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

Whether you're a relatively new real estate agent or one who's remained in the business for a while, you most likely could use a refresher on these bank-owned homes.
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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 property that is owned by a bank or lending institution after stopping working to sell at a foreclosure auction. But to truly comprehend REO residential or commercial properties, you first require to understand the foreclosure process.

The Foreclosure Process

When a specific with a mortgage stops paying on that mortgage for any factor, the foreclosure procedure will begin. The mortgage contract will include language about when the bank can start this procedure. Typically, a lender won't start the foreclosure process until the borrower has missed four consecutive payments.

Not all residential or commercial properties that enter the foreclosure process are really foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, says, "In most cases, the mortgage is restored or the lender will work out loss mitigation alternatives to prevent foreclosure. A debtor who submits for Chapter 13 insolvency will also halt the foreclosure process."

This process looks different in every state. Underwood describes, "Alabama is a nonjudicial state. This implies 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 notifies the mortgagor that they are in default and provides details about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, require lending institutions to file a claim versus the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are likewise published in the county paper for three weeks. If the bank or lender is the high-bidder or only buyer 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 says, "Lenders aren't in business of maintaining these residential or commercial properties. Their objective 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 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 business.

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 key differences. There's still a check in the yard, a listing on the MLS, and photos of the residential or commercial property. The broker's goal is to discover a purchaser for the residential or commercial property. But instead of a private client, 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 normal home that's market-ready. We had one REO residential or commercial property where the previous owner took whatever out of the home, consisting of sinks and banisters. The bank will hire a business to tidy things up and ensure things are working, but buyers will not find a staged, upgraded home."

Lenders wish to offer REO residential or commercial properties for fair market value as rapidly as possible, so prices is determined by acquiring a BPO, or broker price opinion. 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 sale price. If the residential or commercial property suffers on the market, the bank will begin dropping the cost in incremental percentages to find a buyer.

Title Process for REO residential or commercial properties

When the title business receives 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 prospective issues so that we can provide a clear title to the buyer," Underwood describes.

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 addressed such as judgments, encumbrances, or liens, the title business will clear the title so that it's prepared for a future purchaser. Once the or commercial property goes under agreement, all that's needed is an upgrade to title.

Common Title Issues with REO Properties

Several common title issues can develop with REO residential or commercial properties. Tax redemption problems 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 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, resolving this is a quite straightforward procedure. But if it's owned by a 3rd party, it can get complicated." To redeem from a specific, a bank is required to pay the overdue taxes, penalty, interest, in addition to the worth of any improvements on the residential or commercial property. In some circumstances, there can be a prolonged settlement process to remove this tax lien.

Encroachment concerns are also common with REO residential or commercial properties. Residential or commercial property lines aren't constantly clearly marked, which is why studies are a necessary part of the title search and exam. Underwood describes, "An encroachment is any structure that exists on a neighbor's land or residential or commercial property - a fence, a shed, a mobile home, and even part of a house or barn." It can be complicated to clear these concerns and in some cases, a quitclaim deed may be required.

And just like 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 do not have marital status, and other encumbrances can likewise be discovered during the title search and exam. Title business experienced with REO residential or commercial properties understand exactly which issues to look for and how to address them to present REO buyers with a clear title.

Owner's title insurance secures homebuyers from surprise dangers to their title after purchase. An enhanced owner's policy might be suggested for people who purchase an REO residential or commercial property. But despite the policy, REO residential or commercial property buyers must always know laws concerning the right of redemption.

Right of Redemption Laws

Individuals, consisting of the foreclosed debtor or heirs of the debtor, deserve to 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 quantity of the foreclosure bid, interest, and other charges including taxes, insurance coverage, and repairs."

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

He continues, "Redemptions of foreclosed homes are really uncommon, however anyone acquiring an REO residential or commercial property requires 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 questions about the right of redemption.

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

Lenders supplying financing for REO purchases will typically require affirmative coverage for the remaining redemption duration. Options, such as a bond, exist if the loan quantity is up to 30% higher than the foreclosure quote, but purchasers ought to comprehend that affirmative coverage for the remaining redemption duration only safeguards the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location till November 2021. As this moratorium has actually raised, loan providers have implemented loss mitigation treatments to keep people in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation strategies are not successful, the foreclosure process begins.

Underwood says, "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 start 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, however it will definitely be more than what we're used 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 understand the nuance of buying a bank-owned home are much better equipped to serve their clients.

At South Oak Title and Closing, we like partnering with real estate agents to help them better serve their customers. Whether you have specific questions 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 questions today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has invested decades dealing with banks, lending institutions, and REO residential or commercial properties through his time leading the REO department at a Birmingham law office. Jeff is married and has two children: one current graduate and one existing student at Auburn University.
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Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.

This article is meant to provide general details about REO residential or commercial properties in Alabama and must not be thought about legal guidance. Laws worrying REO residential or commercial properties likewise vary from one state to another. Please consult your regional attorney with questions.