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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 offered on the market in the coming months.

Whether you're a relatively 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 realty 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 need to comprehend the foreclosure process.

The Foreclosure Process

When a private with a mortgage stops making payments on that mortgage for any factor, the foreclosure process will start. The mortgage arrangement will consist of language about when the bank can start this process. Typically, a lending institution will not begin the foreclosure procedure until the borrower has actually missed out on four consecutive payments.

Not all residential or commercial properties that go into the foreclosure process are in fact foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, says, "In most cases, the mortgage is restored or the loan provider will exercise loss mitigation alternatives to avoid foreclosure. A debtor who applies for Chapter 13 bankruptcy will likewise halt the foreclosure procedure."

This process looks different in every state. Underwood explains, "Alabama is a nonjudicial state. This indicates that the bank does not have to submit a suit versus 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 details about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need lending institutions to file a lawsuit 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 only purchaser at the foreclosure sale, this residential or commercial property becomes "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 goal 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 lending institution 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 really similar to listing any other residential or commercial property, with a few essential distinctions. There's still a check in the lawn, a listing on the MLS, and pictures 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 specific customer, the broker represents a lending institution. On the MLS, this residential or commercial property will be designated as bank-owned.

Underwood states, "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 house, consisting of sinks and banisters. The bank will hire a company to tidy things up and ensure things are working, but buyers will not discover a staged, updated home."

Lenders wish to offer REO residential or commercial properties for reasonable market price as rapidly as possible, so prices is determined by getting a BPO, or broker price opinion. Two real estate agents will provide their opinion on the marketplace price of the residential or commercial property, and then these viewpoints are balanced to get the market price. If the residential or commercial property suffers on the market, the bank will start dropping the price 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 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 test, we're trying to find any prospective concerns so that we can provide a clear title to the buyer," Underwood explains.

If the title is clear, this file is prepared for when the residential or commercial property goes under agreement. If there are issues that require to be resolved such as judgments, encumbrances, or liens, the title business will clear the title so that it's all set for a future buyer. Once the residential or goes under agreement, all that's required is an upgrade to title.

Common Title Issues with REO Properties

Several typical title problems can emerge with REO residential or commercial properties. Tax redemption issues are especially common. In Alabama, taxes are paid in financial obligations. 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 3rd party will purchase the tax certificate.

Underwood says, "If the county owns the tax certificate, fixing this is a quite straightforward process. But if it's owned by a 3rd party, it can get made complex." To redeem from a private, a bank is required to pay the overdue taxes, penalty, interest, as well as the worth of any enhancements on the residential or commercial property. In some situations, there can be an extended settlement process to eliminate this tax lien.

Encroachment issues are likewise common with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly defined, which is why studies are a necessary part of the title search and exam. Underwood describes, "An infringement is any structure that exists on a neighbor's land or residential or commercial property - a fence, a shed, a mobile home, or perhaps part of a home or barn." It can be made complex to clear these problems and in many cases, a quitclaim deed may be required.

And just like any other residential or commercial property, we can find any number of other title concerns. Missing deeds, deeds in the back chain of title that do not have marital status, and other encumbrances can likewise be found during the title search and test. Title business experienced with REO residential or commercial properties know precisely which problems to search for and how to resolve them to present REO buyers with a clear title.

Owner's title insurance coverage secures homebuyers from concealed threats to their title after purchase. An improved owner's policy may be advised for individuals who buy an REO residential or commercial property. But regardless of the policy, REO residential or commercial property purchasers must always be conscious of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or heirs of the debtor, have the right to redeem or redeem a foreclosed residential or commercial property for up to 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 bid, interest, and other charges consisting of taxes, insurance coverage, and repairs."

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

He continues, "Redemptions of foreclosed homes are very uncommon, however anybody buying an REO residential or commercial property requires to deal with an attorney who knows and understands the law." These laws differ from one state to another and can change, so constantly consult your closing attorney with particular concerns about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption duration expires need to be mindful that owner's title insurance coverage will never offer affirmative coverage over the right of redemption. For money buyers, this will be noted as an exception in Schedule B-2 of the owner's title insurance coverage policy throughout of the redemption duration.

Lenders offering funding for REO purchases will normally require affirmative coverage for the staying redemption period. Options, such as a bond, exist if the loan amount is up to 30% higher than the foreclosure bid, however purchasers must comprehend that affirmative coverage for the staying redemption duration 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 carried out loss mitigation treatments to keep people in their mortgages and help them retain their residential or commercial properties. However, if loss mitigation techniques are not successful, the foreclosure process starts.

Underwood states, "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 begin 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 certainly be more than what we're used to seeing."

There's no requirement 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 buying a bank-owned home are much better geared up to serve their clients.

At South Oak Title and Closing, we love partnering with real estate agents to help them much better serve their customers. Whether you have particular concerns about working with REO residential or commercial properties or simply need an REO expert 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 actually invested years working with banks, lending institutions, and REO residential or commercial properties through his time leading the REO division at a Birmingham law company. Jeff is wed and has 2 daughters: one recent graduate and one present student at Auburn University.

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

This post is meant to provide basic details about REO residential or commercial properties in Alabama and should not be thought about legal suggestions. Laws worrying REO residential or commercial properties also vary from state to state. Please consult your local lawyer with questions.
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