After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now growing. As an outcome, we can anticipate to see a boost in the variety of REO residential or commercial properties offered on the marketplace in the coming months.
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Whether you're a fairly brand-new real estate agent or one who's been in business for a while, you probably could use a refresher on these bank-owned homes.
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Our resident REO professional, Jeff Underwood, shares what real estate agents need to learn 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 cost a foreclosure auction. But to really understand REO residential or commercial properties, you first require to understand the foreclosure procedure.

The Foreclosure Process

When an individual with a mortgage stops making payments on that mortgage for any factor, the foreclosure process will begin. The mortgage contract will consist of language about when the bank can begin this process. Typically, a loan provider will not begin the foreclosure process up until the customer has missed out on four consecutive payments.

Not all residential or commercial properties that get in the foreclosure procedure are really foreclosed upon. Jeff Underwood, managing attorney at South Oak Title & Closing in Auburn, states, "In lots of cases, the mortgage is renewed or the lending institution will exercise loss mitigation options to avoid foreclosure. A debtor who declares Chapter 13 bankruptcy will likewise stop the foreclosure procedure."

This process looks different in every state. Underwood discusses, "Alabama is a nonjudicial state. This indicates that the bank does not need to file a suit against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notifications that informs the mortgagor that they are in default and offers info about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require loan providers to submit a claim against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are likewise published in the county newspaper for three weeks. If the bank or lender is the high-bidder or only buyer at the foreclosure sale, this residential or commercial property becomes "genuine estate owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood states, "Lenders aren't in the company of keeping 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 lending institution sends 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 really comparable to listing any other residential or commercial property, with a few essential distinctions. There's still a sign 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 rather of an individual client, the broker represents a loan provider. 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 home, consisting of sinks and banisters. The bank will hire a company to tidy things up and ensure things are working, however purchasers won't find a staged, updated home."

Lenders wish to sell REO residential or commercial properties for fair market value as rapidly as possible, so prices is determined by acquiring a BPO, or broker rate opinion. Two real estate agents will provide their opinion on the market cost of the residential or commercial property, and after that these opinions are balanced to obtain the sticker price. If the residential or commercial property suffers on the market, the bank will start dropping the price in incremental percentages to discover a purchaser.

Title Process for REO residential or commercial properties

When the title company 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 noted for sale, and as with any title search and test, we're trying to find any possible concerns so that we can present 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 concerns that require to be dealt with such as judgments, encumbrances, or liens, the title business 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 needed is an update to title.

Common Title Issues with REO Properties

Several common title problems 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 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 purchase the tax certificate.

Underwood states, "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 a private, a bank is required to pay the delinquent taxes, charge, interest, along with the worth of any improvements on the residential or commercial property. In some circumstances, there can be an extended settlement process to remove this tax lien.

Encroachment problems are also common with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly delineated, which is why studies are a needed part of the title search and test. Underwood discusses, "An encroachment is any structure that exists on a next-door neighbor's land or residential or commercial property - a fence, a shed, a mobile home, and even 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 just like 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 throughout the title search and examination. Title business experienced with REO residential or commercial properties know exactly which concerns to search for and how to address them to present REO purchasers with a clear title.

Owner's title insurance safeguards homebuyers from concealed risks to their title after purchase. An improved owner's policy might be recommended for individuals who buy an REO residential or commercial property. But despite the policy, REO residential or commercial property buyers should always understand laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or heirs of the debtor, have the right to redeem or purchase back 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 celebration needs to pay the quantity of the foreclosure bid, interest, and other charges consisting of taxes, insurance, and repair work."

"Because foreclosure sales can take place fairly rapidly in Alabama, the redemption period is longer than in the majority of states. For mortgages came from before 2016, that redemption period is a year. For mortgages come from after January 1, 2016, the redemption period is shortened to 180 days."

He continues, "Redemptions of foreclosed homes are really rare, but anybody acquiring an REO residential or commercial property needs to deal with an attorney who knows and comprehends the law." These laws vary from state to state and can change, so always consult your closing lawyer with specific concerns 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 offer affirmative protection 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 plan throughout of the redemption period.

Lenders supplying funding for REO purchases will typically need affirmative protection for the remaining redemption duration. Options, such as a bond, exist if the loan quantity is up to 30% greater than the foreclosure bid, however buyers ought to comprehend that affirmative coverage for the staying redemption duration just protects the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in location up until November 2021. As this moratorium has lifted, lenders 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 unsuccessful, the foreclosure process begins.

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 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, however it will certainly be more than what we're utilized to seeing."

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

At South Oak Title and Closing, we love partnering with real estate agents to help them much better serve their clients. Whether you have particular questions about working with REO residential or commercial properties or just 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 invested decades dealing with banks, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law office. Jeff is married and has 2 daughters: one current graduate and one current student at Auburn University.

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

This post is planned to provide general details about REO residential or commercial properties in Alabama and ought to not be thought about legal suggestions. Laws worrying REO residential or commercial properties also differ from one state to another. Please consult your regional lawyer with questions.