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REO - Real Estate Owned Properties

By Arvin Sahakian · Mar 10, 2015 · Real Estate

REO - Real Estate Owned Properties

Image courtesy of Death To The Stock Photo, Death To The Stock Photo

REO means Real Estate Owned, also known as Bank Owned. This occurs when a lender takes full ownership of a property because the previous owner was foreclosed on, and the lender was unsuccessful in auctioning off the property to a new buyer.

For those experienced in real estate transactions, REO's have long signaled the possibility of an excellent bargain when buying a property. If you're a consumer looking for a more affordable home, or an investor intending to buy the property for a return on your investment, it's in your financial interest to get up to speed on REO properties.

In this article you will learn what an REO is, how a property becomes an REO, and why the lenders who own these properties become motivated sellers. We will also discuss the purchasing process involved in buying REO properties and some of the advantages and disadvantages.

What is an REO?

An REO or Real Estate Owned property, is a foreclosed property that is repossessed by the lenders. This occurs after an unsuccessful foreclosure auction to which the lender cannot find any buyers.

The lenders become the owners of the property, classified as a REO. These properties are also referred to as Bank Owned. The sellers are the financial institutions which have held the mortgage note on the property.

As owners, the lenders will manage evictions of any existing residents and may do some repairs to bring the property to a condition they feel will make it more attractive to would be buyers. The lender must also pay off any existing liens on the property, including unpaid property and income tax liens. The new buyers will have a clean title.

The REO Process

Generally there are several distinct phases a distressed property will pass through before the lenders take ownership. This process tends to be slow-moving for a few reasons, such as:

  • To make sure the lender is able to retrieve as much of the original loan amount on the property as possible to limit their losses.
  • To comply with multiple regulations associated with taking procession of the property

Before a lender takes full possession of a property, there are three processes that will take place first:

1. Traditional Sale

The current homeowners will attempt to sell the property in the conventional way using a real estate agent. At this point the mortgage amount they owe may be more than the market value of the property, or the owners may be experiencing financial hardship and simply can't afford to maintain the payments for much longer.

The objective is to sell the property for enough money to pay off all existing debts on the home and walk away. If a successful sale does not occur for any reason, then the owners will attempt to sell under a short sale listing.

2. Short Sale Listing

In a short sale listing, the owners will present the lender a documented account of their financial hardship and the reason why they believe they are a good candidate for a short sale. If approved, the owners will hire a real estate listing agent to list the home. The objective is to to sell the property for as much as possible and have the lender forgive the difference between what the borrowers owes on the existing mortgage, and what the property sells for.

Any lien holders on the property, other than the primary lender, have to approve the selling price. If they don't agree on the selling price then the short sale cannot happen and a new price has to be agreed upon. This is the reason the majority of short sales take so long and ultimately don't close.

After an unsuccessful attempt to sell the property under a short sale listing, the homeowners must choose what to do next. Unfortunately, for many home owners in this position, they are left with little choice but to default on the mortgage agreement. When this occurs, the lender will begin the foreclosure and auction process.

3. Foreclosure & Auction

At this point, the lender has complied with local and state laws to foreclose on the property and have the ability to auction the property to a potential buyer. The lender sets a minimum bid to begin the auction. The following are some factors lenders consider when setting a minimum auction price:

  • Loan balance
  • Accrued interest
  • Late Payments
  • Penalties
  • Attorney fees

Many lenders are not successful in this initial auction because the minimum bid is higher than the market value of the property. Very few buyers are willing to pay above market prices. In addition there may be other liens against the property, which the new owners must repay. The property may still be occupied by the previous residents as well, adding an additional liability to would be buyers.

When this first attempt to auction fails, the lender will set another date and attempt to do another auction to sell the property. After an unsuccessful second auction the property passes into REO status. This can bring distinct advantages for would be buyers, such as:

  • No set minimum bid
  • No Liens on property
  • Will not be occupied by tenants
  • Lenders are motivated to sell

Selling an REO Property

The lenders want to be freed from the property quickly, while making sure they obtain the highest price. Their objective is to cover as much of the original mortgage liens and the fees associated with the foreclosure as possible. For these reasons, lenders are open to negotiating more favorable terms and conditions for buyers. They are willing to make counter-offers, and they will be receptive if asked to pay some or all closing costs involved in the deal as well.

