What is an REO/Foreclosure?
REO is an abbreviation for a REAL ESTATE OWNED property. The term REO can be used ambiguously, to describe a specific type of property, but in real estate the phrase real estate owned property indicates that the property in question has been foreclosed on and has been taken back by the mortgage lender or trustee. REOs and FORECLOSUREs are not the same thing, however an REO is only produced as a result of an unsuccessful foreclosure, in which a buyer for the property cannot be found, and so the mortgage lender repossesses the property to sell separately.
FORECLOSURE- What is a foreclosure?
Foreclosure is the legal and professional proceeding in which a mortgagee, or other lienholder, usually a lender, obtains a court ordered termination of a mortgagor's equitable right of redemption. Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender tries to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, the lender cannot be sure that it can successfully repossess the property, thus the lender seeks to foreclose the equitable right of redemption. Other lienholders can also foreclose the owner's right of redemption for other debts, such as for overdue taxes, unpaid contractors' bills or overdue HOA dues or assessments.
The foreclosure process as applied to residential mortgage loans is a bank or other secured creditor selling or repossessing a parcel of real property (immovable property) after the owner has failed to comply with an agreement between the lender and borrower called a "mortgage" or "deed of trust". Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that "the lender has foreclosed its mortgage or lien". If the promissory note was made with a recourse clause then if the sale does not bring enough to pay the existing balance of principal and fees the mortgagee can file a claim for a deficiency judgment.
REO (REAL ESTATE OWNED)- What is an 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. A bank will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If there are no bidders that are interested, then the bank will legally repossess the property. As soon as the bank repossesses the property, it is listed on their books as REO - Real Estate Owned - and is categorized as an asset (non-performing).
As soon as a property goes into a distressed status (the borrower/home owner misses mortgage payments) the bank will want to determine the amount of equity that the property has. A popular method to determine the equity is to obtain a Broker Price Opinion BPO or order an appraisal. Based on the amount of equity that is determined from the BPO, the bank will decide to try for a short sale or to allow it to go through the foreclosure process. If the bank is able to sell the property through a short sale or at a foreclosure auction, then the property will not become a REO property.
After repossession and the property becomes classified as REO, 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 real estate broker (REALTOR). Generally speaking, bank REO properties are in poor shape in terms of repairs and maintenance; however, real estate 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.
Once a property is REO, the bank or lender will try to get rid of the property by either selling it directly themselves or through an established broker. Many larger banks such as Bank of America and Wells Fargo have REO/asset management departments that will field bids and offers, oversee upkeep and handle sales. The majority of REO properties that are on the open market are listed in MLS by the broker/REALTOR that performed the BPO.