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REO - Bank Real Estate Owned

REO stands for Real Estate Owned or in other words, bank owned property. When a bank forecloses on a property and takes title to the property they now own it and have to carry it on their books as real estate owned.

Real Estate Owned Property Negatively Impacts a Banks Lending Ability

Having foreclosed property on the books as real estate owned is very detrimental for a bank. It negatively affects their lending ability and increases the banks reserve requirements. It actually is less damaging for a bank to carry a "non-performing" loan on the books than real estate owned. Hence, you will often find a bank dragging their feet on a foreclosure. If you find one of these, they may be a worthwhile target for a short sale.

How Does a Property End Up as Real Estate Owned?

The process of a property ending up a bank REO starts with a property owner not being able or not willing to make their mortgage payments. Once the mortgage is three to four months past due and the owner is unable to or unwilling to make up all the back payments or unable to work out a payment plan with the bank, the bank generally files a lis pendens. This simply means that a lawsuit is pending.

There is a period of time before the property is actually foreclosed on during which the owner can attempt to sell the property for enough to cover the mortgage, past due payments and interest and fees, plus other closing costs. Or, if there isn't enough equity, the owner may be able to negotiate a short sale on the property whereby the bank releases the mortgage so the new buyer can close even through the bank doesn't get the full amount due it.

It is important for the owner to understand that they are not automatically released from the underlying note, or promise to pay. The bank may and many times does, go after the owner later for a deficiency judgment for the difference between what was owed and the amount receive by the bank at the closing. Many times this is mute as the seller declares bankruptcy and/or has no assets for the bank to go after.

Selling a foreclcosure on the court house steps

Assuming that the property didn't sell, the bank eventually will get around to actually foreclosing on the property. With proper notice to the owner(s) and other lien holders the bank sets a particular date, time, and place (usually the local court house steps) for the sale of the property to occur. This is advertised in a local paper where legal notices are usually published.

On the specified date and time and at the specified place an auction takes place for the property. Unless there was decent equity in the property only the bank bids at the auction. If there were decent equity in the property, it probably would have sold prior to the foreclosure. The bank usually bides the amount owed to them, including back payments, interest, legal fees and costs. The bank now owns the property and takes over responsibility for the property. They now have an REO property on their books.

Banks Want to Unload Their REO Properties ASAP

Once a bank has an REO property on their books they want to sell it as soon as they can for the most money that they can get. It is a rare situation that a bank will sell an REO property directly without the services of a Realtor and the use of an MLS, multiple listing system. The bank wants action and they want the greatest exposure in order to get the best price. Consequently, you will usually find Bank Owned, REO, property listed by a local Realtor in the local MLS.

There are exceptions of course. If the property was financed with an FHA or VA loan, then HUD or the VA will "buy" the home back from the bank and make them whole. The bank is out of the picture and the home is then sold via the VA auction or HUD auction process.

Another exception is when one of the secondary market makers is actually the holder of the loan and the bank was merely servicing the loan and collecting the payments, but was no longer the actual mortgage holder. In this case, the secondary market institution would be the one foreclosing and then selling the property. They do the same thing as a bank would do and list the property with a local Realtor and have it exposed to the market through the local MLS.

Even though the bank wants to unload their REO property quickly they can sometimes be difficult to deal with. The person making the decision is often thousands of miles away and has no knowledge of the real condition of the property nor local market conditions. They sometimes demand unreasonable prices and often end up with the property on the market for months before finally selling for a lower price. They do obtain appraisals or a BPO, a Broker Price Opinion, but often, as with short sales, these are off the mark given the condition of the property.

Buying Real Estate Owned Property Not For The Typical Buyer

When someone loses their home in a foreclosure due to circumstances outside of their control, such as a job lose or health issue, they are angry. In most cases they take it out on the property on the way out. They remove light fixtures, appliances (even built-in ones), cabinets, and sometimes the heating and a/c units and plumbing fixtures.

Many times an REO is not livable as is. It may need substantial renovation to put back into a livable condition. As a result, typically a special mortgage program, such as the FHA 203k, is needed that allows for the proceeds to be used for the purchase as well as for the fix-up.

Buying an REO will take more time and effort to put a deal together than buying a non-foreclosure home. It will involve special mortgage programs. It may not result in a super discounted deal as the bank wants as much money back as possible. Hence, many REO properties are purchased by investors and not by the typical home buyer. I really don't recommend buying an REO for a first time home buyer. But if you understand the process and risks, you may be able to get a decent deal on a property.

Click here to be taken from the "REO" page to the "Buying a Foreclosed Home" page.

SBI!