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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 number of REO residential or commercial properties readily available on the marketplace in the coming months.

Whether you're a reasonably new real estate agent or one who's been 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 require to learn 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 sell at a foreclosure auction. But to truly understand REO residential or commercial properties, you initially require to understand the foreclosure procedure.

The Foreclosure Process

When a private with a mortgage stops paying on that mortgage for any reason, the foreclosure procedure will start. The mortgage contract will include language about when the bank can begin this process. Typically, a loan provider won't begin the foreclosure process up until the has missed four consecutive payments.

Not all residential or commercial properties that go into the foreclosure process are in fact foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, states, "In lots of cases, the mortgage is renewed or the lender will work out loss mitigation alternatives to avoid foreclosure. A debtor who submits for Chapter 13 bankruptcy will also stop the foreclosure process."

This procedure looks various in every state. Underwood discusses, "Alabama is a nonjudicial state. This implies that the bank does not have to submit a claim against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that notifies the mortgagor that they remain in default and offers info about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need lending institutions 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 loan provider is the high-bidder or just buyer at the foreclosure sale, this residential or commercial property becomes "property owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in the business of retaining 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 market as an REO residential or commercial property." The loan provider sends a referral for this residential or commercial property to both a property brokerage and a title company.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is really similar to listing any other residential or commercial property, with a couple of crucial differences. There's still a check in the backyard, a listing on the MLS, and images of the residential or commercial property. The broker's goal is to discover a purchaser for the residential or commercial property. But instead of a private 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 may not look like a normal home that's market-ready. We had one REO residential or commercial property where the previous owner took whatever out of the home, including sinks and banisters. The bank will hire a company to tidy things up and make certain things are working, however purchasers will not discover a staged, upgraded home."

Lenders want to sell REO residential or commercial properties for reasonable market price as quickly as possible, so rates is determined by obtaining a BPO, or broker rate opinion. Two real estate agents will offer their viewpoint on the market rate of the residential or commercial property, and after that these opinions are balanced to obtain the sale price. If the residential or commercial property languishes on the marketplace, the bank will begin dropping the rate in incremental portions to discover a purchaser.

Title Process for REO residential or commercial properties

When the title company receives the referral for an REO residential or commercial property, they will start 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 similar to any title search and exam, we're searching for any prospective concerns so that we can present a clear title to the purchaser," Underwood explains.

If the title is clear, this file is prepared for when the residential or commercial property goes under agreement. If there are problems that need to be dealt with 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 agreement, all that's needed 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 especially typical. In Alabama, taxes are paid in arrears. If they're not paid by December 31, they're subject to penalties 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 says, "If the county owns the tax certificate, resolving this is a pretty straightforward procedure. But if it's owned by a third party, it can get complicated." To redeem from an individual, a bank is needed to pay the overdue taxes, penalty, interest, along with the value of any enhancements on the residential or commercial property. In some circumstances, there can be an extended settlement procedure to remove this tax lien.

Encroachment issues are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly defined, which is why surveys are a required part of the title search and exam. Underwood describes, "An advancement is any structure that exists on a next-door 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 issues and in some cases, a quitclaim deed may be required.

And just like any other residential or commercial property, we can find any variety of other title issues. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can likewise be found during the title search and test. Title companies experienced with REO residential or commercial properties understand exactly which issues to look for and how to resolve them to present REO buyers with a clear title.

Owner's title insurance secures homebuyers from surprise dangers to their title after purchase. An improved owner's policy might be suggested for people who acquire an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers should always be aware of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or heirs of the debtor, can redeem or purchase back a foreclosed residential or commercial property for up to a year after the foreclosure sale. Underwood discusses, "To redeem a foreclosed residential or commercial property, the redeeming celebration must pay the amount of the foreclosure quote, interest, and other charges including taxes, insurance coverage, and repairs."

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

He continues, "Redemptions of foreclosed homes are really uncommon, however anyone acquiring an REO residential or commercial property needs to deal with an attorney who knows and comprehends the law." These laws vary from state to state and can change, so constantly consult your closing lawyer with particular concerns about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption period expires requirement to be aware that owner's title insurance coverage 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 providing funding for REO purchases will normally require affirmative protection for the remaining redemption period. Options, such as a bond, exist if the loan amount is up to 30% greater than the foreclosure quote, however buyers must comprehend that affirmative protection for the staying redemption period only safeguards the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location till November 2021. As this moratorium has lifted, loan providers have actually implemented loss mitigation procedures to keep individuals in their mortgages and help them keep their residential or commercial properties. However, if loss mitigation strategies are not successful, 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 begin to see a higher-than-normal portion of REO residential or commercial properties on the market. It won't resemble it remained in 2008, but it will definitely be more than what we're utilized to seeing."

There's no need 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 nuance of buying a bank-owned home are better geared up to serve their clients.

At South Oak Title and Closing, we enjoy partnering with real estate agents to help them much better serve their customers. Whether you have particular questions about dealing with REO residential or commercial properties or just need an REO expert 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 invested years dealing 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 children: one current graduate and one current student at Auburn University.

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

This article is intended to supply general information about REO residential or commercial properties in Alabama and should not be considered legal suggestions. Laws worrying REO residential or commercial properties likewise differ from one state to another. Please consult your local attorney with concerns.
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