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

Whether you're a fairly new real estate agent or one who's remained in the company for a while, you probably could use 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?

Basically, an REO residential or commercial property is realty that is owned by a bank or loan provider after failing to sell at a foreclosure auction. But to truly understand REO residential or commercial properties, you first need to comprehend the foreclosure process.

The Foreclosure Process

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

Not all residential or commercial properties that enter the foreclosure process are in fact foreclosed upon. Jeff Underwood, managing attorney at South Oak Title & Closing in Auburn, says, "In a lot of cases, the mortgage is renewed or the lender will work out loss mitigation choices to prevent foreclosure. A debtor who applies for Chapter 13 insolvency will also stop the foreclosure procedure."

This process looks different in every state. Underwood discusses, "Alabama is a nonjudicial state. This implies that the bank does not need to submit a claim against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that notifies the mortgagor that they are in default and supplies information about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need lenders to submit a claim versus the mortgagor in state court to foreclose.

In Alabama, notifications about the upcoming foreclosure sale are also published in the county newspaper 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 states, "Lenders aren't in business of retaining these residential or commercial properties. Their objective 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 market as an REO residential or commercial property." The loan provider sends out a recommendation for this residential or commercial property to both a genuine estate 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 noting any other residential or commercial property, with a couple of essential differences. There's still a check in the yard, a listing on the MLS, and pictures 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 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 common home that's market-ready. We had one REO residential or commercial property where the previous owner took whatever out of the house, including sinks and banisters. The bank will work with a business to clean things up and ensure things are working, but purchasers won't discover a staged, upgraded home."

Lenders wish to sell REO residential or commercial properties for reasonable market price as quickly as possible, so rates is figured out by acquiring a BPO, or broker cost opinion. Two real estate agents will offer their viewpoint on the market cost of the residential or commercial property, and after that these opinions are balanced to get the sticker price. If the residential or commercial property languishes on the market, the bank will begin dropping the cost in incremental portions to find a purchaser.

Title Process for REO residential or commercial properties

When the title business gets 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 noted for sale, and as with any title search and exam, we're looking for any possible problems so that we can present a clear title to the buyer," Underwood explains.

If the title is clear, this file is all set for when the residential or commercial property goes under agreement. If there are concerns that require to be resolved such as judgments, encumbrances, or liens, the title business will clear the title so that it's prepared for a future purchaser. Once the residential or commercial property goes under contract, all that's required is an update to title.

Common Title Issues with REO Properties

Several common title problems can arise with REO residential or commercial properties. Tax redemption problems are especially common. In Alabama, taxes are paid in arrears. If they're not paid by December 31, they're subject to penalties and interest. If taxes are still unsettled by April, the county will have a tax sale in May. In the majority of cases, the county is the high bidder. But in other cases, a third celebration will acquire the tax certificate.

Underwood says, "If the county owns the tax certificate, resolving this is a quite straightforward procedure. 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 overdue taxes, penalty, interest, as well as the value of any enhancements on the residential or commercial property. In some circumstances, there can be a prolonged settlement procedure to eliminate this tax lien.

Encroachment problems are also typical with REO residential or commercial . Residential or commercial property lines aren't constantly clearly defined, which is why surveys 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, or perhaps part of a house or barn." It can be complicated to clear these problems and in many cases, a quitclaim deed might be required.

And similar to any other residential or commercial property, we can find any variety of other title problems. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can likewise be discovered during the title search and examination. Title companies experienced with REO residential or commercial properties know precisely which issues to look for and how to resolve them to present REO purchasers with a clear title.

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

Right of Redemption Laws

Individuals, including the foreclosed debtor or beneficiaries of the debtor, can redeem or buy back a foreclosed residential or commercial property for approximately a year after the foreclosure sale. Underwood discusses, "To redeem a foreclosed residential or commercial property, the redeeming celebration must pay the amount of the foreclosure bid, interest, and other charges consisting of taxes, insurance coverage, and repairs."

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

He continues, "Redemptions of foreclosed homes are extremely uncommon, however anyone acquiring an REO residential or commercial property needs to work with an attorney who knows and comprehends the law." These laws vary from state to state and can change, so always consult your closing attorney with specific questions about the right of redemption.

Buyers acquiring an REO residential or commercial property before the redemption period ends need to be conscious that owner's title insurance will never offer affirmative protection over the right of redemption. For cash buyers, this will be noted as an exception in Schedule B-2 of the owner's title insurance plan throughout of the redemption duration.

Lenders providing funding for REO purchases will normally need affirmative coverage for the staying redemption duration. Options, such as a bond, exist if the loan amount depends on 30% higher than the foreclosure quote, however buyers need to understand that affirmative protection for the staying redemption period only protects the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place until November 2021. As this moratorium has actually lifted, loan providers have implemented loss mitigation procedures to keep people in their mortgages and help them keep their residential or commercial properties. However, if loss mitigation strategies are not successful, the foreclosure process starts.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting 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 portion of REO residential or commercial properties on the market. It will not be like it remained 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 comprehend the subtlety of purchasing a bank-owned home are better equipped to serve their customers.

At South Oak Title and Closing, we love partnering with real estate agents to help them better serve their customers. Whether you have specific questions about working with REO residential or commercial properties or simply require 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, lending institutions, and REO residential or commercial properties through his time leading the REO division at a Birmingham law practice. Jeff is wed and has two daughters: one recent graduate and one present student at Auburn University.

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

This article is planned to provide basic details about REO residential or commercial properties in Alabama and must not be considered legal advice. Laws concerning REO residential or commercial properties also vary from one state to another. Please consult your regional attorney with questions.
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