What's an REO?

With the goings-on in the real estate market, there appears some confusion about what exactly a REO is.... it simply means "real estate owned". Understandably, most think of foreclosed properties, no thanks in part to the media attention that has been focused on that particular type of property. To clear the air, foreclosures and REO's are different. For the purpose of this description, I am going to assume that we are on the same page and are referring to banks and lenders and how they distinguish between the two.....

When a homeowner defaults on a payment for a property, the bank has the ability to force a foreclosure. Foreclosure by definition is the proceeding, by a creditor, to regain property or other collateral following a default on mortgage payments. It begins when the trustee files a notice of default. This is a letter which is sent to the owner/trustor notifying him or her of their default of the loan. This notifies the owner of the intent of the lender to follow through on their right to collect on the debt. The copy of the notice is mailed to the address of notice as per the deed of trust. The next step in the foreclosure process is the publishing of a notice of trustee's sale in a local paper while at the same time filing said notice with the county recorders office. This cannot be done till after 90 days have passed since the recording of the notice of default. Once the notice of trustee's sale is filed, the home may be sold at public auction, but no sooner than 20 days from the filing.

What happens if no one buys the foreclosure at auction? Ownership reverts back to the lender who wrote the mortgage note! Hence the term REO! The lender assumes ownership of the property, and may dispose of that property to recover their cash investment. You may ask yourself, why didn't it sell at auction....there could be a myriad of reasons..but most common being the payoff(auction min bid) of the note was more than the home was worth!

REO's represent a good opportunity for an investor to pick up properties with built in value. Because the Banks are not in the business of selling real estate, but rather lending, and since the property is now a toxic asset on their books (there is no mortgage $ coming in, the bank is now on the hook for among other things, property taxes, HOA etc.) they are more than willing to sell at a discount (in most instances) to remove the non-performing asset from their books. Lender REO's only come to be(in most cases)when the property fails to sell at the foreclosure auction.