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 hire a business to tidy things up and make sure things are working, however buyers won't find a staged, updated home."

Lenders wish to sell REO residential or commercial properties for reasonable market price as quickly as possible, so pricing is identified by getting a BPO, or broker price opinion. Two real estate agents will offer their opinion on the marketplace price 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 market, the bank will begin dropping the price in incremental portions to discover 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 examination, we're trying to find any prospective concerns so that we can present a clear title to the purchaser," Underwood discusses.

If the title is clear, this file is prepared for when the residential or commercial property goes under contract. If there are issues 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 contract, all that's required is an update 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 subject to charges and interest. If taxes are still overdue 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 pretty simple procedure. But if it's owned by a third celebration, it can get complicated." To redeem from a specific, a bank is needed to pay the overdue taxes, charge, interest, as well as the value of any enhancements on the residential or commercial property. In some circumstances, 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 clearly marked, which is why surveys are an essential part of the title search and test. Underwood describes, "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 complicated to clear these problems 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 problems. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can likewise be found throughout the title search and exam. Title companies experienced with REO residential or commercial properties know exactly which problems to search for and how to resolve them to present REO buyers with a clear title.

Owner's title insurance coverage safeguards homebuyers from covert dangers to their title after purchase. An improved owner's policy may be recommended for individuals who buy an REO residential or commercial property. But no matter the policy, REO residential or commercial property buyers should constantly understand laws worrying 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 as much as a year after the foreclosure sale. Underwood explains, "To redeem a foreclosed residential or commercial property, the redeeming party must pay the amount of the foreclosure quote, interest, and other charges including taxes, insurance coverage, and repair work."

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

He continues, "Redemptions of foreclosed homes are extremely uncommon, however anyone acquiring an REO residential or commercial property requires to work with a lawyer who knows and comprehends the law." These laws vary from one state to another and can change, so always consult your closing lawyer with particular questions about the right of redemption.

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

Lenders providing funding for REO purchases will generally require affirmative protection for the staying redemption duration. Options, such as a bond, exist if the loan amount depends on 30% higher than the foreclosure quote, however buyers should comprehend that affirmative protection for the remaining redemption period just protects the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in place till November 2021. As this moratorium has raised, lending institutions have actually implemented loss mitigation procedures to keep individuals in their mortgages and help them maintain their residential or commercial properties. However, if loss mitigation techniques are unsuccessful, the foreclosure procedure starts.

Underwood says, "Foreclosure starts are up 39% over the last quarter, and we're anticipating to see an increase in these as the year advances. Starting in the 3rd quarter of this year, we'll start to see a higher-than-normal percentage of REO residential or commercial properties on the market. It will not be like it was in 2008, however it will certainly 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 understand the subtlety of purchasing a bank-owned home are better equipped to serve their customers.

At South Oak Title and Closing, we love partnering with real estate agents to assist them much better serve their clients. Whether you have particular questions about dealing with REO residential or commercial properties or just require an REO professional in your corner, we're here for you. Contact us with your questions today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has actually spent decades dealing with banks, lenders, and REO residential or commercial properties through his time leading the REO division at a Birmingham law firm. Jeff is married and has 2 daughters: one recent graduate and one existing student at Auburn University.

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 need to not be thought about legal suggestions. Laws worrying REO residential or commercial properties also differ from state to state. Please consult your regional attorney with concerns.
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