After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now on the rise. As an outcome, we can anticipate to see an increase in the variety of REO residential or commercial properties offered on the marketplace in the coming months.

Whether you're a reasonably brand-new real estate agent or one who's remained in the service for a while, you probably could utilize a refresher on these bank-owned homes.

Our resident REO specialist, 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?

Basically, an REO residential or commercial property is realty that is owned by a bank or lender after failing to cost a foreclosure auction. But to truly comprehend REO residential or commercial properties, you initially need to comprehend the foreclosure procedure.

The Foreclosure Process

When a private with a mortgage stops making payments on that mortgage for any reason, the foreclosure process will begin. The mortgage agreement will include language about when the bank can begin this process. Typically, a lender won't begin the foreclosure procedure till the borrower has actually missed out on four successive payments.

Not all residential or commercial properties that get in the foreclosure procedure are actually foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, states, "In a lot of cases, the mortgage is renewed or the loan provider will work out loss mitigation alternatives to prevent foreclosure. A debtor who declares Chapter 13 personal bankruptcy will also stop the foreclosure process."

This process looks different in every state. Underwood discusses, "Alabama is a nonjudicial state. This suggests that the bank does not have to file a suit against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that informs the mortgagor that they remain in default and provides information about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, require loan providers to file a claim against the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also published in the county paper for 3 weeks. If the bank or lender is the high-bidder or only purchaser 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 business of retaining 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 business.

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 differences. There's still an indication in the yard, a listing on the MLS, and images of the residential or commercial property. The broker's objective is to find a purchaser for the residential or commercial property. But instead of a specific 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 might not look like a typical home that's market-ready. We had one REO residential or commercial property where the previous owner took whatever out of the house, consisting of sinks and banisters. The bank will work with a company to tidy things up and make certain things are working, however purchasers won't find a staged, upgraded home."

Lenders wish to sell REO residential or commercial properties for reasonable market worth as quickly as possible, so prices is figured out by obtaining a BPO, or broker price opinion. Two real estate agents will provide their opinion on the marketplace price of the residential or commercial property, and after that these opinions are balanced to acquire the sticker price. If the residential or commercial property languishes on the market, the bank will start dropping the rate in incremental percentages 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, simply 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 test, we're trying to find any prospective concerns so that we can provide a clear title to the purchaser," Underwood discusses.

If the title is clear, this file is ready for when the residential or commercial property goes under agreement. If there are issues that require to be addressed such as judgments, encumbrances, or liens, the title company will clear the title so that it's prepared for a future buyer. 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 common title concerns can occur with REO residential or commercial properties. Tax redemption problems are particularly typical. 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 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 acquire the tax certificate.

Underwood states, "If the county owns the tax certificate, resolving this is a pretty uncomplicated process. But if it's owned by a 3rd party, it can get complicated." To redeem from a specific, a bank is needed to pay the delinquent taxes, penalty, interest, in addition to the value of any enhancements on the residential or commercial property. In some scenarios, there can be an extended settlement procedure to remove this tax lien.

Encroachment concerns are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly delineated, which is why surveys are an essential part of the title search and exam. Underwood discusses, "An encroachment is any structure that exists on a neighbor's land or residential or commercial property - a fence, a shed, a mobile home, or perhaps part of a home 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 concerns. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can also be discovered during the title search and exam. Title business experienced with REO residential or commercial properties know precisely which concerns to try to find 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 advised for people who acquire an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers ought to constantly be aware of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or beneficiaries of the debtor, can redeem or purchase back a foreclosed residential or commercial property for approximately a year after the foreclosure sale. Underwood explains, "To redeem a foreclosed residential or commercial property, the redeeming celebration should pay the quantity of the foreclosure bid, interest, and other charges consisting of taxes, insurance coverage, and repairs."

"Because foreclosure sales can happen reasonably quickly in Alabama, the redemption period is longer than in most states. For mortgages came from before 2016, that redemption duration is a year. For mortgages originated after January 1, 2016, the redemption period is reduced to 180 days."

He continues, "Redemptions of foreclosed homes are extremely uncommon, but anybody buying an REO residential or commercial property needs to work with a lawyer who knows and understands the law." These laws vary from state to state and can alter, so always consult your closing lawyer with particular concerns about the right of redemption.

Buyers purchasing an REO residential or commercial property before the redemption period expires need to be aware that owner's title insurance coverage will never ever offer affirmative coverage over the right of redemption. For cash buyers, this will be noted as an exception in Schedule B-2 of the owner's title insurance coverage for the period of the redemption duration.

Lenders offering financing for REO purchases will normally need affirmative protection for the staying redemption duration. Options, such as a bond, exist if the loan amount is up to 30% greater than the foreclosure bid, but purchasers must understand that affirmative coverage for the remaining redemption duration just secures the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in place up until November 2021. As this moratorium has actually lifted, loan providers have carried out loss mitigation treatments to keep people in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation strategies are not successful, the foreclosure process starts.

Underwood states, "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 begin to see a higher-than-normal portion of REO residential or commercial properties on the marketplace. It will not resemble it was in 2008, however it will certainly be more than what we're used 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 nuance of purchasing a bank-owned home are much better equipped to serve their clients.

At South Oak Title and Closing, we enjoy partnering with real estate agents to assist them better serve their customers. Whether you have specific questions about dealing with REO residential or commercial properties or just need an REO professional 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 dealing with banks, lenders, and REO residential or commercial properties through his time leading the REO department at a Birmingham law practice. Jeff is married and has 2 children: one recent graduate and one existing student at Auburn University.

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

This post is planned to provide general info about REO residential or commercial properties in Alabama and need to not be thought about legal advice. Laws worrying REO residential or commercial properties also vary from one state to another. Please consult your local attorney with concerns.