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After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now on the rise. As an outcome, we can expect to see an increase in the variety of REO residential or commercial properties available on the marketplace in the coming months.

Whether you're a fairly brand-new real estate agent or one who's been in business for a while, you most likely could use a refresher on these bank-owned homes.
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Our resident REO expert, Jeff Underwood, shares what real estate agents require to know 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 property that is owned by a bank or loan provider after stopping working to cost a foreclosure auction. But to truly understand REO residential or properties, you initially need to understand 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 begin. The mortgage agreement will consist of language about when the bank can start this process. Typically, a lender won't begin the foreclosure procedure up until the debtor has missed out on 4 consecutive payments.

Not all residential or commercial properties that get in the foreclosure process are really foreclosed upon. Jeff Underwood, managing attorney at South Oak Title & Closing in Auburn, states, "Oftentimes, the mortgage is renewed or the lender will exercise loss mitigation options to prevent foreclosure. A debtor who applies for Chapter 13 personal bankruptcy will also stop the foreclosure process."

This procedure looks various in every state. Underwood describes, "Alabama is a nonjudicial state. This implies that the bank does not have to file a lawsuit against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that informs the mortgagor that they remain in default and offers details about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need loan providers 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 paper 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 "property owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in the company 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 realty 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 listing any other residential or commercial property, with a few crucial distinctions. There's still a sign in the yard, 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 private client, 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 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 company to clean things up and make certain things are working, however purchasers won't find a staged, upgraded home."

Lenders want to sell REO residential or commercial properties for reasonable market value as quickly as possible, so pricing is determined by obtaining 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 viewpoints are balanced to obtain the sticker price. If the residential or commercial property suffers on the market, the bank will begin dropping the cost in incremental percentages to find a purchaser.

Title Process for REO residential or commercial properties

When the title company gets the referral 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 noted for sale, and similar to any title search and examination, we're looking for any potential problems so that we can present a clear title to the purchaser," Underwood discusses.

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 dealt with 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 commercial property goes under agreement, all that's required is an update to title.

Common Title Issues with REO Properties

Several common title issues can develop 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're subject to charges and interest. If taxes are still overdue 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.

Underwood states, "If the county owns the tax certificate, fixing this is a pretty uncomplicated procedure. But if it's owned by a 3rd party, it can get made complex." To redeem from a private, a bank is needed to pay the overdue taxes, penalty, interest, in addition to the worth of any enhancements on the residential or commercial property. In some circumstances, there can be an extended settlement process to eliminate this tax lien.

Encroachment issues are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly delineated, which is why surveys are a required part of the title search and test. Underwood explains, "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 house or barn." It can be complicated to clear these concerns and in many cases, a quitclaim deed may 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 likewise be found during the title search and examination. Title companies experienced with REO residential or commercial properties know exactly which problems to try to find and how to address them to present REO buyers with a clear title.

Owner's title insurance coverage secures homebuyers from hidden 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 regardless of the policy, REO residential or commercial property buyers should always be aware of laws concerning the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or beneficiaries of the debtor, can redeem or purchase back 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 celebration needs to pay the amount of the foreclosure quote, interest, and other charges consisting of taxes, insurance coverage, and repairs."

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

He continues, "Redemptions of foreclosed homes are very rare, however anyone buying an REO residential or commercial property needs to work with an attorney who understands and comprehends the law." These laws vary from state to state and can alter, so always consult your closing attorney with specific concerns about the right of redemption.

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

Lenders supplying funding for REO purchases will typically require affirmative protection for the remaining redemption period. Options, such as a bond, exist if the loan quantity is up to 30% greater than the foreclosure quote, but buyers ought to understand that affirmative protection for the staying redemption duration just safeguards the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location till November 2021. As this moratorium has raised, lending institutions have actually carried out loss mitigation procedures to keep people in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation methods are not successful, the foreclosure procedure starts.

Underwood states, "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 third quarter of this year, we'll begin to see a higher-than-normal percentage of REO residential or commercial properties on the marketplace. It will not be like it was in 2008, however it will definitely be more than what we're utilized to seeing."

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

At South Oak Title and Closing, we like partnering with real estate agents to assist them better serve their customers. Whether you have specific concerns about dealing with REO residential or commercial properties or just need an REO specialist 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 spent years working with banks, lenders, and REO residential or commercial properties through his time leading the REO division at a Birmingham law company. Jeff is wed and has two daughters: one current graduate and one present student at Auburn University.

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

This post is intended to offer basic details about REO residential or commercial properties in Alabama and need to not be considered legal advice. Laws worrying REO residential or commercial properties also differ from one state to another. Please consult your regional attorney with questions.