After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now growing. As a result, we can expect to see an increase in the variety of REO residential or commercial properties 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 most likely could use 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 stopping working to offer at a foreclosure auction. But to really understand REO residential or commercial properties, you initially require to understand the foreclosure process.

The Foreclosure Process

When a private with a mortgage stops paying on that mortgage for any factor, the foreclosure process will start. The mortgage arrangement will consist of language about when the bank can begin this procedure. Typically, a lender will not start the foreclosure procedure till the customer has missed four successive payments.

Not all residential or commercial properties that enter the foreclosure procedure are in fact foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, states, "In lots of cases, the mortgage is renewed or the loan provider will work out loss mitigation alternatives to prevent foreclosure. A debtor who declares Chapter 13 personal bankruptcy will also stop the foreclosure procedure."

This process looks different in every state. Underwood explains, "Alabama is a nonjudicial state. This implies that the bank does not need to submit a claim versus the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that informs the mortgagor that they are in default and supplies details about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need 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 just 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 says, "Lenders aren't in the business of retaining 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 market as an REO residential or commercial property." The lending institution sends out a referral 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 extremely similar to noting any other residential or commercial property, with a couple of essential distinctions. 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 purchaser 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 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 business to tidy things up and make sure things are working, but buyers won't find a staged, upgraded home."

Lenders desire to offer REO residential or commercial properties for reasonable market value as rapidly as possible, so pricing is figured out by acquiring a BPO, or broker price opinion. Two real estate agents will provide their opinion on the market cost of the residential or commercial property, and after that these opinions are balanced to acquire the list cost. If the residential or commercial property suffers on the market, the bank will start dropping the price in incremental percentages to find a buyer.

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 noted for sale, and as with any title search and test, we're searching for any possible problems so that we can present 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 problems that need to be addressed such as judgments, encumbrances, or liens, the title company will clear the title so that it's ready for a future purchaser. Once the residential or commercial property goes under contract, all that's needed is an update to title.

Common Title Issues with REO Properties

Several typical title issues can develop with REO residential or commercial properties. Tax redemption concerns are especially typical. In Alabama, taxes are paid in arrears. If they're not paid by December 31, they undergo 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 3rd party will buy the tax certificate.

Underwood says, "If the county owns the tax certificate, resolving this is a pretty straightforward procedure. But if it's owned by a 3rd party, it can get complicated." To redeem from a private, a bank is needed to pay the delinquent taxes, charge, interest, along with the worth of any improvements on the residential or commercial property. In some circumstances, there can be an extended settlement procedure to remove this tax lien.

Encroachment concerns are also typical with REO residential or commercial properties. Residential or commercial property lines aren't always clearly delineated, which is why surveys are a necessary part of the title search and exam. 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, and even part of a house or barn." It can be made complex to clear these issues and sometimes, a quitclaim deed may be needed.

And as with any other residential or commercial property, we can discover any number of other title issues. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can also be found during the title search and exam. Title business experienced with REO residential or commercial properties know precisely which problems to search for and how to address them to present REO buyers with a clear title.

Owner's title insurance secures property buyers from hidden threats to their title after purchase. An improved owner's policy might 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 concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or heirs of the debtor, can redeem or purchase back a foreclosed residential or commercial property for approximately a year after the foreclosure sale. Underwood describes, "To redeem a foreclosed residential or commercial property, the redeeming party needs to pay the quantity of the foreclosure bid, interest, and other charges including taxes, insurance, and repairs."

"Because foreclosure sales can happen relatively quickly in Alabama, the redemption duration is longer than in the majority of states. For mortgages came from before 2016, that redemption period 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 really rare, however anyone buying an REO residential or commercial property requires to deal with an attorney who knows and comprehends the law." These laws vary from state to state and can alter, so always consult your with particular concerns about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption duration ends requirement to be aware that owner's title insurance coverage will never provide affirmative protection over the right of redemption. For cash buyers, this will be noted as an exception in Schedule B-2 of the owner's title insurance coverage policy for the duration of the redemption duration.

Lenders offering funding for REO purchases will typically need affirmative coverage for the remaining redemption period. Options, such as a bond, exist if the loan quantity depends on 30% greater than the foreclosure quote, however buyers should understand that affirmative coverage for the staying redemption duration just secures 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 lifted, lenders have actually carried out loss mitigation procedures to keep people in their mortgages and assist them retain their residential or commercial properties. However, if loss mitigation strategies are unsuccessful, 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 progresses. Starting in the third quarter of this year, we'll start to see a higher-than-normal percentage of REO residential or commercial properties on the market. It won't be like it remained in 2008, but it will definitely be more than what we're utilized to seeing."

There's no need 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 nuance of buying a bank-owned home are better equipped to serve their clients.

At South Oak Title and Closing, we love partnering with real estate agents to help them better serve their clients. Whether you have particular questions about dealing with REO residential or commercial properties or just require 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 invested years dealing with banks, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law firm. Jeff is wed and has 2 daughters: one current graduate and one existing student at Auburn University.

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

This post is meant to supply general info about REO residential or commercial properties in Alabama and need to 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 concerns.