After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now growing. As an outcome, we can anticipate to see a boost in the number of REO residential or commercial properties readily available on the market in the coming months.

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

Our resident REO expert, Jeff Underwood, shares what real estate agents need 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 genuine estate that is owned by a bank or lending institution after stopping working to cost a foreclosure auction. But to really comprehend REO residential or commercial properties, you initially require to understand the foreclosure procedure.

The Foreclosure Process

When a specific with a mortgage stops making payments on that mortgage for any factor, the foreclosure process will start. The mortgage agreement will consist of language about when the bank can begin this procedure. Typically, a lender will not start the foreclosure process till the borrower has actually missed four consecutive payments.

Not all residential or commercial properties that enter the foreclosure process are actually foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, says, "In most cases, the mortgage is restored or the lending institution will work out loss mitigation options to prevent foreclosure. A debtor who submits for Chapter 13 insolvency will also stop the foreclosure procedure."

This process looks various in every state. Underwood discusses, "Alabama is a nonjudicial state. This means 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 informs the mortgagor that they remain in default and supplies info about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need lending institutions to submit a claim against 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 lending institution is the high-bidder or only 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 states, "Lenders aren't in the business of retaining 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 marketplace as an REO residential or commercial property." The lender 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 extremely similar to listing any other residential or commercial property, with a couple of crucial differences. There's still a sign in the backyard, a listing on the MLS, and photos of the residential or commercial property. The broker's objective is to discover a buyer for the residential or commercial property. But instead of an individual customer, 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 may 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 ensure things are working, but buyers won't find a staged, upgraded home."

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

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, just as they would for any other residential or commercial property. "We do this before the residential or commercial property is noted for sale, and just like any title search and test, we're looking for any potential concerns so that we can present a clear title to the purchaser," Underwood discusses.

If the title is clear, this file is prepared 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 business 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 occur with REO residential or commercial properties. Tax redemption issues are particularly common. In Alabama, taxes are paid in defaults. If they're not paid by December 31, they undergo 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 celebration will acquire the tax certificate.

Underwood says, "If the county owns the tax certificate, resolving this is a quite simple procedure. 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 overdue taxes, charge, interest, along with the worth of any enhancements on the residential or commercial property. In some circumstances, there can be a prolonged settlement process to remove this tax lien.

Encroachment issues are also typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly marked, which is why studies are a needed part of the title search and exam. Underwood discusses, "An infringement 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 complicated to clear these issues and in some cases, a quitclaim deed might be needed.

And just like any other residential or commercial property, we can discover any number 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 test. Title companies experienced with REO residential or commercial properties know exactly which problems to try to find 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 suggested for people who buy an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers should constantly understand laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or beneficiaries of the debtor, have the right to redeem or buy back a foreclosed residential or commercial property for approximately a year after the foreclosure sale. Underwood describes, "To redeem a foreclosed residential or commercial property, the redeeming party must pay the quantity of the foreclosure bid, interest, and other charges consisting of taxes, insurance, and repairs."

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

He continues, "Redemptions of foreclosed homes are very unusual, but anyone buying an REO residential or commercial property needs to deal with a lawyer who understands and understands the law." These laws vary from one state to another and can alter, so constantly consult your closing attorney with specific questions about the right of redemption.

Buyers acquiring an REO residential or commercial property before the redemption period expires need to be conscious that owner's title insurance coverage will never offer affirmative coverage over the right of redemption. For cash 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 offering financing for REO purchases will normally require affirmative protection for the remaining redemption duration. Options, such as a bond, exist if the loan quantity is up to 30% higher than the foreclosure bid, but purchasers should comprehend that affirmative coverage for the staying redemption period only secures the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place till November 2021. As this moratorium has lifted, lending institutions have actually executed loss mitigation procedures to keep people 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 says, "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 portion of REO residential or commercial properties on the marketplace. It won't be like 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 frightened by REO residential or commercial properties. As more of these residential or commercial properties appear in the MLS, real estate agents who understand the subtlety of purchasing 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 assist them better serve their clients. Whether you have particular concerns about dealing with REO residential or commercial properties or just need 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, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law office. Jeff is married and has 2 children: one current graduate and one current trainee at Auburn University.

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

This post is intended to supply general information about REO residential or commercial properties in Alabama and should not be thought about legal recommendations. Laws worrying REO residential or commercial properties likewise vary from one state to another. Please consult your regional attorney with questions.