After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now rising. As an outcome, we can anticipate to see a boost in the number of REO residential or commercial properties available on the market in the coming months.

Whether you're a reasonably new real estate agent or one who's remained in business for a while, you most likely might use a refresher on these bank-owned homes.
hud.gov
Our resident REO expert, Jeff Underwood, shares what real estate agents need to understand about REO residential or commercial properties in Alabama.

What is an REO residential or commercial property?

Basically, an REO residential or commercial property is property that is owned by a bank or lending institution after failing to sell at a foreclosure auction. But to really understand REO residential or commercial properties, you initially need to understand the foreclosure procedure.

The Foreclosure Process

When a private with a mortgage stops paying on that mortgage for any factor, the foreclosure process will start. The mortgage agreement will consist of language about when the bank can start this procedure. Typically, a loan provider won't start the foreclosure procedure up until the customer has actually missed out on four successive payments.

Not all residential or commercial properties that get in the foreclosure process are in fact foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, states, "In a lot of cases, the mortgage is renewed or the lending institution will exercise loss mitigation options to avoid foreclosure. A debtor who applies for Chapter 13 personal bankruptcy will also halt the foreclosure process."

This procedure looks different in every state. Underwood explains, "Alabama is a nonjudicial state. This implies that the bank does not have to submit a claim 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 information about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need lenders to file a lawsuit against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are also published in the county paper for 3 weeks. If the bank or lender is the high-bidder or just 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 says, "Lenders aren't in business of keeping 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 market as an REO residential or commercial property." The loan provider sends a referral for this residential or commercial property to both a real estate 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 few 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 goal is to find a buyer for the residential or commercial property. But rather of an individual 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 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 employ a business to tidy things up and ensure things are working, however purchasers will not discover a staged, updated home."

Lenders desire to sell REO residential or commercial properties for reasonable market price as quickly as possible, so rates is identified by getting a BPO, or broker rate opinion. Two real estate agents will offer their viewpoint on the marketplace cost of the residential or commercial property, and after that these opinions are balanced to obtain the market price. If the residential or commercial property languishes on the market, the bank will begin dropping the price in incremental percentages to find a buyer.

Title Process for REO residential or commercial properties

When the title company receives the recommendation for an REO residential or commercial property, they will start a title search, simply 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 exam, we're trying to find any prospective concerns so that we can provide a clear title to the buyer," Underwood discusses.

If the title is clear, this file is prepared for when the residential or commercial property goes under contract. If there are concerns that require to be dealt with such as judgments, encumbrances, or liens, the title company will clear the title so that it's prepared for a future buyer. 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 problems can occur with REO residential or . Tax redemption issues are particularly common. In Alabama, taxes are paid in defaults. If they're not paid by December 31, they undergo 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 celebration will purchase the tax certificate.

Underwood says, "If the county owns the tax certificate, solving this is a pretty uncomplicated process. But if it's owned by a 3rd party, it can get complicated." To redeem from an individual, a bank is required to pay the delinquent taxes, penalty, interest, along with the value of any improvements on the residential or commercial property. In some situations, there can be a prolonged settlement process to remove this tax lien.

Encroachment problems are likewise common with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly delineated, which is why surveys are a necessary part of the title search and examination. 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, or perhaps part of a home or barn." It can be complicated 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 discover any number of other title problems. Missing deeds, deeds in the back chain of title that do not have marital status, and other encumbrances can likewise be found during the title search and test. Title companies experienced with REO residential or commercial properties understand precisely which problems to look for and how to address them to present REO purchasers with a clear title.

Owner's title insurance safeguards property buyers from hidden threats to their title after purchase. A boosted owner's policy might be advised for individuals who buy an REO residential or commercial property. But regardless of the policy, REO residential or commercial property purchasers should constantly understand laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including 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 describes, "To redeem a foreclosed residential or commercial property, the redeeming celebration must pay the quantity of the foreclosure quote, interest, and other charges including taxes, insurance coverage, and repairs."

"Because foreclosure sales can happen reasonably quickly in Alabama, the redemption period is longer than in many states. For mortgages stemmed before 2016, that redemption period is a year. For mortgages stemmed after January 1, 2016, the redemption period is reduced to 180 days."

He continues, "Redemptions of foreclosed homes are really rare, however anyone purchasing an REO residential or commercial property requires to deal with a lawyer who knows and comprehends the law." These laws differ from one state to another and can change, so constantly consult your closing attorney with particular questions about the right of redemption.

Buyers purchasing 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 money purchasers, this will be listed as an exception in Schedule B-2 of the owner's title insurance coverage for the period of the redemption period.

Lenders offering financing for REO purchases will usually require affirmative protection for the remaining redemption duration. Options, such as a bond, exist if the loan quantity depends on 30% higher than the foreclosure quote, but buyers ought to understand that affirmative protection for the staying redemption period only secures the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place till November 2021. As this moratorium has raised, loan providers have actually executed loss mitigation procedures to keep people in their mortgages and assist them retain their residential or commercial properties. However, if loss mitigation methods are not successful, the foreclosure process starts.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see a boost in these as the year advances. 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 will not resemble it remained in 2008, but it will certainly be more than what we're utilized to seeing."

There's no requirement 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 comprehend the subtlety of buying 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 particular questions 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 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 two daughters: one current graduate and one present trainee at Auburn University.
mercyhousing.org
Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.

This article is meant to provide basic details about REO residential or commercial properties in Alabama and ought to not be thought about legal guidance. Laws concerning REO residential or commercial properties also vary from state to state. Please consult your local attorney with concerns.