REO’s
Real estate owned or REO is a class of property owned by a lender typically a bank, government agency, or government loan insurer, after an unsuccessful sale at a foreclosure auction. A foreclosing beneficiary 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 beneficiary will legally take back the property. This is commonly the case as the amount owed on the home is probably higher than the current market value of this foreclosure property. As soon as the beneficiary repossess the property it is listed on their books as REO and categorized as an asset (non-performing).
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Today many buyers are interested in purchasing “distressed” properties hoping to get a great deal. The definition of a “distressed” property is a property where the owner has fallen behind on their payments to either their mortgage company or the homeowners association and a lien has been filed with the courts, initiating foreclosure proceedings.
Of the properties available on the market, short sales are those that are in the earliest stage of distress or “pre-foreclosure”. In a short sale, the property owner is behind on their mortgage payment and wants to sell the property, but can’t find a buyer willing to pay enough money for the property to cover the remaining principal on the mortgage. The property owner then asks their lender if it is willing to accept less than what is owed on the mortgage. Short sales can take months to complete as lenders try to figure out how big of a loss they are willing to take. In some cases, even after months of analysis, a lender may decide it doesn’t want to do one at all. And this is the rub-many short sales do not work out after months of waiting and negotiations.
If a short sale agreement cannot be reached between buyer and seller, the property heads to a foreclosure auction.
In today’s market, it’s likely that no sale will happen at auction, and the property will end up back on the books of the lender. At this time it is called a REO (Real Estate Owned) property — also referred to as “bank owned”. When the lender takes possession of the property, the title is “cleansed,” meaning any problems or claims that may hassle a buyer are removed. When a lender decides to sell a REO, they are normally priced aggressively, as the lender wants to move the property off their books quickly. It is now in every sense a traditional sale except the lender is the seller. There will however be a limited amount of disclosure, the lender may only sell “as-is” or do very little repairs.
