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 market in the coming months.
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Whether you're a fairly 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?

Put simply, an REO residential or commercial property is property that is owned by a bank or lending institution after failing to cost a foreclosure auction. But to truly understand REO residential or commercial properties, you initially require to comprehend the foreclosure procedure.

The Foreclosure Process

When an individual with a mortgage stops making payments on that mortgage for any reason, the foreclosure process will begin. The mortgage arrangement will consist of language about when the bank can start this procedure. Typically, a loan provider will not start the foreclosure process up until the debtor has actually missed 4 successive payments.

Not all residential or commercial properties that go into the foreclosure process are really foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, says, "Oftentimes, the mortgage is restored or the lending institution will work out loss mitigation alternatives to avoid foreclosure. A debtor who files for Chapter 13 bankruptcy will likewise halt the foreclosure procedure."

This procedure looks different in every state. Underwood describes, "Alabama is a nonjudicial state. This suggests that the bank does not have to submit a lawsuit against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notices that notifies the mortgagor that they are in default and provides details about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require loan providers to submit a suit against the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also released in the county newspaper for three weeks. If the bank or lender is the high-bidder or just buyer at the foreclosure sale, this residential or commercial property ends up being "real estate 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 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 loan provider sends a referral for this residential or commercial property to both a property brokerage and a title business.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is very similar to listing any other residential or commercial property, with a couple of crucial 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 objective is to find a purchaser for the residential or commercial property. But instead of a private 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 might 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, including sinks and banisters. The bank will hire a business to tidy things up and ensure things are working, but buyers will not discover a staged, updated home."

Lenders wish to sell REO residential or commercial properties for fair market price as rapidly as possible, so rates is determined by obtaining a BPO, or broker price viewpoint. Two real estate agents will give their viewpoint on the marketplace rate of the residential or commercial property, and then these opinions are averaged to obtain the list cost. If the residential or commercial property suffers on the market, the bank will start dropping the rate in incremental portions to discover a purchaser.

Title Process for REO residential or commercial properties

When the title business receives 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 just like any title search and examination, we're looking for any potential problems so that we can provide a clear title to the purchaser," Underwood explains.

If the title is clear, this file is ready for when the residential or commercial property goes under contract. If there are problems that need to be resolved such as judgments, encumbrances, or liens, the title company will clear the title so that it's ready for a future buyer. 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 typical title concerns can arise with REO residential or commercial properties. Tax redemption issues are especially typical. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they go through penalties and interest. If taxes are still unpaid 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 acquire the tax certificate.

says, "If the county owns the tax certificate, resolving this is a pretty uncomplicated process. But if it's owned by a 3rd party, it can get made complex." To redeem from an individual, a bank is needed to pay the delinquent taxes, charge, interest, as well as the worth of any improvements on the residential or commercial property. In some circumstances, there can be an extended settlement process to eliminate this tax lien.

Encroachment problems are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't always clearly delineated, which is why surveys are a needed part of the title search and test. 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 house or barn." It can be made complex to clear these issues and in many cases, a quitclaim deed might be required.

And as with any other residential or commercial property, we can find any number of other title problems. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can also be found throughout 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 buyers with a clear title.

Owner's title insurance secures property buyers from covert risks to their title after purchase. An enhanced owner's policy may be recommended for individuals who purchase an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers ought to constantly understand laws concerning the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or successors of the debtor, deserve to redeem or redeem a foreclosed residential or commercial property for up to a year after the foreclosure sale. Underwood discusses, "To redeem a foreclosed residential or commercial property, the redeeming party should pay the quantity of the foreclosure bid, interest, and other charges consisting of taxes, insurance coverage, and repairs."

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

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

Buyers purchasing an REO residential or commercial property before the redemption period expires requirement to be aware that owner's title insurance coverage will never supply 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 plan for the duration of the redemption period.

Lenders offering financing for REO purchases will usually need affirmative protection for the remaining redemption period. Options, such as a bond, exist if the loan quantity is up to 30% higher than the foreclosure quote, but buyers should comprehend that affirmative coverage for the staying redemption duration just secures the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place up until November 2021. As this moratorium has lifted, loan providers have carried out loss mitigation procedures to keep people in their mortgages and assist them keep their residential or commercial properties. However, if loss mitigation techniques are unsuccessful, the foreclosure process starts.

Underwood says, "Foreclosure starts are up 39% over the last quarter, and we're anticipating to see a boost in these as the year progresses. Starting in the 3rd quarter of this year, we'll start to see a higher-than-normal portion 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 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 comprehend the nuance of buying a bank-owned home are better equipped to serve their customers.

At South Oak Title and Closing, we enjoy partnering with real estate agents to assist them better serve their clients. Whether you have particular concerns about working with REO residential or commercial properties or just need an REO specialist 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 spent decades 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 2 daughters: one recent graduate and one present trainee at Auburn University.

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

This article is meant to offer basic info 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 one state to another. Please consult your local attorney with concerns.