Real Estate Owned (REO)

Definition

Real Estate Owned (REO) is a term used in the real estate industry to refer to properties acquired by a lender, often a bank or a loan insurer, through the foreclosure process after a borrower defaults on their mortgage payments. Once a property has gone through the foreclosure auction and is not purchased, it becomes REO. The lender then takes possession of the property with the intent to sell it and recoup the unpaid loan balance.

REO properties are managed by the lender’s REO department, which is tasked with maintaining, marketing, and selling the property. The ultimate goal is to minimize the lender’s losses and return the property to productive use.

Examples

Bank-Owned Homes: If a homeowner stops making mortgage payments, the lender will foreclose on the property. If the property fails to sell at the foreclosure auction, it becomes an REO property and the bank will list it for sale, usually with the help of a realtor.
Government-Owned Properties: Government institutions like Fannie Mae or Freddie Mac also acquire REO properties through foreclosures. These properties are managed and subsequently listed for sale via property management companies or online auction platforms.

Frequently Asked Questions (FAQs)

What is the primary difference between foreclosure and REO?

Foreclosure is the legal process by which a lender takes control of a property due to the borrower’s inability to meet mortgage obligations. REO (Real Estate Owned) indicates that the property has already gone through foreclosure and is now owned by the lender.

How do banks sell REO properties?

Banks typically hire real estate agents or list REO properties on online platforms. They might also offer these properties at discounted rates, especially if they have been on the market for a long time.

Are REO properties cheaper?

REO properties are often sold at a discount compared to market prices, but the condition of the property may vary, and some may require significant repairs.

How can I find REO properties for sale?

REO properties can be found through various means, such as the lender’s website, real estate agents specializing in REOs, public records, and online auction sites.

What are the risks of buying an REO property?

Risks includes the property’s condition, potential liens or unpaid taxes, and the time required for repairs and renovations.

Foreclosure: The legal process by which a lender seeks to recover the balance of a loan from a borrower who has ceased to make payments, typically leading to the sale of the property.
Short Sale: A sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property, often used as an alternative to foreclosure.
Pre-Foreclosure: A stage in which the property is in the process of foreclosure due to a borrower’s default, but has not yet been sold at auction.
Deed in Lieu of Foreclosure: A deed instrument in which a borrower conveys all interest in a property to the lender to satisfy a loan that is in default and avoid foreclosure proceedings.

Online References

Suggested Books for Further Studies

“Foreclosure Investing For Dummies” by Ralph R. Roberts and Joseph Kraynak
“The Pre-Foreclosure Property Investor’s Kit” by Thomas J. Lucier
“Real Estate Investing: Market Analysis, Valuation Techniques, and Risk-Rewards” by David M. Geltner
“Investing in REO Properties: A Guide for Buyers, Investors, and Foreclosure Auction Pros” by Frank Hill
“The Book on Investing in Real Estate with No (and Low) Money Down” by Brandon Turner

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

### What happens to a property if it fails to sell at a foreclosure auction? - [ ] It is demolished. - [x] It becomes a Real Estate Owned (REO) property by the lender. - [ ] Ownership is transferred to the state. - [ ] The original borrower retains ownership. > **Explanation:** If a property fails to sell at a foreclosure auction, it becomes Real Estate Owned (REO) property, meaning the lender retains ownership. ### Who typically manages REO properties? - [ ] The original homeowner - [ ] The local government - [x] The lender's REO department - [ ] A real estate developer > **Explanation:** REO properties are managed by the lender's REO department, which looks after the property until it can be sold. ### Why are REO properties often sold at a discount? - [ ] To generate quick revenue - [ ] Because of better property condition - [x] Due to potential damage and longer listing times - [ ] Because they are always in excellent locations > **Explanation:** REO properties are often sold at a discount because they can be damaged or neglected from the foreclosure process and being unoccupied for a period. ### Can REO properties have unpaid liens or taxes? - [x] Yes, they can. - [ ] No, all dues are cleared before auction. - [ ] No, they are always lien-free. - [ ] Yes, but it is uncommon. > **Explanation:** Yes, REO properties can still carry unpaid liens or back taxes that need to be settled by the new owner or negotiate during the purchase process. ### How can potential buyers identify REO properties for sale? - [ ] Through television ads - [ ] Only by word of mouth - [ ] Only by visiting bank offices - [x] Via real estate agents, online listings, and lender websites > **Explanation:** Potential buyers can find REO properties through real estate agents, online listings, and lenders' websites among other resources. ### What is one common risk associated with purchasing REO properties? - [ ] Overly high prices - [x] Potential property damage - [ ] Legal residency issues - [ ] Lack of property deeds > **Explanation:** One common risk is potential property damage that occurred during a foreclosure process or while the property remained vacant. ### Which government institutions might acquire REO properties? - [x] Fannie Mae and Freddie Mac - [ ] The Federal Reserve - [ ] Local school boards - [ ] USPS > **Explanation:** Government institutions like Fannie Mae and Freddie Mac acquire REO properties due to their roles in the mortgage industry. ### What is a key step before purchasing an REO property? - [ ] Ignoring property condition - [ ] Skipping title search - [x] Conducting a thorough property inspection - [ ] Paying in cash only > **Explanation:** Conducting a thorough property inspection is crucial to assess any potential repairs and understand the property's condition. ### Are REO properties always in poor condition? - [ ] Yes, without exception - [ ] No, they are usually renovated - [x] No, condition varies widely - [ ] Yes, and they are unfixable > **Explanation:** REO properties vary widely in condition. Some may be in poor shape while others are relatively well-maintained. ### Which term best describes a sale where the proceeds will not cover the debts secured? - [x] Short Sale - [ ] Auction - [ ] Wholesale - [ ] Quick Sale > **Explanation:** A Short Sale is when the proceeds from selling the property fall short of the debts against it. It's often considered as an alternative to foreclosure.

Thank you for exploring the world of Real Estate Owned (REO) properties with us and tackling our sample quiz questions. Continue striving to deepen your understanding of real estate investments!