What does REO mean or Real Estate Owned?
An REO (or real estate owned) is a property that gets repossessed by the bank resulting from the borrower’s default on the mortgage.
The term REO originates from GAAP referring to “other real estate owned” (OREO), which is used on financial statements as a classification of real property not directly related to the main business. REO’s are considered to be non-income producing assets.
Banks are not in the business of owning property, when they take back properties into their portfolios via the foreclosure process. Often times, these properties have a lot of deferred maintenance and are in poor condition. Banks must manage these properties and prepare them for resale. The bank’s job is to dispose of the asset and minimize their loss on the mortgage loan. Investors love REO’s because they can buy these very inexpensively from banks to compensate for their often poor condition.
Once a homeowner defaults on the mortgage loan, the bank will begin the foreclosure process. They will try to see if they can encourage the borrower to sell the property on a short sale, which is where the bank will accept less than the full loan balance to facilitate a home sale. Short sales enable the borrower to avoid foreclosure.
If the borrower does not cooperate with a short sale, the bank will proceed with the foreclosure process to take the house back so it can liquidate it to minimize their loss. At the foreclosure auction, the bank takes the property back as an REO as a result of being the high bidder at auction. Other bidders may show up to bid on the property, but the bank’s loan balance can be much higher than what the other auction bidders are willing to pay.
When the bank takes title to the property, it has an opportunity to clear up the title. Sometimes there are junior liens, which get extinguished in the foreclosure sale.
The bank becomes responsible for managing the property. This means they must change the locks, secure swimming pools (to prevent drownings), cut grass, remove debris, and prevent squatters from gaining possession of the property. The bank will hire a real estate agent to manage the property and prepare it for resale.
Real estate investors like to buy foreclosures and REO’s because they can buy these properties on the cheap. They can get especially good deals on fixer uppers that require a lot of repairs. Since banks can be in a hurry to liquidate these homes, investors pick these up at discounts to compensate for the condition of the property.
Are you interested in buying REO’s? Fill out our buyer form telling us what you’re looking for. Caroline Allison is an expert at helping people find great deals on pre-foreclosures and REO’s.