What is an REO?
REO is a common term used in real estate circles. In its short absolute form, it stands for Real Estate Owned. In different contexts, it is also referred as Bank Owned or Lender Owned Real Estate. A lender/bank initiates foreclosure proceedings on a property when the borrower fails to make the scheduled payments on a mortgage loan. This process usually leads to the foreclosure auction, unless the borrower and the lender work out an amicable arrangement. In simple terms, REOs are bank/lender foreclosed properties being offer for sale.
If at the auction, the property receives no bids at all or bids that are substantially lower than the lien amount, then the bank may choose to repossess the property. Such properties that have already been through the foreclosure process end up in the REO portfolio of a lender. Mortgage Lenders and Banks are primarily financial companies engaged in making loans and thus prefer not to spend substantial resources handling their REO properties. They usually outsource this process to companies that specialize in this niche. Many of the bigger lenders also sell them directly by using Realtors/brokers that specialize in handling REO properties. REOs are popular with real estate investors as they often are priced well below the market value for the given area. Financial institutions are keen to dispose off their REO holdings quickly as these properties are treated as non performing assets on their accounting books. The maintenance and holding costs including taxes and insurance add to increasing costs for the lender. This losing situation for the bank/lender allows a savvy investor to find a good deal on real estate on very favorable terms.