What Does REO Foreclosure Mean in Real Estate?
Understand REO foreclosure: what it signifies in real estate, the process properties undergo, and key insights for potential acquisition.
Real Estate Owned (REO) refers to properties a lender takes back after a foreclosure process. It represents a specific stage in a property’s disposition following a borrower’s inability to meet mortgage obligations. This article explains what REO foreclosure means.
Understanding REO Properties
A Real Estate Owned property is a home now owned by a bank or mortgage lender, typically after it failed to sell at a foreclosure auction. If a property does not receive a sufficient bid or no bids are placed, ownership defaults to the original bank or lender. This distinguishes REO properties from short sales or pre-foreclosures, where the original homeowner still retains ownership and is attempting to sell the property to avoid foreclosure.
Lenders acquire REO properties to recover the outstanding loan balance, not out of a desire to own real estate. These properties are often vacant and potentially in disrepair, as former occupants may not have maintained the home during the period leading to foreclosure. Banks are motivated to sell REO properties quickly to minimize ongoing costs like upkeep, property taxes, and potential liabilities from vandalism.
The Path to REO
A property’s journey to REO status begins when a homeowner defaults on their mortgage payments. Lenders typically initiate legal proceedings after a borrower misses several payments, often around 120 days of delinquency. The initial step is usually the issuance of a Notice of Default, informing the borrower of missed payments and the amount owed, and providing a period to rectify the situation.
If the default is not cured, the lender proceeds with a Notice of Sale, announcing a public auction where the property will be sold to satisfy the debt. At this foreclosure auction, the lender typically places a credit bid for at least the outstanding loan amount. If no third-party bidders purchase the property or bids are insufficient, the lender takes ownership of the property.
Acquiring an REO Property
Buyers interested in REO properties typically work with real estate agents specializing in bank-owned homes. These properties are commonly listed through the Multiple Listing Service (MLS) or directly on bank websites. A key aspect of purchasing an REO property is that they are almost always sold “as-is,” meaning the lender will not undertake repairs or renovations prior to the sale.
Negotiating with a bank for an REO property differs from negotiating with individual sellers; banks expect negotiation and may issue counteroffers. Buyers should perform thorough home inspections to understand the property’s condition, as any needed repairs will be the buyer’s responsibility. While traditional mortgages are a common financing option, some REO properties requiring extensive repairs might necessitate alternative financing, such as renovation loans or hard money loans. Obtaining a mortgage pre-approval is advisable, as it demonstrates financial readiness and can expedite the closing process.