GitLab

After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now rising. As a result, we can anticipate to see an increase in the number of REO residential or commercial properties available on the market in the coming months.
hud.gov
Whether you're a reasonably new real estate agent or one who's been in the company for a while, you most likely might utilize a refresher on these bank-owned homes.

Our resident REO professional, 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?

Put simply, an REO residential or commercial property is realty that is owned by a bank or lender after failing to sell at a foreclosure auction. But to genuinely understand REO residential or commercial properties, you first 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 start. The mortgage agreement will consist of language about when the bank can begin this process. Typically, a loan provider won't start the foreclosure procedure till the borrower has actually missed four successive 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 many cases, the mortgage is renewed or the loan provider will work out loss mitigation choices to prevent foreclosure. A debtor who applies for Chapter 13 bankruptcy will likewise stop the foreclosure process."

This process looks different in every state. Underwood discusses, "Alabama is a nonjudicial state. This means that the bank does not have to submit a lawsuit versus the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notices that informs the mortgagor that they remain in default and offers info about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, require loan providers to submit a lawsuit against the mortgagor in state court to foreclose.

In Alabama, notifications 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 only 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 states, "Lenders aren't in the company 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 lending institution sends a recommendation for this residential or commercial property to both a realty brokerage and a title business.

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 couple of crucial distinctions. There's still a sign in the yard, a listing on the MLS, and photos of the residential or commercial property. The broker's objective is to discover a buyer for the residential or commercial property. But rather 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 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 hire a company to tidy things up and make sure things are working, however purchasers won't discover a staged, upgraded home."

Lenders wish to offer REO residential or commercial properties for fair market price as rapidly as possible, so prices is identified by acquiring a BPO, or broker price viewpoint. Two real estate agents will give their viewpoint on the marketplace cost of the residential or commercial property, and then these viewpoints are averaged to obtain the market price. If the residential or commercial property languishes on the market, the bank will start dropping the price in incremental portions to find a purchaser.

Title Process for REO residential or commercial properties

When the title business receives the recommendation for an REO residential or commercial property, they will start 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 exam, we're trying to find any potential issues so that we can provide 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 need to be resolved such as judgments, encumbrances, or liens, the title company 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 upgrade to title.

Common Title Issues with REO Properties

Several common title problems can emerge with REO residential or commercial properties. Tax redemption concerns are particularly common. In Alabama, taxes are paid in defaults. If they're not paid by December 31, they undergo penalties 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 buy the tax certificate.

Underwood states, "If the county owns the tax certificate, fixing this is a pretty straightforward process. But if it's owned by a 3rd party, it can get made complex." To redeem from a specific, a bank is required to pay the delinquent taxes, penalty, interest, along with the worth of any enhancements on the residential or commercial property. In some situations, there can be an extended settlement process to remove this tax lien.

Encroachment concerns are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly marked, which is why surveys are an essential part of the title search and test. Underwood explains, "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, or even part of a house or barn." It can be complicated to clear these problems and in some cases, a quitclaim deed might be needed.

And similar to any other residential or commercial property, we can find any variety of other title concerns. 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 business experienced with REO residential or commercial properties know precisely which concerns to search for and how to address them to present REO buyers with a clear title.

Owner's title insurance coverage protects property buyers from covert risks to their title after purchase. An enhanced owner's policy may be advised for individuals who purchase an REO residential or commercial property. But no matter the policy, REO residential or commercial property purchasers need to constantly know laws concerning the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or beneficiaries of the debtor, can redeem or redeem a foreclosed residential or commercial property for approximately a year after the foreclosure sale. Underwood describes, "To redeem a foreclosed residential or commercial property, the redeeming party should pay the quantity of the foreclosure bid, interest, and other charges consisting of taxes, insurance coverage, and repairs."

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

He continues, "Redemptions of foreclosed homes are very unusual, however anyone acquiring an REO residential or commercial property needs to deal with a lawyer who understands and understands the law." These laws vary from one state to another and can change, so always consult your closing attorney with particular concerns about the right of redemption.

an REO residential or commercial property before the redemption duration ends requirement to be mindful that owner's title insurance coverage will never provide affirmative protection 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 plan throughout of the redemption period.

Lenders providing financing for REO purchases will typically require affirmative coverage for the staying redemption duration. Options, such as a bond, exist if the loan amount is up to 30% higher than the foreclosure quote, however purchasers need to comprehend that affirmative coverage for the staying redemption period just safeguards the lending institution.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location up until November 2021. As this moratorium has actually raised, lending institutions have actually executed loss mitigation procedures to keep people in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation methods are unsuccessful, the foreclosure procedure 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 marketplace. 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 daunted 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 better geared up to serve their clients.

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 working with REO residential or commercial properties or simply need an REO expert 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 spent decades dealing with banks, loan providers, and REO residential or commercial properties through his time leading the REO department at a Birmingham law office. Jeff is married and has 2 children: one recent graduate and one current student at Auburn University.

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

This post is meant to offer general information about REO residential or commercial properties in Alabama and should not be considered legal guidance. Laws concerning REO residential or commercial properties also vary from state to state. Please consult your local attorney with concerns.