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

Whether you're a reasonably new real estate agent or one who's been in business for a while, you most likely might use a refresher on these bank-owned homes.

Our resident REO expert, 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?

Basically, an REO residential or commercial property is realty that is owned by a bank or lender after stopping working to cost a foreclosure auction. But to genuinely comprehend REO residential or commercial properties, you initially require to comprehend the foreclosure process.

The Foreclosure Process

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

Not all residential or commercial properties that enter the foreclosure procedure are actually foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, states, "In numerous cases, the mortgage is restored or the lender will work out loss mitigation options to avoid foreclosure. A debtor who applies for Chapter 13 insolvency will likewise halt the foreclosure procedure."

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

In Alabama, notices about the upcoming foreclosure sale are likewise released in the county newspaper for three weeks. If the bank or lender is the high-bidder or only 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 says, "Lenders aren't in business of retaining these residential or commercial properties. Their goal is to offer 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 referral for this residential or commercial property to both a genuine estate 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 listing any other residential or commercial property, with a few key differences. There's still a check in the backyard, a listing on the MLS, and photos 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 private client, the broker represents a lender. 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 whatever out of the house, including sinks and banisters. The bank will hire a business to clean things up and make sure things are working, however purchasers will not find a staged, updated home."

Lenders want to sell REO residential or commercial properties for fair market price as rapidly as possible, so rates is figured out by getting a BPO, or broker cost viewpoint. Two real estate agents will provide their viewpoint on the market cost of the residential or commercial property, and then these opinions are averaged to obtain the sale price. If the residential or commercial property languishes on the market, the bank will begin dropping the price in incremental portions to find a purchaser.

Title Process for REO residential or commercial properties

When the title company gets 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 listed for sale, and as with any title search and examination, we're trying to find any possible issues so that we can provide 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 issues that need to be resolved such as judgments, encumbrances, or liens, the title business will clear the title so that it's ready for a future buyer. Once the residential or commercial property goes under contract, all that's required is an upgrade to title.

Common Title Issues with REO Properties

Several common title concerns can occur 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'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 third party will buy the tax certificate.

Underwood says, "If the county owns the tax certificate, resolving this is a quite uncomplicated process. But if it's owned by a third party, it can get made complex." To redeem from an individual, a bank is required to pay the overdue taxes, penalty, interest, in addition to the worth of any enhancements on the residential or commercial property. In some situations, there can be an extended settlement process to remove this tax lien.

Encroachment problems are also typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly marked, which is why surveys are an essential part of the title search and test. Underwood discusses, "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 home or barn." It can be made complex to clear these concerns and in many cases, a quitclaim deed might be required.

And as with any other residential or commercial property, we can find any number 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 found throughout the title search and exam. 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 coverage safeguards homebuyers from hidden threats to their title after purchase. An enhanced owner's policy may be recommended for individuals who acquire an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers need to constantly know laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or beneficiaries of the debtor, can 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 needs to pay the quantity of the foreclosure bid, interest, and other charges consisting of taxes, insurance, and repairs."

"Because foreclosure sales can happen fairly quickly in Alabama, the redemption period is longer than in many 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 really rare, however anyone purchasing an REO residential or commercial property needs to work with a lawyer who understands and understands the law." These laws differ from one state to another and can change, so constantly consult your closing lawyer with specific questions about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption period expires requirement to be aware that owner's title insurance will never ever offer affirmative protection over the right of redemption. For money purchasers, this will be listed as an exception in Schedule B-2 of the owner's title insurance policy for the period of the redemption period.

Lenders providing funding for REO purchases will typically require affirmative coverage for the remaining redemption duration. Options, such as a bond, exist if the loan amount is up to 30% higher than the foreclosure quote, however purchasers ought to comprehend that affirmative protection for the remaining redemption period only secures the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in location until November 2021. As this moratorium has raised, lending institutions have actually carried out loss mitigation to keep people in their mortgages and help them retain their residential or commercial properties. However, if loss mitigation methods are unsuccessful, the foreclosure procedure begins.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're anticipating to see a boost in these as the year advances. Starting in the third 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 be like it remained 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 daunted 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 buying a bank-owned home are much better geared up to serve their customers.

At South Oak Title and Closing, we like partnering with real estate agents to help them better serve their clients. 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 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 two 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 intended to provide general information about REO residential or commercial properties in Alabama and must not be thought about legal recommendations. Laws worrying REO residential or commercial properties also differ from one state to another. Please consult your local lawyer with questions.