Real Estate Owned (“REO”)

Real estate owned (or “REO”) is a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction. This is common because most of the properties up for sale at these auctions are worth less than the total amount owed to the bank. The minimum bid in most foreclosure auctions equals the outstanding loan amount, the accrued interest, and any costs associated with the foreclosure sale (including attorneys' fees, if any).

After an unsuccessful auction, the bank will go through the process of trying to sell the property on its own. It will remove some of the liens and other expenses on the home and try to resell it to the public, either through future auctions or direct marketing through a Realtor. Generally speaking, bank REO properties are in poor shape in terms of repairs and maintenance. However, because of their substantially reduced prices, they are excellent investments for real estate investors. As a result, investors will often go after these properties as banks are not in the business of owning homes and so, in some cases, the low price can more than compensate for the condition of the property.

But "buyer beware" is the watchword with a bank-owned property.  Buyers of REOs just don't have the safety nets available in more normal transactions.  The lenders, because they never actually lived in the property, are not required to disclose property defects or to repair them when there are problems.  Investors, therefore, should make use of reliable inspectors to make sure they're not signing-up for problems.  

Further, the REO departments are reticent about negotiating prices.  They will deal with realistic counter-offers, but they frown upon lowball offers and tend to reject them.  They also expect buyers to have their own financing in place, and do not want offers with contingencies. 

If you would like to learn more about REOs, and foreclosure properties in general, please sign-up for one of our free foreclosure workshops, and get started as a foreclosure investor.