After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now rising. As an outcome, we can anticipate to see a boost in the number of REO residential or commercial properties offered 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 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?

Basically, an REO residential or commercial property is realty that is owned by a bank or lender after failing to sell at a foreclosure auction. But to genuinely understand REO residential or commercial properties, you first require to comprehend the foreclosure process.

The Foreclosure Process

When a private with a mortgage stops paying on that mortgage for any factor, the foreclosure process will begin. The mortgage contract will consist of language about when the bank can begin this process. Typically, a lender won't start the foreclosure procedure up until the debtor has missed out on 4 consecutive 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 most cases, the mortgage is reinstated or the lender will work out loss mitigation choices to avoid foreclosure. A debtor who declares Chapter 13 bankruptcy will likewise halt the foreclosure process."

This process looks different in every state. Underwood explains, "Alabama is a nonjudicial state. This indicates that the bank does not have to submit a suit against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notices that informs the mortgagor that they remain in default and provides info about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require lenders to submit a lawsuit against the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are likewise released in the county paper for 3 weeks. If the bank or lending institution is the high-bidder or only buyer at the foreclosure sale, this residential or commercial property ends up being "realty owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood states, "Lenders aren't in the company of maintaining these residential or commercial properties. Their goal 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 really comparable to noting any other residential or commercial property, with a couple of crucial 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 customer, the broker represents a lending institution. 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 work with a business to clean things up and make certain things are working, however purchasers will not find a staged, upgraded home."

Lenders wish to sell REO residential or commercial properties for fair market price as quickly as possible, so rates is determined by acquiring a BPO, or broker rate opinion. Two real estate agents will give their opinion on the marketplace cost of the residential or commercial property, and after that these opinions are averaged to acquire the sticker price. If the residential or commercial property languishes on the market, the bank will begin dropping the rate in incremental portions to find a buyer.

Title Process for REO residential or commercial properties

When the title company receives the recommendation 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 as with any title search and examination, we're trying to find any potential issues so that we can provide 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 contract. If there are problems that need 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 contract, all that's needed is an update to title.

Common Title Issues with REO Properties

Several typical title concerns can develop with REO residential or commercial properties. Tax redemption concerns are especially typical. 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. Most of the times, the county is the high bidder. But in other cases, a 3rd party will acquire the tax certificate.

Underwood says, "If the county owns the tax certificate, solving this is a quite straightforward procedure. But if it's owned by a 3rd party, it can get made complex." To redeem from a specific, a bank is needed to pay the overdue taxes, charge, interest, in addition to the value of any improvements on the residential or commercial property. In some scenarios, there can be a prolonged settlement procedure to remove this tax lien.

Encroachment problems are also typical with REO residential or commercial properties. Residential or commercial property lines aren't always plainly defined, which is why surveys are an essential part of the title search and exam. Underwood discusses, "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 issues and in some cases, a quitclaim deed might be required.

And similar to any other residential or commercial property, we can discover any variety 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 found throughout the title search and exam. Title business experienced with REO residential or commercial properties know precisely which issues to look for and how to resolve them to present with a clear title.

Owner's title insurance coverage secures property buyers from covert dangers to their title after purchase. A boosted owner's policy may be suggested for people who buy an REO residential or commercial property. But regardless of the policy, REO residential or commercial property buyers should constantly understand 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 up to a year after the foreclosure sale. Underwood explains, "To redeem a foreclosed residential or commercial property, the redeeming celebration must pay the quantity of the foreclosure bid, interest, and other charges including taxes, insurance coverage, and repair work."

"Because foreclosure sales can take place relatively quickly in Alabama, the redemption duration is longer than in the majority of states. For mortgages came from 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 extremely unusual, but anyone buying an REO residential or commercial property needs to deal with a lawyer who knows and understands the law." These laws vary from one state to another and can change, so always consult your closing attorney with particular questions about the right of redemption.

Buyers acquiring an REO residential or commercial property before the redemption duration ends need to be aware that owner's title insurance will never ever provide affirmative coverage 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 duration.

Lenders offering financing for REO purchases will generally need affirmative coverage for the staying redemption duration. Options, such as a bond, exist if the loan quantity is up to 30% greater than the foreclosure bid, however buyers should comprehend that affirmative coverage for the remaining redemption period just safeguards the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location up until November 2021. As this moratorium has actually raised, lenders have carried out loss mitigation treatments to keep people in their mortgages and assist them retain their residential or commercial properties. However, if loss mitigation strategies 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 start to see a higher-than-normal percentage of REO residential or commercial properties on the marketplace. It won't resemble it remained in 2008, however 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 comprehend the subtlety of buying a bank-owned home are much better geared up to serve their customers.

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 simply require 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 invested years working with banks, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law firm. Jeff is wed and has two children: one recent graduate and one present student at Auburn University.
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Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.

This short article is planned to provide basic details about REO residential or commercial properties in Alabama and ought to not be considered legal guidance. Laws concerning REO residential or commercial properties also differ from state to state. Please consult your local attorney with concerns.