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

Whether you're a reasonably new real estate agent or one who's been in the service for a while, you most likely could utilize a refresher on these bank-owned homes.

Our resident REO expert, Jeff Underwood, shares what real estate agents require to learn 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 loan provider after failing to cost a foreclosure auction. But to genuinely understand REO residential or commercial properties, you first need to understand the foreclosure procedure.

The Foreclosure Process

When a specific with a mortgage stops paying on that mortgage for any factor, the foreclosure procedure will start. The mortgage contract will consist of language about when the bank can start this procedure. Typically, a lender will not begin the foreclosure process till the debtor has actually missed out on four successive payments.

Not all residential or commercial properties that enter the foreclosure process are actually foreclosed upon. Jeff Underwood, handling lawyer at South Oak Title & Closing in Auburn, states, "Oftentimes, the mortgage is restored or the lending institution will work out loss mitigation choices to prevent foreclosure. A debtor who applies for Chapter 13 insolvency will likewise stop the foreclosure process."

This procedure looks different in every state. Underwood describes, "Alabama is a nonjudicial state. This means that the bank does not need to file a lawsuit against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notices that notifies the mortgagor that they are in default and supplies info about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, require lending institutions to file a suit against the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are likewise published in the county newspaper for three weeks. If the bank or lending institution is the high-bidder or just purchaser at the foreclosure sale, this residential or commercial property ends up being "genuine estate owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in business 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 market as an REO residential or commercial property." The loan provider sends a referral for this residential or commercial property to both a property brokerage and a title company.

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 key differences. There's still a sign in the lawn, a listing on the MLS, and images of the residential or commercial property. The broker's objective is to discover a purchaser for the residential or commercial property. But rather of an individual customer, 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 may not look like a normal 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 employ a company to clean things up and make sure things are working, but purchasers won't find a staged, updated home."

Lenders desire 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 cost viewpoint. Two real estate agents will offer their viewpoint on the marketplace cost of the residential or commercial property, and after that these opinions are balanced to acquire the market price. If the residential or commercial property languishes on the market, the bank will begin dropping the cost in incremental portions to discover a buyer.

Title Process for REO residential or commercial properties

When the title company gets the referral 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 potential problems so that we can present a clear title to the purchaser," Underwood discusses.

If the title is clear, this file is prepared for when the residential or commercial property goes under agreement. If there are issues that require to be addressed 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 agreement, all that's needed is an update to title.

Common Title Issues with REO Properties

Several common title concerns can develop with REO residential or commercial properties. Tax redemption problems are particularly common. In Alabama, taxes are paid in arrears. If they're not paid by December 31, they're subject to charges and interest. If taxes are still unpaid by April, the county will have a tax sale in May. Most of the times, the county is the high bidder. But in other cases, a 3rd celebration will buy the tax certificate.

Underwood states, "If the county owns the tax certificate, resolving this is a pretty straightforward procedure. 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 overdue taxes, charge, interest, along with the worth of any enhancements on the residential or commercial property. In some situations, there can be a prolonged settlement process to remove this tax lien.

Encroachment problems are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly defined, which is why studies are a required part of the title search and examination. Underwood explains, "An infringement is any structure that exists on a 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 made complex to clear these issues and in many cases, a quitclaim deed might be needed.

And as with any other residential or commercial property, we can find any number of other title concerns. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can also be discovered throughout the title search and examination. experienced with REO residential or commercial properties understand exactly which concerns to search for and how to address them to present REO purchasers with a clear title.

Owner's title insurance safeguards homebuyers from surprise dangers to their title after purchase. An enhanced owner's policy may be advised for individuals who purchase an REO residential or commercial property. But despite the policy, REO residential or commercial property buyers should constantly be aware of laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or successors of the debtor, can redeem or buy back 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 celebration needs to pay the amount of the foreclosure bid, interest, and other charges including taxes, insurance coverage, and repairs."

"Because foreclosure sales can take place reasonably rapidly in Alabama, the redemption period is longer than in many states. For mortgages came from before 2016, that redemption period is a year. For mortgages come from after January 1, 2016, the redemption duration is reduced to 180 days."

He continues, "Redemptions of foreclosed homes are very uncommon, but anyone buying an REO residential or commercial property needs to work with an attorney who understands and comprehends the law." These laws vary from state to state and can change, so constantly consult your closing lawyer with specific questions about the right of redemption.

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

Lenders supplying financing for REO purchases will usually require affirmative protection for the remaining redemption period. Options, such as a bond, exist if the loan amount depends on 30% greater than the foreclosure quote, but purchasers should comprehend that affirmative protection for the staying redemption period only safeguards the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures remained in location till November 2021. As this moratorium has actually lifted, lending institutions have carried out loss mitigation treatments to keep people in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation methods are unsuccessful, the foreclosure process begins.

Underwood says, "Foreclosure starts are up 39% over the last quarter, and we're anticipating 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 portion of REO residential or commercial properties on the marketplace. It will not resemble it remained in 2008, however it will definitely be more than what we're used to seeing."

There's no need 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 subtlety of purchasing a bank-owned home are much better geared up to serve their clients.

At South Oak Title and Closing, we enjoy partnering with real estate agents to assist them much better serve their customers. Whether you have specific questions about dealing with REO residential or commercial properties or just 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 invested decades working with banks, lenders, and REO residential or commercial properties through his time leading the REO division at a Birmingham law office. Jeff is wed and has two daughters: one current graduate and one present student at Auburn University.

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

This post is planned to supply general information about REO residential or commercial properties in Alabama and must not be thought about legal advice. Laws worrying REO residential or commercial properties likewise differ from one state to another. Please consult your regional attorney with questions.