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After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now increasing. As a result, we can anticipate 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 reasonably new real estate agent or one who's been in business for a while, you probably might utilize a refresher on these bank-owned homes.
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Our resident REO expert, Jeff Underwood, shares what real estate agents need to understand about REO residential or commercial properties in Alabama.
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What is an REO residential or commercial property?

Put simply, an REO residential or commercial property is real estate that is owned by a bank or lending institution after failing to offer at a foreclosure auction. But to truly comprehend REO residential or commercial properties, you first require to comprehend the foreclosure procedure.

The Foreclosure Process

When an individual with a mortgage stops paying on that mortgage for any factor, the foreclosure procedure will start. The mortgage arrangement will consist of language about when the bank can start this procedure. Typically, a loan provider will not begin the foreclosure procedure up until the debtor has missed four successive payments.

Not all residential or commercial properties that enter the foreclosure procedure are really foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, states, "In many cases, the mortgage is reinstated or the lender will exercise loss mitigation options to avoid foreclosure. A debtor who applies for Chapter 13 bankruptcy will also stop the foreclosure process."

This process looks different in every state. Underwood explains, "Alabama is a nonjudicial state. This implies that the bank does not need to submit a suit against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notices that notifies the mortgagor that they are in default and supplies info about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, require loan providers to file a suit versus the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are likewise published in the county paper for three weeks. If the bank or loan provider is the high-bidder or just purchaser at the foreclosure sale, this residential or commercial property ends up being "property owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in business 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 market 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 really similar to noting any other or commercial property, with a couple of essential 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 goal is to discover a purchaser for the residential or commercial property. But instead 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 may not look like a common home that's market-ready. We had one REO residential or commercial property where the previous owner took whatever out of the home, consisting of sinks and banisters. The bank will hire a company to tidy things up and make sure things are working, but buyers will not discover a staged, upgraded home."

Lenders wish to sell REO residential or commercial properties for fair market price as quickly as possible, so rates is identified by obtaining a BPO, or broker cost opinion. Two real estate agents will offer their opinion on the market cost of the residential or commercial property, and after that these opinions are balanced to get the sticker price. If the residential or commercial property suffers 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 business gets the recommendation 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 trying to find any potential problems so that we can present a clear title to the purchaser," Underwood discusses.

If the title is clear, this file is all set for when the residential or commercial property goes under contract. If there are problems that require to be dealt with such as judgments, encumbrances, or liens, the title company will clear the title so that it's all set for a future buyer. 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 typical title concerns can develop with REO residential or commercial properties. Tax redemption problems are particularly common. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they undergo charges and interest. If taxes are still unpaid 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 states, "If the county owns the tax certificate, resolving this is a quite uncomplicated process. But if it's owned by a 3rd party, it can get made complex." To redeem from an individual, a bank is needed to pay the delinquent 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 eliminate this tax lien.

Encroachment concerns are likewise common with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly defined, which is why surveys are an essential part of the title search and examination. 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, and even part of a home or barn." It can be made complex to clear these issues and sometimes, a quitclaim deed might be required.

And just like any other residential or commercial property, we can find any number of other title issues. 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 precisely which issues to search for and how to resolve them to present REO purchasers with a clear title.

Owner's title insurance coverage secures property buyers from concealed dangers to their title after purchase. An enhanced owner's policy may be advised for people who buy an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers should always understand laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or successors of the debtor, deserve to redeem or purchase back a foreclosed residential or commercial property for up to a year after the foreclosure sale. Underwood describes, "To redeem a foreclosed residential or commercial property, the redeeming celebration must pay the amount of the foreclosure bid, interest, and other charges consisting of taxes, insurance, and repair work."

"Because foreclosure sales can happen reasonably rapidly in Alabama, the redemption period is longer than in the majority of states. For mortgages stemmed before 2016, that redemption period is a year. For mortgages stemmed after January 1, 2016, the redemption period is shortened to 180 days."

He continues, "Redemptions of foreclosed homes are really unusual, but anyone buying an REO residential or commercial property needs 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 lawyer with specific questions about the right of redemption.

Buyers purchasing an REO residential or commercial property before the redemption duration ends need to be conscious that owner's title insurance will never ever supply affirmative protection over the right of redemption. For money purchasers, this will be noted as an exception in Schedule B-2 of the owner's title insurance policy throughout of the redemption period.

Lenders offering financing for REO purchases will usually require affirmative coverage for the remaining redemption period. Options, such as a bond, exist if the loan amount depends on 30% greater than the foreclosure quote, but buyers should understand that affirmative protection for the remaining redemption period just secures the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location until November 2021. As this moratorium has actually raised, lenders have executed loss mitigation procedures to keep individuals in their mortgages and assist them keep their residential or commercial properties. However, if loss mitigation techniques are unsuccessful, the foreclosure procedure starts.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting 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 portion of REO residential or commercial properties on the market. It won't resemble it was in 2008, however it will definitely 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 comprehend the subtlety of purchasing a bank-owned home are much better equipped to serve their customers.

At South Oak Title and Closing, we like partnering with real estate agents to help them better serve their customers. Whether you have particular concerns about working with REO residential or commercial properties or simply need 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 years dealing with banks, loan providers, and REO residential or commercial properties through his time leading the REO department at a Birmingham law practice. Jeff is married and has 2 daughters: one current graduate and one present student at Auburn University.

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

This short article is meant to offer general information about REO residential or commercial properties in Alabama and ought to not be considered legal suggestions. Laws worrying REO residential or commercial properties also vary from one state to another. Please consult your regional attorney with concerns.