After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now on the rise. As an outcome, we can expect to see an increase in the variety 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 the business for a while, you probably might utilize a refresher on these bank-owned homes.

Our resident REO professional, Jeff Underwood, shares what real estate agents require to understand about REO residential or commercial properties in Alabama.

What is an REO residential or commercial property?

Put simply, 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 first require to understand the foreclosure process.

The Foreclosure Process

When an individual with a mortgage stops paying on that mortgage for any factor, the foreclosure procedure will start. The mortgage contract will include language about when the bank can begin this process. Typically, a lender will not start the foreclosure process up until the customer has missed out on 4 successive payments.

Not all residential or commercial properties that enter the foreclosure process are actually foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, says, "Oftentimes, the mortgage is restored or the loan provider will work out loss mitigation alternatives to avoid foreclosure. A debtor who submits for Chapter 13 personal bankruptcy will also halt the foreclosure process."

This procedure looks various in every state. Underwood explains, "Alabama is a nonjudicial state. This indicates that the bank does not have to file a suit versus the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that informs the mortgagor that they remain in default and supplies details about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, require lending institutions to file a lawsuit against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are also released in the county newspaper 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 "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 retaining these residential or commercial properties. Their objective is to offer the home and recoup their losses from the foreclosure. After the foreclosure sale, the residential or commercial property will go on the marketplace as an REO residential or commercial property." The loan provider sends out a recommendation for this residential or commercial property to both a property brokerage and a title business.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is extremely similar to noting any other residential or commercial property, with a few crucial distinctions. There's still a sign in the backyard, a listing on the MLS, and images of the residential or commercial property. The broker's goal is to discover a buyer for the residential or commercial property. But rather 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 states, "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 everything out of the home, consisting of sinks and banisters. The bank will work with a company to clean things up and make sure things are working, however buyers won't find a staged, updated home."

Lenders desire to sell REO residential or commercial properties for fair market price as quickly as possible, so pricing is determined by acquiring a BPO, or broker rate viewpoint. Two real estate agents will offer their opinion on the marketplace rate of the residential or commercial property, and then these viewpoints are balanced to acquire the list rate. If the residential or commercial property suffers on the market, the bank will begin dropping the cost in incremental portions to find a buyer.

Title Process for REO residential or commercial properties

When the title business receives the referral for an REO residential or commercial property, they will initiate 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 examination, we're looking for any prospective concerns 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 agreement. If there are concerns that need to be addressed such as judgments, encumbrances, or liens, the title company will clear the title so that it's prepared for a future purchaser. Once the residential or commercial property goes under agreement, all that's required is an update to title.

Common Title Issues with REO Properties

Several common title issues can arise with REO residential or commercial properties. Tax redemption concerns are particularly typical. In Alabama, taxes are paid in defaults. If they're not paid by December 31, they go through 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 acquire the tax certificate.

Underwood states, "If the county owns the tax certificate, resolving this is a quite simple process. But if it's owned by a 3rd party, it can get complicated." To redeem from an individual, a bank is needed to pay the delinquent taxes, charge, interest, along with the worth of any improvements on the residential or commercial property. In some situations, there can be an extended settlement procedure to eliminate this tax lien.

Encroachment concerns are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly marked, which is why studies are a necessary 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 even part of a house or barn." It can be complicated to clear these problems and in many cases, a quitclaim deed may be required.

And similar to any other residential or commercial property, we can find any variety of other title problems. Missing deeds, deeds in the back chain of title that do not have marital status, and other encumbrances can likewise be discovered during the title search and exam. Title companies experienced with REO residential or commercial properties understand exactly which concerns to search for and how to resolve them to present REO buyers with a clear title.

Owner's title insurance secures homebuyers from covert dangers to their title after purchase. An improved owner's policy might be recommended for individuals who acquire an REO residential or commercial property. But no matter the policy, REO residential or commercial property purchasers ought to constantly know 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 approximately a year after the foreclosure sale. Underwood explains, "To redeem a foreclosed residential or commercial property, the redeeming party needs to pay the amount of the foreclosure bid, interest, and other charges consisting of taxes, insurance, and repairs."

"Because foreclosure sales can occur relatively 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 originated after January 1, 2016, the redemption duration is reduced to 180 days."

He continues, "Redemptions of foreclosed homes are extremely unusual, but anybody purchasing an REO residential or commercial property requires to deal with a lawyer who understands and comprehends the law." These laws differ from one state to another and can alter, so constantly consult your closing attorney with specific concerns about the right of redemption.

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

Lenders providing financing for REO purchases will generally require affirmative coverage for the staying redemption period. Options, such as a bond, exist if the loan amount depends on 30% greater than the foreclosure bid, however buyers need to comprehend that affirmative protection for the remaining redemption duration only secures the loan provider.

The Future of REO Properties

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

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see a boost in these as the year progresses. 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 marketplace. It won't resemble it remained in 2008, but it will certainly be more than what we're utilized to seeing."

There's no requirement for real estate agents to be frightened 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 better equipped to serve their customers.

At South Oak Title and Closing, we enjoy partnering with real estate agents to help them much better serve their customers. Whether you have specific concerns 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 actually spent years working with banks, lending institutions, and REO residential or commercial properties through his time leading the REO department at a Birmingham law office. Jeff is wed and has two daughters: one current graduate and one present trainee at Auburn University.

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

This article is planned to offer general info about REO residential or commercial properties in Alabama and need to not be considered legal guidance. Laws worrying REO residential or commercial properties likewise differ from state to state. Please consult your local attorney with concerns.