Several Types of Investors Lenders will Work With:

  • Large institutional private equity investors, which own more than several hundred thousand properties.
  • Middle tier investors, who will purchase several hundred to several thousand properties in a certain region of the country.
  • Small Investors, which own several dozen properties.
  • Foreign investors and sovereign wealth funds, primarily interested in U.S. residential property.
  • Individual Investors, who own anywhere from one to a dozen or so properties.

No Standard Process

Financial institutions have not standardized their approach to REO sales. This means that potential buyers have to monitor several sources of information at the same time. There are several options available for buyers to find REO properties, we will list a few of them we have seen:

  • Through the financial institutions' listing agents. The agents will post the inventory on the company's website, through a multiple listing service (MLS), in print ads, on third-party sites such as and, in social media and on Craigslist.
  • Word of mouth. For instance, residents of the neighborhood will become aware the lender has taken over the property and notify a buyer they know will be interested.
  • The lender directly. It's possible to just go to the Loss Mitigation Department and request a list of inventory of bank owned properties.

Purchasing an REO Property

Due to the potential for discounts, buyers have to be aware of stiff competition. This will be the case among buyers searching for properties to convert into rental income properties. Therefore, it is no surprise that more investors are doing "buy-and-hold" instead of flipping to sell to another buyer right away.

The process of searching, making offers, and closing on an REO consists of:

  • Searching for what is available. For example, through your real estate agent or the loss mitigation departments of large financial institutions.
  • Calculating how much you can spend on the mortgage.
  • Accurately estimate repair costs. The bargain price you receive could be wiped out by an unexpected repair cost. You can limit this occurrence by conducting a thorough home inspection. It is important to consult with a contractor and home inspector you trust.
  • Getting pre-approved for a mortgage. Many lenders selling the home will require the offers are coming from pre-approved buyers.
  • Making an offer. Due to competition, it's important to make a reasonable first offer and not go too low to ensure the lender will make a counter-offer. If your offer is too low, they will simply not respond.
  • Take advantage of negotiations. There is no harm in reaching out and requesting the reduction in price to cover some expenses, such as the closing costs.
  • Limit contingencies in the contract. Less contingencies reduce the potential for buyers exiting the purchase process. One exception would be the inspection contingency, which means you have a certain number of days to inspect the property and exit the process if you are not happy with the findings.
  • Be prepared to walk away from the deal. The REO transaction demands the ability to absorb expected and unexpected costs. After conducting your inspections and due diligence, simply walk away from the deal if you are not comfortable with the findings. There is always another opportunity available.

Advantages of Buying an REO Property

REO properties provide investors with below-market prices. This can be especially attractive if you are searching for a property in locations where the average sales price is higher than the REO property listed for sale. In addition, these properties will be free of liens, as opposed to foreclosed properties which still have liens attached to them.

Disadvantages of Buying an REO Property

Investors with more experience in REO and more financial resources can end up with the best deals, making it difficult for competitors to get their offers selected. Remember, financial institutions want to unload the inventory and it makes common business sense to favor seasoned buyers with deep pockets.

Another negative is that the property is usually in bad shape. After all, those evicted may have deliberately trashed it in spite. When vacant, theft and vandalism can occur as well. This is why it is important to conduct a thorough inspection of the property with a licensed contractor and home inspector before making your final decision.

REO is an Option for Both Consumers & Investors

The REO process takes place because homeowners have tried a number of possible solutions to get out from under their mortgage and simultaneously reduce the damage to their credit rating through a short sale listing. When this doesn't work, the property moves into foreclosure. Due to the pricing and liens against the property, most foreclosures fail in their first and second attempt resulting in the lender taking ownership of the property. Through REO listings, you gain access to a unique opportunity: Purchasing real estate for below market prices, without liens and, if desired, in bulk.

Buying an REO property has its trade off. There is no primary central system, such as the traditional MLS, in which all that should be available is listed for sale. You are also competing with several other individuals and large investors, which will affect how much you bid and what the counter-offers will look like. In addition, it won't be until the home inspection that you will find out the true condition of the property. The reality of an REO property is that it is a time-consuming process with no guarantee of a closing, but if you're informed and well prepared, you increase your chances substantially.

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