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After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now on the rise. As a result, we can expect to see a boost in the variety of REO residential or commercial properties readily available on the marketplace in the coming months.

Whether you're a relatively brand-new real estate agent or one who's been in the company for a while, you probably might use a refresher on these bank-owned homes.

Our resident REO professional, Jeff Underwood, shares what real estate agents require to know 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 property 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 comprehend the foreclosure process.

The Foreclosure Process

When a specific with a mortgage stops paying on that mortgage for any reason, the foreclosure process will start. The mortgage agreement will include language about when the bank can begin this procedure. Typically, a lender won't start the foreclosure process until the borrower has missed out on 4 successive payments.

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

This procedure looks various in every state. Underwood discusses, "Alabama is a nonjudicial state. This means that the bank does not have to file a lawsuit 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 information about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require lending institutions to submit a suit versus the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are also released in the county paper for three weeks. If the bank or lender is the high-bidder or just 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 company of retaining 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 loan provider 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 very comparable to listing any other residential or commercial property, with a few essential distinctions. There's still a check in the backyard, a listing on the MLS, and images of the residential or commercial property. The broker's objective is to find a buyer for the residential or commercial property. But instead of a private 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 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, including sinks and banisters. The bank will employ a business to clean things up and make sure things are working, however purchasers will not discover a staged, upgraded home."

Lenders want to offer REO residential or commercial properties for reasonable market worth as rapidly as possible, so prices is determined by getting a BPO, or broker price viewpoint. Two real estate agents will provide their opinion on the market price of the residential or commercial property, and after that these opinions are balanced to get the list rate. If the residential or commercial property suffers on the marketplace, the bank will start dropping the price in incremental portions to find 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, 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 similar to any title search and exam, we're trying to find any potential issues so that we can present a clear title to the buyer," Underwood explains.

If the title is clear, this file is ready for when the residential or commercial property goes under agreement. If there are concerns that need to be attended to such as judgments, encumbrances, or liens, the title company will clear the title so that it's all set for a future purchaser. Once the residential or commercial property goes under contract, all that's needed is an upgrade to title.

Common Title Issues with REO Properties

Several common title problems can emerge with REO residential or commercial properties. Tax redemption concerns are especially common. In Alabama, taxes are paid in arrears. If they're not paid by December 31, they go through penalties and interest. If taxes are still unsettled by April, the county will have a tax sale in May. For the most part, the county is the high bidder. But in other cases, a third celebration will purchase the tax certificate.

Underwood says, "If the county owns the tax certificate, solving this is a pretty simple procedure. But if it's owned by a third celebration, it can get complicated." To redeem from a specific, a bank is required to pay the delinquent taxes, penalty, interest, as well as the value of any enhancements on the residential or commercial property. In some scenarios, there can be a prolonged settlement process to eliminate this tax lien.

Encroachment concerns are also typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly delineated, which is why surveys are a needed part of the title search and examination. Underwood describes, "An advancement 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 might be needed.

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 and test. Title business experienced with REO residential or commercial properties understand exactly which issues to search for and how to address them to present REO purchasers with a clear title.

Owner's title insurance coverage safeguards property buyers from surprise threats to their title after purchase. An improved owner's policy may be recommended for people who buy an REO residential or commercial property. But regardless of the policy, REO residential or commercial property purchasers must always understand laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or beneficiaries of the debtor, deserve to redeem or redeem 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 must pay the amount of the foreclosure bid, interest, and other charges consisting of taxes, insurance coverage, and repair work."

"Because foreclosure sales can take place relatively rapidly in Alabama, the redemption duration is longer than in many states. For mortgages stemmed before 2016, that redemption period is a year. For mortgages come from after January 1, 2016, the redemption period is shortened to 180 days."
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He continues, "Redemptions of foreclosed homes are very unusual, however anybody purchasing an REO residential or commercial property needs to work with a lawyer who understands and understands the law." These laws vary from one state to another and can change, so always consult your closing lawyer with specific concerns about the right of redemption.

Buyers purchasing an REO residential or commercial property before the redemption duration expires need to be conscious that owner's title insurance will never supply affirmative protection 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 plan throughout of the redemption duration.

Lenders providing funding for REO purchases will generally 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 bid, but purchasers need to comprehend that affirmative coverage for the remaining redemption period only secures the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in location till November 2021. As this moratorium has actually raised, loan providers have actually executed loss mitigation procedures to keep individuals in their mortgages and help them maintain their residential or commercial properties. However, if loss mitigation techniques are not successful, the foreclosure procedure begins.

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 percentage of REO residential or commercial properties on the market. It will not resemble it remained in 2008, however 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 buying 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 assist them much better serve their customers. Whether you have specific questions about dealing with REO residential or commercial properties or just 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 decades 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 married and has two children: one recent graduate and one existing student at Auburn University.
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Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.

This article is intended to provide basic details about REO residential or commercial properties in Alabama and must not be thought about legal recommendations. Laws concerning REO residential or commercial properties also vary from one state to another. Please consult your local lawyer with questions.