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After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now rising. As a result, we can anticipate 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 fairly new real estate agent or one who's been in business for a while, you probably might use a refresher on these .
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?
Simply put, an REO residential or commercial property is genuine estate that is owned by a bank or loan provider after failing to sell at a foreclosure auction. But to truly understand REO residential or commercial properties, you initially need to comprehend the foreclosure procedure.
The Foreclosure Process
When an individual with a mortgage stops paying on that mortgage for any reason, the foreclosure procedure will start. The mortgage arrangement will include language about when the bank can begin this process. Typically, a loan provider won't start the foreclosure procedure until the debtor has missed four successive payments.
Not all residential or commercial properties that go into the foreclosure process are actually foreclosed upon. Jeff Underwood, managing attorney at South Oak Title & Closing in Auburn, states, "In a lot of cases, the mortgage is renewed or the lender will work out loss mitigation options to prevent foreclosure. A debtor who applies for Chapter 13 personal bankruptcy will also halt the foreclosure procedure."
This process looks various in every state. Underwood explains, "Alabama is a nonjudicial state. This indicates that the bank does not have to submit a claim against the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that informs the mortgagor that they remain in default and supplies details about reinstatement. Failure to do so will result in a foreclosure sale." Other states, such as Florida, need loan providers to file a lawsuit versus the mortgagor in state court to foreclose.
In Alabama, notices about the upcoming foreclosure sale are likewise released in the county newspaper for 3 weeks. If the bank or lending institution is the high-bidder or only purchaser at the foreclosure sale, this residential or commercial property ends up being "realty 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 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 recommendation for this residential or commercial property to both a realty brokerage and a title company.
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 couple of essential distinctions. There's still a sign in the backyard, a listing on the MLS, and images of the residential or commercial property. The broker's objective is to discover a buyer for the residential or commercial property. But instead 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 may 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, including sinks and banisters. The bank will employ a company to tidy things up and ensure things are working, but buyers will not find a staged, updated home."
Lenders want to offer REO residential or commercial properties for fair market value as rapidly as possible, so prices is identified by getting a BPO, or broker price opinion. Two real estate agents will give their opinion on the market price of the residential or commercial property, and after that these viewpoints are balanced to obtain the sale price. If the residential or commercial property suffers on the market, the bank will start dropping the price in incremental percentages to find 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, 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 as with any title search and examination, we're searching for any possible issues so that we can provide a clear title to the buyer," Underwood discusses.
If the title is clear, this file is all set for when the residential or commercial property goes under contract. If there are problems that need to be attended to such as judgments, encumbrances, or liens, the title company will clear the title so that it's ready for a future purchaser. Once the residential or commercial property goes under agreement, all that's needed is an upgrade to title.
Common Title Issues with REO Properties
Several common title problems can develop with REO residential or commercial properties. Tax redemption problems are especially typical. In Alabama, taxes are paid in financial obligations. 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. For the most part, the county is the high bidder. But in other cases, a 3rd party will acquire the tax certificate.
Underwood says, "If the county owns the tax certificate, solving this is a pretty simple process. But if it's owned by a 3rd celebration, it can get complicated." To redeem from a private, a bank is required to pay the delinquent taxes, charge, interest, in addition to the worth of any improvements on the residential or commercial property. In some situations, there can be a prolonged settlement procedure to eliminate this tax lien.
Encroachment concerns are likewise common with REO residential or commercial properties. Residential or commercial property lines aren't always plainly marked, which is why surveys are an essential part of the title search and test. Underwood describes, "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 concerns and in many cases, a quitclaim deed may be needed.
And similar to any other residential or commercial property, we can discover any variety of other title concerns. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can likewise be discovered during the title search and examination. Title companies experienced with REO residential or commercial properties understand exactly which concerns to search for and how to address them to present REO buyers with a clear title.
Owner's title insurance protects homebuyers from surprise dangers to their title after purchase. An enhanced owner's policy might be recommended for people who buy an REO residential or commercial property. But despite the policy, REO residential or commercial property purchasers ought to constantly be mindful of laws worrying the right of redemption.
Right of Redemption Laws
Individuals, consisting of the foreclosed debtor or heirs 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 must pay the quantity of the foreclosure quote, interest, and other charges consisting of taxes, insurance, and repair work."
"Because foreclosure sales can occur reasonably rapidly in Alabama, the redemption period is longer than in most states. For mortgages came from before 2016, that redemption duration is a year. For mortgages originated after January 1, 2016, the redemption duration is shortened to 180 days."
He continues, "Redemptions of foreclosed homes are extremely unusual, however anybody purchasing an REO residential or commercial property needs to work with a lawyer who knows and understands the law." These laws vary from one state to another 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 aware that owner's title insurance coverage will never ever offer affirmative protection over the right of redemption. For money purchasers, this will be noted as an exception in Schedule B-2 of the owner's title insurance coverage for the period of the redemption period.
Lenders offering financing for REO purchases will typically need affirmative protection for the remaining redemption period. Options, such as a bond, exist if the loan quantity depends on 30% greater than the foreclosure bid, however purchasers should comprehend that affirmative protection for the remaining redemption duration just protects the lender.
The Future of REO Properties
Due to the pandemic, a moratorium on foreclosures remained in location until November 2021. As this moratorium has lifted, loan providers have executed loss mitigation procedures to keep individuals in their mortgages and assist them maintain their residential or commercial properties. However, if loss mitigation strategies are unsuccessful, the foreclosure procedure starts.
Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see an increase in these as the year advances. Starting in the third 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 certainly be more than what we're utilized to seeing."
There's no requirement 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 much better geared up to serve their customers.
At South Oak Title and Closing, we love partnering with real estate agents to assist them 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 invested years working with banks, lenders, and REO residential or commercial properties through his time leading the REO department at a Birmingham law practice. Jeff is married and has two daughters: one current graduate and one existing student at Auburn University.
Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.
This post is planned to offer 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 differ from one state to another. Please consult your local lawyer with concerns.
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