What Is Real Estate Owned (REO)?

Real estate owned (REO) is property owned by a lender, such as a bank, that has not been successfully sold at a foreclosure auction. REO properties can include detached houses, condominiums, townhomes, and land. A lender—often a bank or quasi-governmental entity such as Fannie Mae or Freddie Mac—takes ownership of a foreclosed property when no bidder offers the amount it seeks to cover the loan.

Key Takeaways

  • Real estate owned (REO) is foreclosed-upon real estate in a lender’s portfolio.
  • The properties may be in a lender’s portfolio, such as a bank or another lender, because the property could not be sold at a high enough price at a foreclosure auction.
  • Banks then attempt to sell their REOs using a real estate agent or by listing the properties online.
  • REOs are often sold at a discount by banks and other lenders.

Understanding Real Estate Owned (REO)

When a borrower defaults on his mortgage, the pre-foreclosure period often involves either a real estate short sale or a public auction. If neither goes through, the foreclosure process can end with the lender—a bank, for example—taking ownership of the property. Banks may attempt to sell real estate-owned properties in their portfolios without the help of real estate agents. When this is the case, banks often list their REO properties online, making many REO listings readily available on bank websites. A bank’s loan officers may also notify customers looking for homes about the REO properties in its portfolio.

To make a real-estate owned property more attractive to buyers, the lender may attempt to remove some of the liens and other expenses accumulated on the property’s title. REO properties can be attractive to real estate investors because banks may, in some cases, sell them at a discount to their market value since selling such properties is not typically their primary business line.

REO Specialists

A bank’s REO specialist manages its REO properties by marketing the properties, reviewing any offers, preparing regular reports on the status of properties in the bank’s portfolio, and tracking down deeds. The REO specialist also works closely with the bank’s in-house or contracted property manager to ensure properties are secure and winterized or to prepare a property for vacancy. The REO specialist undertakes these job functions to help the bank liquidate its properties quickly and efficiently.

REO Properties and Real Estate Agents

To give REO properties the widest exposure, REO specialists often contract the services of local real estate agents to list the properties in the multiple listing service (MLS). Listing REO properties in the MLS ensures that interested real estate seekers using websites like Zillow, Realtor.com, Redfin, and Trulia, as well as local real estate websites, will see the listings. An REO property’s listing agent brings any offers he receives to the REO specialist. Real estate agents negotiate the commission they will receive for selling REO properties with the REO specialist.

Special Considerations for REO Properties

Banks typically sell REO properties as is, meaning the buyer buys the home and all the problems along with it. For example, a home buyer finds an ideal home, and it is an REO property. The buyer decides to make an offer but chooses to have the home inspected first. The results of the home inspection show that there is a problem with the plumbing. Because the subject property is REO, the home inspector’s findings are for the prospective buyer’s information only. A buyer can make an offer in spite of the findings, knowing that the bank most likely will not repair any deficiencies found by the home inspector. To help with a smooth closing, buyers should also search public records to ensure that all liens associated with a property have been paid.