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

Whether you're a reasonably brand-new real estate agent or one who's remained in 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 property that is owned by a bank or lending institution after failing to sell at a foreclosure auction. But to genuinely understand REO residential or commercial properties, you first need to comprehend the foreclosure procedure.

The Foreclosure Process

When an individual with a mortgage stops making payments on that mortgage for any factor, the foreclosure procedure will begin. The mortgage arrangement will consist of language about when the bank can begin this procedure. Typically, a lending institution will not begin the foreclosure procedure till the borrower has missed 4 successive payments.

Not all residential or commercial properties that go into the foreclosure process are actually foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, states, "In most cases, the mortgage is restored or the loan provider will work out loss mitigation options to prevent foreclosure. A debtor who submits for Chapter 13 bankruptcy will likewise halt the foreclosure process."

This procedure looks different in every state. Underwood describes, "Alabama is a nonjudicial state. This means that the bank does not need to submit a claim versus the defaulted mortgagor to foreclose. Instead, the bank sends a series of notices that notifies the mortgagor that they are in default and provides info about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require lenders to submit a claim against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are also published in the county paper for 3 weeks. If the bank or lending institution 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 keeping 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 referral for this residential or commercial property to both a real 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 couple of essential differences. There's still an indication in the backyard, a listing on the MLS, and images of the residential or commercial property. The broker's objective is to discover a purchaser for the residential or commercial property. But rather of a private 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 whatever out of the house, consisting of sinks and banisters. The bank will employ a business to clean things up and make sure things are working, but purchasers won't find a staged, updated home."

Lenders wish to sell REO residential or commercial properties for fair market worth as quickly as possible, so pricing is figured out by getting a BPO, or broker cost viewpoint. Two real estate agents will offer their viewpoint on the market cost of the residential or commercial property, and after that these viewpoints are averaged to get the sticker price. If the residential or commercial property suffers on the market, the bank will start dropping the cost in incremental portions to discover a purchaser.

Title Process for REO residential or commercial properties

When the title business gets the recommendation 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 listed for sale, and similar to any title search and examination, we're trying to find any prospective problems so that we can present a clear title to the purchaser," Underwood explains.

If the title is clear, this file is ready for when the residential or commercial property goes under contract. 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 all set for a future purchaser. Once the residential or commercial property goes under agreement, all that's needed is an update to title.

Common Title Issues with REO Properties

Several typical title problems can emerge with REO residential or commercial properties. Tax redemption problems are particularly common. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they go through penalties and interest. If taxes are still overdue by April, the county will have a tax sale in May. Most of the times, the county is the high bidder. But in other cases, a third party will purchase the tax certificate.

Underwood says, "If the county owns the tax certificate, resolving this is a pretty simple procedure. But if it's owned by a third party, it can get made complex." To redeem from an individual, a bank is needed to pay the delinquent taxes, penalty, interest, as well as 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 concerns are also typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly delineated, which is why studies are a necessary part of the title search and exam. Underwood explains, "An encroachment 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 house or barn." It can be complicated to clear these issues and in many cases, a quitclaim deed may be required.

And just like 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 found throughout the title search and exam. Title companies experienced with REO residential or commercial properties know exactly which issues to look for and how to resolve them to present REO buyers with a clear title.

Owner's title insurance secures property buyers from surprise dangers to their title after purchase. A boosted owner's policy might be suggested for individuals who buy an REO residential or commercial property. But regardless of the policy, REO residential or commercial property purchasers need to always be mindful of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or heirs of the debtor, deserve to redeem or purchase back a foreclosed residential or commercial property for as much as a year after the foreclosure sale. Underwood explains, "To redeem a foreclosed residential or commercial property, the redeeming party should pay the amount of the foreclosure quote, interest, and other charges including taxes, insurance, and repair work."

"Because foreclosure sales can take place fairly rapidly in Alabama, the redemption period is longer than in many states. For mortgages stemmed before 2016, that redemption duration 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 very rare, but anybody purchasing an REO residential or commercial property requires to deal with an attorney who understands and comprehends the law." These laws differ from state to state 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 duration ends requirement to be mindful that owner's title insurance coverage will never ever supply affirmative protection over the right of redemption. For cash purchasers, this will be noted as an exception in Schedule B-2 of the owner's title insurance coverage for the duration of the redemption period.

Lenders supplying funding for REO purchases will usually need affirmative coverage for the remaining redemption duration. Options, such as a bond, exist if the loan quantity depends on 30% greater than the foreclosure bid, but purchasers should comprehend that affirmative coverage for the remaining redemption duration only safeguards the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place until November 2021. As this moratorium has actually lifted, loan providers have actually executed loss mitigation procedures to keep people in their mortgages and assist them retain their residential or commercial properties. However, if loss mitigation techniques are not successful, the foreclosure procedure begins.

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 third 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 was in 2008, but 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 understand the subtlety of purchasing a bank-owned home are better equipped to serve their clients.

At South Oak Title and Closing, we like partnering with real estate agents to assist them much better serve their customers. Whether you have particular questions about working with REO residential or commercial properties or simply 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 spent years 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 daughters: one recent graduate and one present trainee at Auburn University.

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

This short article is planned to supply general info about REO residential or commercial properties in Alabama and ought to not be considered legal recommendations. Laws concerning REO residential or commercial properties likewise differ from one state to another. Please consult your regional attorney with concerns.