After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now on the increase. As an outcome, we can expect 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 fairly 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 expert, 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?

Simply put, an REO residential or commercial property is realty 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 initially need to comprehend the foreclosure procedure.

The Foreclosure Process

When a specific with a mortgage stops paying on that mortgage for any reason, the foreclosure process will begin. The mortgage contract will consist of language about when the bank can begin this procedure. Typically, a lending institution will not start the foreclosure process till the debtor has actually missed out on 4 successive payments.

Not all residential or commercial properties that get in the foreclosure process are actually foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, says, "In a lot of cases, the mortgage is renewed or the loan provider will work out loss mitigation options to avoid foreclosure. A debtor who files for Chapter 13 insolvency will likewise stop the foreclosure process."

This process looks various in every state. Underwood discusses, "Alabama is a nonjudicial state. This means that the bank does not need to file a claim versus the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that notifies the mortgagor that they remain in default and supplies information about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need lending institutions to submit a suit against the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are likewise published in the county newspaper for 3 weeks. If the bank or lender is the high-bidder or only purchaser at the foreclosure sale, this residential or commercial property ends up being "property owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood states, "Lenders aren't in business of maintaining these residential or commercial properties. Their objective is to offer 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 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 listing 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 discover a buyer for the residential or commercial property. But instead of a specific 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 normal 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 work with a company to clean things up and make sure things are working, however purchasers will not discover a staged, updated home."

Lenders want to offer REO residential or commercial properties for fair market value as rapidly as possible, so pricing is identified by acquiring a BPO, or broker rate viewpoint. Two real estate agents will give their opinion on the market price of the residential or commercial property, and then these opinions are balanced to get the sale price. If the residential or commercial property suffers on the marketplace, the bank will begin dropping the price in incremental percentages to discover a purchaser.

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, 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 exam, we're trying to find any possible concerns so that we can present a clear title to the purchaser," Underwood describes.

If the title is clear, this file is all set for when the residential or commercial property goes under contract. If there are concerns that need to be attended to such as judgments, encumbrances, or liens, the title business 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 required is an upgrade to title.

Common Title Issues with REO Properties

Several common title concerns can arise with REO residential or commercial properties. Tax redemption concerns are particularly typical. In Alabama, taxes are paid in defaults. 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. In most cases, 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, solving this is a pretty simple process. But if it's owned by a 3rd party, it can get complicated." To redeem from a specific, a bank is needed to pay the overdue taxes, charge, interest, along with 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 likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly delineated, which is why studies are a required part of the title search and examination. Underwood discusses, "An infringement is any structure that exists on a next-door neighbor's land or residential or commercial property - a fence, a shed, a mobile home, or even part of a home or barn." It can be complicated to clear these problems and sometimes, a quitclaim deed might 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 do not have 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 exactly which problems to look for and how to address them to present REO buyers with a clear title.

Owner's title insurance coverage secures homebuyers from surprise risks to their title after purchase. An improved owner's policy may be suggested for individuals who acquire an REO residential or commercial property. But regardless of the policy, REO residential or commercial property buyers ought to always be mindful of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or successors 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 describes, "To redeem a foreclosed residential or commercial property, the redeeming celebration needs to pay the amount of the foreclosure quote, interest, and other charges consisting of taxes, insurance, and repair work."

"Because foreclosure sales can occur fairly rapidly in Alabama, the redemption duration is longer than in many states. For mortgages originated before 2016, that redemption duration 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 uncommon, but anyone acquiring an REO residential or commercial property requires to deal with a lawyer who knows and understands the law." These laws differ from one state to another and can change, so always consult your closing lawyer with particular concerns about the right of redemption.

Buyers acquiring an REO residential or commercial property before the redemption duration expires requirement to be conscious that owner's title insurance coverage will never 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 coverage for the duration of the redemption duration.

Lenders providing financing for REO purchases will generally require affirmative coverage for the staying redemption duration. Options, such as a bond, exist if the loan amount is up to 30% greater than the foreclosure bid, however buyers need to understand that affirmative protection for the remaining redemption duration just safeguards the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location until November 2021. As this moratorium has actually raised, lending institutions have executed loss mitigation treatments to keep individuals in their mortgages and help them retain their residential or commercial properties. However, if loss mitigation techniques are unsuccessful, the foreclosure procedure begins.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see an increase in these as the year progresses. Starting in the 3rd 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 be like it remained in 2008, however it will certainly be more than what we're used 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 subtlety of buying a bank-owned home are better geared up to serve their customers.

At South Oak Title and Closing, we like partnering with real estate agents to assist them better serve their clients. Whether you have specific concerns 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 today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has actually spent years dealing with banks, loan providers, and REO residential or commercial properties through his time leading the REO department at a Birmingham law office. Jeff is married and has 2 daughters: one recent graduate and one current student at Auburn University.
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Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.

This post is planned to offer general info about REO residential or commercial properties in Alabama and should not be considered legal guidance. Laws worrying REO residential or commercial properties likewise vary from one state to another. Please consult your local lawyer with questions.