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

Whether you're a relatively brand-new real estate agent or one who's been in business for a while, you probably might utilize a refresher on these bank-owned homes.

Our resident REO specialist, 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?

Simply put, an REO residential or commercial property is real estate that is owned by a bank or lending institution after stopping working to offer at a foreclosure auction. But to really comprehend REO residential or commercial properties, you initially require to comprehend the foreclosure process.

The Foreclosure Process

When an individual with a mortgage stops making payments on that mortgage for any factor, the foreclosure process will start. The mortgage contract will consist of language about when the bank can start this procedure. Typically, a loan provider will not start the foreclosure process until the debtor has missed out on four consecutive payments.
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Not all residential or commercial properties that enter the foreclosure procedure are actually foreclosed upon. Jeff Underwood, managing attorney at South Oak Title & Closing in Auburn, says, "Oftentimes, the mortgage is renewed or the lending institution will exercise loss mitigation choices to avoid foreclosure. A debtor who applies for Chapter 13 insolvency will likewise halt the foreclosure procedure."

This process looks various in every state. Underwood discusses, "Alabama is a nonjudicial state. This implies that the bank does not need to submit a suit versus 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 lending institutions to submit a lawsuit against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are likewise released in the county newspaper for three weeks. If the bank or loan provider is the high-bidder or just purchaser 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 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 recommendation 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 essential distinctions. There's still an indication in the yard, a listing on the MLS, and images of the residential or commercial property. The broker's goal is to find a buyer for the residential or commercial property. But instead 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 says, "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 everything out of the house, consisting of sinks and banisters. The bank will work with a company to tidy things up and make certain things are working, but purchasers won't discover a staged, updated home."

Lenders wish to offer REO residential or commercial properties for reasonable market price as rapidly as possible, so rates is determined by getting a BPO, or broker rate opinion. Two real estate agents will give their opinion on the market price of the residential or commercial property, and then these viewpoints are averaged to obtain the list rate. If the residential or commercial property languishes on the market, the bank will start dropping the rate in incremental portions to discover a buyer.

Title Process for REO residential or commercial properties

When the title business gets the recommendation for an REO residential or commercial property, they will initiate 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 similar to any title search and exam, we're looking for any possible issues so that we can present a clear title to the buyer," Underwood explains.

If the title is clear, this file is prepared for when the residential or commercial property goes under agreement. If there are problems that require to be addressed such as judgments, encumbrances, or liens, the title business will clear the title so that it's all set 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 typical title problems can arise with REO residential or commercial properties. Tax redemption concerns are particularly typical. 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 a lot of cases, the county is the high bidder. But in other cases, a 3rd celebration will purchase the tax certificate.

Underwood states, "If the county owns the tax certificate, resolving this is a quite simple procedure. But if it's owned by a 3rd party, it can get complicated." 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 scenarios, there can be an extended settlement process to remove this tax lien.

Encroachment problems are also typical with REO residential or commercial properties. or commercial property lines aren't always plainly defined, which is why studies are a needed part of the title search and test. Underwood discusses, "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, and even part of a home or barn." It can be complicated to clear these issues and in some cases, a quitclaim deed might be needed.

And similar to any other residential or commercial property, we can discover any variety of other title issues. 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 business experienced with REO residential or commercial properties understand precisely which concerns to search for and how to resolve them to present REO purchasers with a clear title.

Owner's title insurance coverage protects homebuyers from concealed dangers to their title after purchase. An improved owner's policy might be advised for individuals who purchase an REO residential or commercial property. But no matter the policy, REO residential or commercial property buyers ought to always be aware of laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or beneficiaries 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 describes, "To redeem a foreclosed residential or commercial property, the redeeming party needs to pay the quantity of the foreclosure quote, interest, and other charges consisting of taxes, insurance coverage, and repair work."

"Because foreclosure sales can occur fairly rapidly in Alabama, the redemption duration is longer than in many states. For mortgages came from 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 very rare, however anyone purchasing an REO residential or commercial property requires to work with a lawyer who understands and understands the law." These laws vary from state to state and can alter, so always consult your closing attorney with specific questions about the right of redemption.

Buyers purchasing an REO residential or commercial property before the redemption duration expires need to be conscious that owner's title insurance coverage will never supply affirmative coverage over the right of redemption. For money buyers, this will be listed as an exception in Schedule B-2 of the owner's title insurance coverage for the duration of the redemption period.

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

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in location until November 2021. As this moratorium has raised, lending institutions have carried out loss mitigation procedures to keep individuals in their mortgages and help them retain their residential or commercial properties. However, if loss mitigation techniques are not successful, the foreclosure process begins.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're anticipating to see an increase in these as the year advances. 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 market. It will not be like it was in 2008, but it will definitely 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 purchasing a bank-owned home are better geared up to serve their customers.
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At South Oak Title and Closing, we love partnering with real estate agents to assist them much better serve their customers. Whether you have particular concerns about dealing with REO residential or commercial properties or simply require an REO professional 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 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 married 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 short article is intended to offer basic details about REO residential or commercial properties in Alabama and ought to not be considered legal guidance. Laws worrying REO residential or commercial properties likewise differ from one state to another. Please consult your local attorney with concerns.