Real Estate Owned (REO)

Definition

Real Estate Owned (REO) refers to a type of property that a bank or financial institution has taken possession of, typically due to a foreclosure or failed auction. This happens when the borrower fails to meet mortgage obligations and the lender reclaims the property. REO properties are managed by the lender or an assigned third party until they are sold or liquidated.

Phonetic

The phonetics of the keyword “Real Estate Owned (REO)” can be transcribed as:- “Real Estate”: /ˈriəl ɪˈsteɪt/- “Owned”: /ˈoʊnd/- “REO”: /ˈɑrˈiˈoʊ/Altogether: /ˈriəl ɪˈsteɪt ˈoʊnd ˈɑrˈiˈoʊ/

Key Takeaways

1. Real Estate Owned (REO) refers to properties owned by lenders, generally banks, after an unsuccessful foreclosure auction. This occurs when a property fails to sell at a foreclosure auction, and the lender reclaims possession of the property.
2. REO properties can offer buyers a good deal, as banks are usually keen to sell them quickly, often at a lower price than comparable properties on the market. However, buyers may need to be prepared for extra expenses like repairs and property maintenance, since REO properties are often sold “as is” with no warranties or guarantees.
3. Investing in REO properties can provide a profitable opportunity for experienced investors who are familiar with the potential risks and rewards involved. These investors can benefit from lower property prices and access to lenders who may be more willing to finance REO properties in order to move them off their books.

Importance

Real Estate Owned (REO) is an important term in the business and finance world as it refers to properties that have been repossessed by lenders, typically through foreclosure. This occurs when borrowers fail to make their mortgage payments, forcing the lenders to take possession of the property to recoup the outstanding debt. REO properties are significant because they offer potential opportunities for investors and homebuyers to acquire properties at lower prices, usually below market value, as lenders aim to quickly recover their losses. Additionally, banks and other financial institutions often require specialized asset management services to handle REO properties, creating a market segment for businesses specializing in the management, maintenance, and sale of these properties. Therefore, understanding the concept of Real Estate Owned (REO) is crucial for investors, homebuyers, and businesses operating in the real estate and financial sectors.

Explanation

Real Estate Owned (REO) serves a crucial purpose in the mortgage industry and plays a significant role in the secondary market for real estate property. In essence, REO refers to properties that have been repossessed by banks or other financial institutions after a borrower defaults on their mortgage. The purpose of REO is to provide financial institutions with an avenue to recuperate their losses, as well as allowing potential buyers to acquire properties at a more affordable price. Initially, lenders attempt to sell these repossessed properties through foreclosure auctions. If the auction fails to produce a sale, the property becomes REO and is added to the lender’s inventory. With an REO, the lender assumes the responsibility of maintaining and managing the property, including handling any necessary repairs and marketing the property for sale. Consequently, this process facilitates the smooth transition of property ownership, often benefiting buyers who may access these properties at lower prices due to the lender’s incentives to recoup their investments. In turn, this supports the stability and liquidity of the real estate market by ensuring that properties do not remain vacant or abandoned for extended periods.

Examples

1. Bank-owned foreclosed home: In 2009, during the US housing crisis, many homes went into foreclosure as homeowners defaulted on their mortgage payments. One example of a Real Estate Owned (REO) property would be a single-family home that had been foreclosed on by a bank and listed for sale by that bank, which now owns the property. 2. Commercial building in distress: In the aftermath of the global financial crisis, a commercial building owner was unable to make loan payments, and the lender took possession of the property. The lender then listed the building for sale as an REO property, since its ownership had transferred from the original borrower to the lender after unsuccessful debt recovery efforts. 3. Retail space owned by a financial institution: An owner of a strip mall defaulted on their mortgage payments and, after unsuccessful attempts to resell the property through a short sale or auction, the property was taken over by the financial institution. The bank now owns this retail space and is listing it for sale as an REO property, offering it at a below-market price in order to recoup its losses from the original loan.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Foreclosure
• Non-performing Asset (NPA)
• Bank-owned Property
• Property Management
• Asset Disposition

Sources for More Information

• Investopedia
• Rocket Mortgage
• Nolo
• Forbes