Real estate owned or REO is a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction. A bank will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If there are no bidders that are interested, then the bank will legally repossess the property. This is usually the case as the amount owed on the home is probably higher than the value of this foreclosure property. As soon as the bank repossess the property, it is listed on their books as REO – Real Estate Owned – and is categorized as an asset (non-performing).
As soon as a property goes into a distressed status (the borrower/home owner misses mortgage payments) the bank will want to determine the amount of equity that the property has. A popular method to determine the equity is to obtain a Broker Price Opinion (BPO) or order an appraisal. Based on the amount of equity that is determined from the BPO, the bank will decide to try for a short sale or to allow it to go through the foreclosure process. If the bank is able to sell the property through a short sale or at a foreclosure auction, then the property will not become a REO property.
After a repossession and the property becomes classified as REO, the bank will go through the process of trying to sell the property on its own or obtain the service of an REO Asset Manger. The bank will remove some of the liens and other expenses on the home and try to resell it to the public, either through future auctions or direct marketing through a real estate broker. Asset Manager will also try to contact REO realtors that specialize in certain zip code to help sell this bank owned properties. Generally speaking, bank REO properties are in poor shape in terms of repairs and maintenance; however, real estate investors will often go after these properties as banks are not in the business of owning homes and so, in some cases, the low price can more than compensate for the condition of the property.
Once a property is REO, the bank or lender will try to get rid of the property by either selling it directly themselves or through an established broker. Many larger banks such as Bank of America and Wells Fargo have REO/asset management departments that will field bids and offers, oversee upkeep and handle sales. The majority of REO properties that are on the open market should be listed in MLS by the broker who performed the BPO. A common problem in many areas involves the listing broker "pocket listing" the transaction and not putting it out on the open market. Those that do put the listing on the MLS will sometimes not field legitimate offers in the hopes of selling it themselves, quite often contrary to the banks' wishes. As a result a new industry have been create where REO exchange have been developed to overcome this issue. Companies like REO RedBook and Reox provide listing opportunity for banks to get their property out to the general public. Other similar companies provide service that connect Asset Managers to experienced realtors that can help sell the REO home. Myriad websites have been created recently to connect Asset Mangers with qualify REO realtors. (Source: Wikipedia)
