After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now increasing. As an outcome, we can expect to see an increase in the number of REO residential or commercial properties readily available on the market in the coming months.
Whether you're a fairly new real estate agent or one who's been in the service for a while, you probably could use a refresher on these bank-owned homes.
Our resident REO expert, 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 offer 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 an individual with a mortgage stops paying on that mortgage for any factor, the foreclosure process will start. The mortgage contract will include language about when the bank can begin this process. Typically, a loan provider won't start the foreclosure process until the customer has actually missed four consecutive payments.
Not all residential or commercial properties that get in the foreclosure process are really foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, says, "In most cases, the mortgage is reinstated or the lending institution will exercise loss mitigation alternatives to prevent foreclosure. A debtor who applies for Chapter 13 bankruptcy will also halt the foreclosure process."
This process looks different in every state. Underwood explains, "Alabama is a nonjudicial state. This means that the bank does not need to submit a lawsuit against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that notifies the mortgagor that they remain in default and supplies info about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, require lenders to file a suit versus the mortgagor in state court to foreclose.
In Alabama, notifications about the upcoming foreclosure sale are likewise released in the county paper for 3 weeks. If the bank or loan provider is the high-bidder or just buyer at the foreclosure sale, this residential or commercial property becomes "real estate owned", or an REO residential or commercial property.
Selling an REO residential or commercial property
Jeff Underwood says, "Lenders aren't in the organization of retaining these residential or commercial properties. Their goal is to sell 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 lending institution sends out 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 very similar to noting any other residential or commercial property, with a few essential differences. There's still a check in the lawn, a listing on the MLS, and images of the residential or commercial property. The broker's goal is to discover a buyer for the residential or commercial property. But instead of a private 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, including sinks and banisters. The bank will hire a company to clean things up and make sure things are working, but purchasers will not discover a staged, upgraded home."
Lenders wish to offer REO residential or commercial properties for fair market value as rapidly as possible, so pricing is figured out by obtaining a BPO, or broker cost viewpoint. Two real estate agents will provide their opinion on the marketplace price of the residential or commercial property, and then these viewpoints are averaged to acquire the market price. If the residential or commercial property languishes on the market, the bank will start dropping the rate in incremental percentages to discover a buyer.
Title Process for REO residential or commercial properties
When the title business gets the referral for an REO residential or commercial property, they will start 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 just like any title search and exam, we're trying to find any potential concerns so that we can present a clear title to the purchaser," Underwood discusses.
If the title is clear, this file is ready for when the residential or commercial property goes under agreement. If there are issues that need to be addressed such as judgments, encumbrances, or liens, the title company will clear the title so that it's ready for a future buyer. 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 common title concerns can arise with REO residential 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 purchase the tax certificate.
Underwood states, "If the county owns the tax certificate, solving this is a pretty simple process. But if it's owned by a third celebration, it can get complicated." To redeem from a specific, a bank is required to pay the overdue taxes, charge, interest, along with the worth of any improvements on the residential or commercial property. In some scenarios, there can be an extended settlement procedure to remove this tax lien.
Encroachment concerns are also common with REO residential or commercial properties. Residential or commercial property lines aren't always clearly delineated, which is why studies are an essential part of the title search and exam. 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 home or barn." It can be complicated to clear these issues and in many cases, a quitclaim deed might be needed.
And similar to any other residential or commercial property, we can discover any variety of other title problems. 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 test. Title companies experienced with REO residential or commercial properties understand precisely which problems to search for and how to address them to present REO purchasers with a clear title.
Owner's title insurance secures homebuyers from concealed risks 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 should constantly understand laws concerning the right of redemption.
Right of Redemption Laws
Individuals, consisting of the foreclosed debtor or beneficiaries of the debtor, can redeem or buy back a foreclosed residential or commercial property for up to a year after the foreclosure sale. Underwood explains, "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 repairs."
"Because foreclosure sales can take place relatively rapidly 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 period is reduced to 180 days."
He continues, "Redemptions of foreclosed homes are really rare, however anyone acquiring an REO residential or commercial property requires to deal with an attorney who understands and comprehends the law." These laws differ from state to state and can alter, so constantly consult your closing attorney with particular concerns about the right of redemption.
Buyers acquiring an REO residential or commercial property before the redemption period expires need to be aware that owner's title insurance coverage will never provide 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 plan for the period of the redemption period.
Lenders supplying funding for REO purchases will generally require affirmative coverage for the staying redemption duration. Options, such as a bond, exist if the loan amount depends on 30% higher than the foreclosure bid, but buyers need to comprehend that affirmative protection 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 place up until November 2021. As this moratorium has lifted, lending institutions have actually implemented loss mitigation treatments to keep people in their mortgages and help them keep their residential or commercial properties. However, if loss mitigation techniques are unsuccessful, the foreclosure process starts.
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 begin to see a higher-than-normal portion of REO residential or commercial properties on the market. It won't 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 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 buying a bank-owned home are better geared up 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 questions about dealing with REO residential or commercial properties or simply need an REO expert 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 actually spent decades working with banks, lending institutions, and REO residential or commercial properties through his time leading the REO department at a Birmingham law office. Jeff is wed and has two daughters: one recent graduate and one existing trainee at Auburn University.
Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.
This article is meant to provide general info about REO residential or commercial properties in Alabama and ought to not be thought about legal recommendations. Laws worrying REO residential or commercial properties likewise differ from state to state. Please consult your regional attorney with concerns.
