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

Whether you're a reasonably brand-new real estate agent or one who's remained in business for a while, you most likely could utilize a refresher on these bank-owned homes.
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Our resident REO professional, Jeff Underwood, shares what real estate agents require to know 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 property that is owned by a bank or lender after failing to sell at a foreclosure auction. But to really comprehend REO residential or commercial properties, you initially require to understand the foreclosure procedure.

The Foreclosure Process

When a specific with a mortgage stops making payments on that mortgage for any factor, the foreclosure process will start. The mortgage arrangement will consist of language about when the bank can start this process. Typically, a lending institution won't begin the foreclosure process up until the customer has actually missed 4 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, says, "Oftentimes, the mortgage is reinstated or the lender will exercise loss mitigation choices to prevent foreclosure. A debtor who submits for Chapter 13 bankruptcy will also stop the foreclosure process."

This procedure looks different in every state. Underwood discusses, "Alabama is a nonjudicial state. This suggests that the bank does not need to submit a suit 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 provides details about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need lending institutions to file 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 lender is the high-bidder or only buyer 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 the company of retaining 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 market as an REO residential or commercial property." The lender sends 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 extremely similar to noting any other residential or commercial property, with a few key distinctions. There's still an indication 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 instead of a specific 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 might not look like a normal 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 hire a company to tidy things up and make certain things are working, however purchasers will not find a staged, upgraded home."

Lenders wish to offer REO residential or commercial properties for reasonable market worth as rapidly as possible, so pricing is figured out by obtaining a BPO, or broker rate opinion. Two real estate agents will give their opinion on the market cost of the residential or commercial property, and after that these opinions are balanced to obtain the list rate. If the residential or commercial property languishes on the marketplace, the bank will begin dropping the rate in incremental portions to discover a buyer.

Title Process for REO residential or commercial properties

When the title company receives the referral 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 similar to any title search and examination, we're searching for any prospective problems so that we can provide a clear title to the buyer," Underwood describes.

If the title is clear, this file is prepared for when the residential or commercial property goes under agreement. If there are problems that need 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 agreement, all that's required is an update to title.

Common Title Issues with REO Properties

Several typical title problems can occur with or commercial properties. Tax redemption issues are particularly typical. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they go through charges and interest. If taxes are still unsettled by April, the county will have a tax sale in May. For the most part, the county is the high bidder. But in other cases, a 3rd party will buy the tax certificate.

Underwood says, "If the county owns the tax certificate, resolving this is a quite straightforward process. But if it's owned by a 3rd party, it can get made complex." To redeem from a private, a bank is needed to pay the delinquent taxes, charge, interest, as well as the value 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 concerns are also typical with REO residential or commercial properties. Residential or commercial property lines aren't always plainly marked, 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, or even part of a house or barn." It can be complicated to clear these concerns and in many cases, a quitclaim deed may be needed.

And similar to any other residential or commercial property, we can find any number of other title problems. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can also be discovered during the title search and test. Title companies experienced with REO residential or commercial properties understand precisely which issues to try to find and how to address them to present REO purchasers with a clear title.

Owner's title insurance secures property buyers from hidden risks to their title after purchase. An enhanced owner's policy might be advised for people who purchase an REO residential or commercial property. But no matter the policy, REO residential or commercial property purchasers should constantly know laws concerning the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or successors of the debtor, have the right to redeem or redeem 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 party needs to pay the amount of the foreclosure quote, interest, and other charges consisting of taxes, insurance, and repairs."

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

He continues, "Redemptions of foreclosed homes are really unusual, however anyone acquiring an REO residential or commercial property needs to deal with a lawyer who knows and comprehends the law." These laws differ from one state to another and can alter, so constantly consult your closing attorney with specific concerns about the right of redemption.

Buyers purchasing an REO residential or commercial property before the redemption period expires requirement to be aware that owner's title insurance will never provide affirmative protection 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 plan for the period of the redemption period.

Lenders supplying funding for REO purchases will usually need affirmative protection for the remaining redemption period. Options, such as a bond, exist if the loan quantity is up to 30% greater than the foreclosure quote, however purchasers must understand that affirmative coverage for the staying redemption period only protects the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in place until November 2021. As this moratorium has actually raised, lenders have implemented loss mitigation procedures to keep individuals in their mortgages and help them retain their residential or commercial properties. However, if loss mitigation techniques are unsuccessful, the foreclosure process begins.

Underwood says, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see a boost in these as the year progresses. Starting in the 3rd quarter of this year, we'll start to see a higher-than-normal percentage of REO residential or commercial properties on the marketplace. It will not be like it remained in 2008, but it will certainly be more than what we're used to seeing."

There's no need 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 much better equipped to serve their customers.

At South Oak Title and Closing, we like partnering with real estate agents to help them much better serve their clients. Whether you have specific concerns about dealing with REO residential or commercial properties or just need 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, lending institutions, and REO residential or commercial properties through his time leading the REO department at a Birmingham law practice. Jeff is married and has 2 daughters: one recent graduate and one current trainee at Auburn University.

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

This article is planned to offer basic information about REO residential or commercial properties in Alabama and should not be thought about legal recommendations. Laws concerning REO residential or commercial properties also differ from one state to another. Please consult your regional attorney with questions.