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

Whether you’re a reasonably new real estate agent or one who’s been in the service for a while, you probably could use a refresher on these bank-owned homes.

Our resident REO specialist, Jeff Underwood, shares what real estate agents require to learn 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 lender after failing to cost a foreclosure auction. But to genuinely comprehend REO residential or commercial properties, you first require to understand the foreclosure process.

The Foreclosure Process

When a specific with a mortgage stops making payments on that mortgage for any factor, the foreclosure procedure will start. The mortgage agreement will consist of language about when the bank can begin this process. Typically, a lending institution won’t start the foreclosure procedure till the debtor has actually missed 4 successive payments.

Not all residential or commercial properties that get in the foreclosure procedure are in fact foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, states, “Oftentimes, the mortgage is renewed or the lender will work out loss mitigation options to prevent foreclosure. A debtor who applies for Chapter 13 insolvency will also halt the foreclosure process.”

This process looks various in every state. Underwood explains, “Alabama is a nonjudicial state. This means that the bank does not need to file a suit versus the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that notifies the mortgagor that they are in default and supplies info about reinstatement. Failure to do so will result in a foreclosure sale.” Other states, such as Florida, need loan providers to file a claim versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also published in the county paper for three weeks. If the bank or lending institution 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 the service of maintaining these residential or commercial properties. Their goal 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 marketplace as an REO residential or commercial property.” The loan provider 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 very comparable to noting any other residential or commercial property, with a couple of key differences. There’s still a check in the backyard, a listing on the MLS, and images of the residential or commercial property. The broker’s goal is to find a purchaser 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 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 home, consisting of sinks and banisters. The bank will work with a business to tidy things up and make certain things are working, but purchasers won’t discover a staged, upgraded home.”

Lenders desire to sell REO residential or commercial properties for reasonable market worth as rapidly as possible, so rates is determined by acquiring a BPO, or broker cost viewpoint. Two real estate agents will offer their opinion on the market price of the residential or commercial property, and then these opinions are averaged to get the list rate. If the residential or commercial property languishes on the market, the bank will begin dropping the rate in incremental portions to discover a buyer.

Title Process for REO residential or commercial properties

When the title company gets the recommendation for an REO residential or commercial property, they will initiate 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 potential issues 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 contract. If there are issues that need to be attended to such as judgments, encumbrances, or liens, the title business 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 common title problems can occur with REO residential or commercial properties. Tax redemption issues are particularly common. In Alabama, taxes are paid in arrears. If they’re not paid by December 31, they go through charges and interest. If taxes are still unpaid by April, the county will have a tax sale in May. In a lot of 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, solving this is a pretty simple process. But if it’s owned by a 3rd party, it can get complicated.” To redeem from an individual, a bank is needed to pay the overdue taxes, charge, interest, as well as the worth of any improvements on the residential or commercial property. In some scenarios, there can be an extended settlement procedure to remove this tax lien.

Encroachment issues are also typical with REO residential or commercial properties. Residential or commercial property lines aren’t always plainly marked, which is why studies are a required part of the title search and test. Underwood discusses, “An advancement 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 made complex to clear these concerns and sometimes, a quitclaim deed might be needed.

And similar to 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 status, and other encumbrances can also be discovered during the title search and test. Title business experienced with REO residential or commercial properties know precisely which concerns to search for and how to resolve them to present REO purchasers with a clear title.

Owner’s title insurance safeguards property buyers from surprise threats to their title after purchase. An enhanced owner’s policy might be suggested for people who buy an REO residential or commercial property. But despite the policy, REO residential or commercial property buyers should always understand laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or successors of the debtor, deserve to redeem or redeem a foreclosed residential or commercial property for as much as a year after the foreclosure sale. Underwood discusses, “To redeem a foreclosed residential or commercial property, the redeeming party must pay the amount of the foreclosure bid, interest, and other charges consisting of taxes, insurance, and repair work.”

“Because foreclosure sales can take place fairly quickly in Alabama, the redemption duration is longer than in the majority of states. For mortgages originated before 2016, that redemption duration is a year. For mortgages originated after January 1, 2016, the redemption period 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 a lawyer who knows and understands the law.” These laws vary from state to state and can alter, so constantly consult your closing attorney with specific concerns about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption period ends need to be conscious that owner’s title insurance will never ever provide affirmative coverage over the right of redemption. For cash purchasers, this will be listed as an exception in Schedule B-2 of the owner’s title insurance coverage throughout of the redemption duration.

Lenders providing funding for REO purchases will generally require affirmative coverage for the staying redemption duration. Options, such as a bond, exist if the loan quantity depends on 30% greater than the foreclosure bid, but buyers ought to comprehend that affirmative coverage for the remaining redemption period just secures the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in place up until November 2021. As this moratorium has raised, lending institutions have actually executed loss mitigation procedures to keep individuals in their mortgages and help them maintain their residential or commercial properties. However, if loss mitigation methods are not successful, the foreclosure process begins.

Underwood says, “Foreclosure starts are up 39% over the last quarter, and we’re anticipating to see an increase in these as the year advances. 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 will not resemble it remained in 2008, but 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 understand the nuance of purchasing a bank-owned home are much better geared up to serve their customers.

At South Oak Title and Closing, we enjoy partnering with real estate agents to help them much better serve their clients. Whether you have specific 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, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law company. Jeff is married and has 2 children: one current graduate and one current student at Auburn University.

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

This short article is intended to offer basic information about REO residential or commercial properties in Alabama and need to not be thought about legal advice. Laws concerning REO residential or commercial properties likewise vary from one state to another. Please consult your regional attorney with questions.