REO, which stands for “Real Estate Owned,” is a term applied to foreclosed properties where ownership has transferred to the bank or lender.
In order to become an REO property, it goes through these general steps:
- Loan Default. The homeowner/borrower defaults on (fails to make) their mortgage payments for a certain length of time usually specified in the mortgage terms themselves.
- Foreclosure. The lender initiates legal proceedings against the borrower to foreclose on the property.
- Auction. The property is then offered to the public at a foreclosure auction and typically sold to the highest bidder. If the property sells to a third party at the auction, the bank or lender recoups some of the cost of the outstanding loan balance, interest and fees from the sale of the property.
- REO Status. If the home fails to sell at auction to a third party, possession typically passes to the lender and it becomes a Real Estate Owned (REO) property. The lender prepares to sell it themselves, which may involve evicting occupants and removing outstanding liens attached to the property.
Is an REO Home the Right Fit For You?
A bank-owned home can be a great opportunity for homebuyers or investors to find a good deal— but only if you’re willing to be patient and thorough. Dealing with a lender, rather than a usual homeowner may mean slower response times and a more difficult negotiation, but it can lead to a potentially lower price from a motivated seller that has already handled outstanding taxes.
Demshki, Kristen. “10 Steps to Buying a Bank-Owned Home: PennyMac.” PennyMac Loan Services, 2018, www.pennymacusa.com/blog/reo-guide-10-steps-to-buying-bank-owned-home