What are REO Properties?
They are often called Bank Owned Homes or Foreclosed Properties For Sale. REO is an acronym which stands for Real Estate Owned and is typically used when referring to a property that is owned by the bank. However, the definition can also apply to HUD Homes and VA Foreclosures.
REO Properties are houses and other real estate that a bank or other financial institution now owns because there were no bids (other than the bank’s opening bid) at the foreclosure auction. Basically the lender was unable to sell the property at the courthouse steps for the amount owed on the mortgage.
Since the lender was unable to sell the property for the amount due on the note at the courthouse sale, Bank REO Properties can prove to be great opportunities for traditional home buyers and real estate investors. Banks are not property management companies. They are lending institutions and they typically want these houses off-of-the-books as quickly as possible.
You have probably seen properties being sold via a “foreclosure auction” at locations other than the courthouse. These auctions are not the actual (State required) lien extinguishing foreclosure sale where the opening bid was made by the bank (that sale has already taken place). They are simply the auctioning of an REO Property and can be a good place to purchase a bank owned property because, unlike the courthouse sale, it may be an absolute auction meaning the bank does not have a required opening bid and the bidding can start at one dollar.
The term short-sale is sometimes used when referring to the potential purchase price of an REO property. This is not the correct terminology at this point in the process. A short-sale would take place before the foreclosure auction while the borrower (homeowner) still owns the residence. In a short-sale the bank is agreeing to accept an amount less than payoff as payment-in-full for the mortgage. Lenders are sometimes reluctant to accept a short-sale because they believe there is equity in the property and they will receive bids higher than the payoff at the courthouse auction.
In the case of an REO property, the courthouse auction has already taken place and there were no bidders. In many situations, the bank now understands that they will need to sell the asset closer to fire-sale values in order to liquidate it.
REO Properties For Sale
How do I purchase an REO Property? It is completely up to the lender, who is actually the owner at this point (Real Estate Owned). They may market and sell the home in pretty much any manner they wish. The most common method is a Foreclosure Listing with a Real Estate Broker. When you see a For Sale Sign with a Foreclosure Banner on it, that is an REO Property up for sale.
Banks do not typically sell these properties themselves. With all the Real Estate laws, regulations and paperwork involved it is not usually practical (or financially feasible) for them to have in-house personnel trained to market and sell their properties. Just like Real Estate Agents and Auction Companies don’t typically offer you free checking.
It is not uncommon for the listing agent to put the SOLD sign up as soon as the Foreclosure for Sale Sign is placed in the front yard. Many aggressive investors (or someone simply wanting to purchase the home as their primary residence) will follow these properties from pre-foreclosure (when a Short Sale can be done) all the way through the foreclosure process. They may even be calling the agent before the agent gets the property folder from the bank.
There can be other companies and service providers involved in the process. The services of REO Property Preservation Companies and Asset Managers for REO Properties are often required when liquidating bank owned homes.
What about HUD Homes and VA Foreclosures
HUD and the VA do not foreclose on residential homes because they do not actually make the loans, they only guarantee them. You have probably heard of FHA Insured Mortgages, VA Guaranteed Loans, and similar programs. If the bank forecloses on a property and the loan was backed by one of these programs, the bank has the option (but not the obligation) to deed the property to the appropriate entity and be reimbursed under the loan guaranty.