What Is Real Estate Owned (REO)?
The term real estate owned (REO) refers to a lender-owned property that is not sold at a foreclosure auction. Properties become REO when owners default and the bank repossesses them and tries to sell them. The lender, often a bank, takes ownership of a foreclosed property when it fails to sell at the amount sought to cover the loan. These properties generally come at a steep discount but may require extensive repairs.
Key Insights
- Affordable Investments: REO properties offer a cost-effective entry point for real estate investors due to steep discounts.
- Sales Channels: Banks list REO properties through real estate agents or on their websites to maximize exposure.
- Specialization: REO specialists manage the marketing, offers, and maintenance of these properties.
- As-Is Condition: Generally, these properties are sold ‘as-is’ and may require significant repairs.
Understanding Real Estate Owned (REO) Properties
When a borrower defaults on their 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 taking ownership of the property. Lenders may include banks, non-traditional lenders, quasi-government entities, or government agencies.
Lenders may attempt to sell REO properties in their portfolios without the help of real estate agents. When this is the case, banks or government agencies often list their REO properties on their websites. A bank’s loan officers may also notify customers looking for homes about the REO properties in its portfolio.
Role of a REO Specialist
The REO specialist is responsible for:
- Marketing the properties
- Reviewing any offers
- Preparing regular reports on the status of properties in the bank’s portfolio
- Tracking down deeds
The specialist ensures properties are secure, winterized, or prepared for vacancy, facilitating efficient liquidation by the lender.
Special Considerations
REO specialists often contract local real estate agents to list properties in the multiple listing service (MLS) for broader exposure. This ensures that potential buyers will see listings across various sites like Zillow, Realtor.com, Redfin, and Trulia.
How a Property Gains REO Status
The process begins with a borrower defaulting on their mortgage. As foreclosure progresses, if the property fails to sell at auction, it becomes real estate owned. From there, the lender prepares it for listing on the market. Buyers should search public records to ensure all liens associated with a property have been cleared.
Advantages and Disadvantages of a REO Property
Advantages
REO properties can be attractive due to:
- Discounted Prices: Banks often sell them below market value to recoup losses quickly.
- Lien-Free Acquisition: The process removes any existing liens and unpaid debts, ensuring clear titles.
- Negotiation Opportunities: Lenders are typically more willing to negotiate to sell the property quickly.
Disadvantages
However, potential buyers should be wary of:
- As-Is Sales: REO properties are sold ‘as-is,’ often requiring extensive repairs.
- High Repair Costs: Neglected properties may need significant work, which could offset initial savings.
- Tenant Issues: Properties, especially multi-family homes, may still have occupants, converting buyers into unwitting landlords.
Conclusion: Making the Most of REO Properties
Real estate can present a lucrative investment opportunity. To save on the purchase price, investors often look into REO properties, which are owned by lenders following a foreclosure. Because maintaining REO properties is costly for lenders, they are often eager to sell, usually at a significant discount. However, buyers must balance these savings with potential renovation costs and possible issues such as existing tenants. By understanding the full scope of REO properties, investors can make informed decisions and seize profitable opportunities.
Related Terms: foreclosure auction, mortgage default, real estate agent.
References
- U.S. Department of Housing and Urban Development. “HUD Homes (REO)”.
- National Association of Realtors. “Settlement Factsheet”.
