Real Estate Owned (REO)

Definition

Real Estate Owned (REO) is a classification used for properties that lenders, primarily banks, have repossessed through the foreclosure process and are held in their inventory. These properties are typically not sold during foreclosure auctions and thus, ownership reverts to the lender. Once in possession, the lender aims to sell the property to recoup any losses.

Examples

Bank Inventory: A bank may acquire multiple homes due to owners defaulting on their mortgage payments. These homes are added to the bank’s REO inventory.
Large Scale: Due to an economic downturn, a regional bank’s REO properties surge in volume, accounting for 10% of its total assets as homeowners fail to meet mortgage obligations.
Investor Opportunity: Real estate investors sometimes buy REO properties at a discount during bank liquidations, aiming to renovate and sell them for profit.

Frequently Asked Questions (FAQs)

What are Real Estate Owned (REO) properties?

REO properties are properties that lenders acquire through the foreclosure process. These properties are typically added to the lender’s inventory because they were not sold during the foreclosure auction.

How do properties become REO?

Properties become REO after the foreclosure process if the lender reclaims the property because no satisfactory bids were made during the foreclosure auction.

Are REO properties cheaper than market value?

Often, REO properties may be sold at a discount compared to market value, as lenders aim to liquidate these non-performing assets quickly.

How can someone purchase an REO property?

REO properties can be purchased directly from the bank or through real estate agents handling the sale. They are often listed on multiple listing services (MLS) and other property platforms.

What are the risks of buying an REO property?

Buyers should be aware that REO properties might require significant repairs and property condition assessments, as they are sold “as-is.”

Foreclosure: The legal process by which a lender can repossess a property due to the borrower’s inability to meet mortgage obligations.
Short Sale: The sale of property for less than the amount owed on its mortgage with the lender’s approval.
Auction: A public sale where properties may be sold to the highest bidder, especially in foreclosure situations.
Deed in Lieu of Foreclosure: A process where the property owner voluntarily gives up ownership to the lender to avoid foreclosure.
Bank-Owned Property: Another term for REO, indicating that the property is owned by a financial institution.
Asset Management Company (AMC): Firms specializing in managing and selling REO properties on behalf of lenders.

Online Resources

HUD Homes: https://www.hudhomes.com - U.S. Department of Housing and Urban Development provides listings for REO properties.
Bank of America’s REO Properties: https://foreclosure.bankofamerica.com - Bank of America provides direct access to their REO property listings.
Zillow: https://www.zillow.com - A popular listing site that includes REO properties.

References

Real Estate Analysis: A Professional Guide by David M. Geltner
Foreclosure Investing For Dummies by Ralph R. Roberts
The Fundamentals of Real Estate Owned (REO) Sales Training Manual by James L. Randle

Suggested Books for Further Study

Investing in REO Properties: A Guide to Creating Real Estate Wealth by Consultant Angie T.
The Book on Investing in Real Estate with No (and Low) Money Down by Brandon Turner
The Real Estate Wholesaling Bible by Than Merrill
Foreclosures: How To Make Money With Hidden Market Properties by Kim Reeder
Real Estate Investing: Market Analysis, Valuation Techniques, and Risk Management by David Parker

Real Estate Basics: Real Estate Owned (REO) Fundamentals Quiz

### What typically happens to a property after it fails to sell at a foreclosure auction? - [ ] It is automatically demolished. - [ ] It goes back to the original owner. - [x] It becomes an REO property. - [ ] It is given to the government. > **Explanation:** When a property fails to sell at foreclosure auction, it typically becomes an REO property, falling into the lender’s ownership to be eventually sold. ### Who generally owns REO properties? - [x] Lenders like banks. - [ ] Real estate agents. - [ ] The previous homeowner. - [ ] Investment firms. > **Explanation:** REO properties are typically owned by lenders, such as banks, who acquires the property through foreclosure. ### Why might a lender be interested in selling an REO property quickly? - [x] To minimize holding costs and recoup losses. - [ ] To improve community relations. - [ ] To help former homeowners regain their property. - [ ] To increase inventory. > **Explanation:** Lenders often aim to sell REO properties quickly to minimize holding costs and recoup financial losses from defaulted loans. ### How are REO properties commonly listed for sale? - [ ] Through car dealerships. - [x] On multiple listing services (MLS) and other property platforms. - [ ] By government mandate. - [ ] At private auctions. > **Explanation:** REO properties are commonly listed for sale on multiple listing services (MLS) and other property platforms. ### What does "sold as-is" mean in the context of REO properties? - [ ] The property is guaranteed to be in perfect condition. - [x] The property is sold in its current state without any repairs. - [ ] The property comes with exclusive warranties. - [ ] The property will be renovated before the sale. > **Explanation:** "Sold as-is" means the property is sold in its current condition, and the seller (lender) does not perform any repairs. ### Can REO properties be a good deal for investors? - [x] Yes, they are often below market value but may require renovation. - [ ] No, they are always overpriced. - [ ] Only if they are new builds. - [ ] Only in urban areas. > **Explanation:** REO properties can often be acquired below market value, but they may require significant renovations and due diligence from investors. ### What added risk does purchasing an REO property involve? - [ ] Property values will always decrease. - [ ] They always come with hidden liens. - [x] They might require significant repairs and assessments. - [ ] They are always in bad locations. > **Explanation:** There is a risk that REO properties might require significant repairs as they are sold “as-is” and might not have been well maintained. ### Are REO properties and foreclosed properties the same thing? - [ ] Yes, they are the exact same situation always. - [x] No, REO properties are specific unsold foreclosures that revert to lenders. - [ ] Yes, because banks own all types of homes. - [ ] It depends on the state laws. > **Explanation:** REO properties are a subset of foreclosed properties that did not sell at auction and thus reverted to lender ownership. ### What might be a benefit of buying an REO property? - [ ] High competition among buyers always driving prices up. - [ ] Guaranteed immediate resale. - [x] Potential to secure a property below market value. - [ ] Lack of legal procedures involved. > **Explanation:** The primary benefit is the potential to secure a property below market value, making them attractive for investors. ### Who generally handles the sale of REO properties for lenders? - [ ] The homeowners’ association. - [x] Real estate agents or asset management companies (AMCs). - [ ] Bank executives. - [ ] Government bodies. > **Explanation:** Lenders typically rely on real estate agents or asset management companies to handle the sale of REO properties in their portfolios.