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

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

Our resident REO professional, Jeff Underwood, shares what real estate agents need to understand 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 real estate that is owned by a bank or loan provider after stopping working to offer at a foreclosure auction. But to genuinely understand REO residential or commercial properties, you initially require to understand the foreclosure procedure.

The Foreclosure Process

When a private with a mortgage stops making payments on that mortgage for any factor, the foreclosure procedure will begin. The mortgage agreement will consist of language about when the bank can start this process. Typically, a lender will not start the foreclosure process up until the customer has missed out on 4 consecutive payments.

Not all residential or commercial properties that go into the foreclosure process are in fact foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, says, "Oftentimes, the mortgage is reinstated or the lender will work out loss mitigation choices to prevent foreclosure. A debtor who files for Chapter 13 bankruptcy will also stop the foreclosure process."

This process looks different in every state. Underwood explains, "Alabama is a nonjudicial state. This implies that the bank does not need to file a claim against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that notifies 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 lenders to submit a claim against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are likewise released in the county newspaper for 3 weeks. If the bank or lender is the high-bidder or just purchaser at the foreclosure sale, this residential or commercial property ends up being "genuine 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 maintaining 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 lender sends out a recommendation for this residential or commercial property to both a property brokerage and a title company.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is really similar to noting any other residential or commercial property, with a few essential differences. There's still an indication in the backyard, a listing on the MLS, and pictures of the residential or commercial property. The broker's objective is to discover a buyer for the residential or commercial property. But instead of a private customer, the broker represents a lender. 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 common 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 ensure things are working, but buyers will not find a staged, upgraded home."

Lenders wish to offer REO residential or commercial properties for fair market value as rapidly as possible, so prices is determined by getting a BPO, or broker rate viewpoint. Two real estate agents will provide their viewpoint on the marketplace cost of the residential or commercial property, and after that these viewpoints are averaged to acquire the sale price. If the residential or commercial property languishes on the marketplace, the bank will begin dropping the price 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 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 searching for any prospective problems so that we can provide a clear title to the purchaser," Underwood explains.

If the title is clear, this file is all set for when the residential or commercial property goes under agreement. If there are concerns that require to be dealt with 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 needed is an update to title.

Common Title Issues with REO Properties

Several common title concerns can emerge with REO residential or commercial properties. Tax redemption concerns 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 unpaid by April, the county will have a tax sale in May. In the majority of cases, the county is the high bidder. But in other cases, a third celebration will buy the tax certificate.

Underwood says, "If the county owns the tax certificate, resolving this is a pretty uncomplicated procedure. But if it's owned by a 3rd celebration, it can get complicated." To redeem from a specific, a bank is needed to pay the delinquent taxes, penalty, interest, in addition to the worth of any enhancements on the residential or commercial property. In some situations, there can be a prolonged settlement procedure to remove this tax lien.

Encroachment problems are also typical with REO residential or commercial properties. Residential or commercial property lines aren't always clearly defined, which is why studies are a needed part of the title search and examination. Underwood describes, "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 home or barn." It can be complicated to clear these issues and in some cases, a quitclaim deed may be required.

And similar to any other residential or commercial property, we can discover any variety of other title issues. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can likewise be found during the title search and test. Title companies experienced with REO residential or commercial properties understand precisely which concerns to try to find and how to address them to present REO buyers with a clear title.

Owner's title insurance secures homebuyers from hidden dangers to their title after purchase. An enhanced owner's policy might be recommended for individuals who buy an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers must constantly understand laws concerning the right of redemption.

Right of Redemption Laws

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

"Because foreclosure sales can occur fairly quickly in Alabama, the redemption duration is longer than in most states. For mortgages stemmed before 2016, that redemption period is a year. For mortgages stemmed after January 1, 2016, the redemption duration is shortened to 180 days."

He continues, "Redemptions of foreclosed homes are very unusual, however anybody acquiring an REO residential or commercial property needs to deal with a lawyer who knows and understands 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 purchasing an REO residential or commercial property before the redemption duration expires need to be conscious that owner's title insurance will never ever provide 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 plan for the period of the redemption duration.

Lenders providing funding for REO purchases will generally require affirmative protection for the staying redemption period. Options, such as a bond, exist if the loan amount is up to 30% higher than the foreclosure quote, but buyers must comprehend that affirmative protection for the remaining redemption duration just secures the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place until November 2021. As this moratorium has lifted, lenders have actually carried out 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 starts.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see an increase 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 won't resemble it remained in 2008, however it will definitely be more than what we're utilized to seeing."

There's no need 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 understand the subtlety of buying a bank-owned home are better geared up to serve their customers.

At South Oak Title and Closing, we enjoy partnering with real estate agents to help them better serve their customers. Whether you have specific questions about dealing with REO residential or commercial properties or just need an REO professional in your corner, we're here for you. Contact us with your questions today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has spent years dealing with banks, lenders, and REO residential or commercial properties through his time leading the REO division at a Birmingham law office. Jeff is wed and has two children: one recent graduate and one existing trainee at Auburn University.

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

This short article is planned to provide general information about REO residential or commercial properties in Alabama and must not be thought about legal suggestions. Laws concerning REO residential or commercial properties also differ from one state to another. Please consult your local attorney with questions.