What Is Real Estate Owned (REO) in Real Estate?

Real Estate Owned (REO) refers to a specific category of property within the real estate market. These properties arise under particular circumstances, primarily involving mortgage defaults and the subsequent actions taken by lenders. This specific designation indicates that a financial institution has taken ownership of the asset.

Defining Real Estate Owned

Real Estate Owned, or REO, denotes a property that has reverted to the ownership of a lender. This typically includes institutions such as banks, credit unions, or government-sponsored enterprises like Fannie Mae or Freddie Mac. This term is primarily used within the financial and real estate industries to categorize these specific assets on a lender’s books. When a property becomes REO, the lender records it as an asset, often referred to on financial statements as “other real estate owned” (OREO). The lender’s primary business is lending money, not managing real estate, so holding REO properties represents a non-performing asset that they aim to liquidate to recover their investment.

How a Property Becomes Real Estate Owned

A property becomes REO when a homeowner defaults on their mortgage payments, leading the lender to initiate foreclosure proceedings. Foreclosure is the legal process by which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments, usually by forcing the sale of the property used as collateral. Following the initiation of foreclosure, the property is typically offered for sale at a public auction, also known as a trustee sale or sheriff’s sale. At this auction, the lender often places a credit bid, which is usually at least the outstanding loan amount plus accumulated fees and costs. If no one bids enough to satisfy the outstanding debt, or if there are no bidders at all, the property “reverts” to the lender, thereby becoming Real Estate Owned.

Characteristics of Real Estate Owned Properties

Once a property becomes REO, it often exhibits several common attributes. These properties are typically vacant because the previous owner has usually moved out during or after the foreclosure process. Due to the circumstances leading to foreclosure, REO properties may suffer from deferred maintenance or neglect, as the former owner might not have been able to maintain the property during their financial distress. This can result in the property being in a distressed condition, potentially requiring significant repairs. Upon taking ownership, the lender assumes responsibility for the property’s ongoing expenses, including property taxes, insurance, and any necessary maintenance. Lenders generally aim to sell these properties quickly to recoup their losses and minimize the carrying costs. Consequently, REO properties are often sold “as-is,” meaning the lender typically will not perform extensive repairs or renovations, and the buyer accepts the property in its current condition.

Distinguishing Real Estate Owned from Other Property Types

It is important to differentiate REO properties from other related real estate terms. Foreclosure refers to the legal process initiated by a lender to reclaim a property due to loan default. REO, on the other hand, is the result of that process, specifically when the property goes unsold at auction and reverts to the lender’s ownership. Thus, foreclosure is the action, while REO describes the ownership status of the property after a failed auction.

Another distinct property type is a short sale, which occurs when a homeowner sells their property for less than the amount owed on the mortgage, with the lender’s approval. In a short sale, the homeowner still owns the property and is actively involved in the sale process, seeking to avoid foreclosure. This contrasts with an REO property, where the lender has already taken ownership, and the sale is directly from the financial institution.