Real Estate Owned

Real estate owned, often shortened to REO, is a title given to real estate that has been foreclosed upon by a lender, usually a bank, government loan insurer, or government agency. This class of property which may include condominiums, detached houses, land, and townhomes end up in the lender’s portfolios after they would have failed to sell it at a foreclosure auction.

How A Property Becomes Real Estate Owned

Once a homeowner or borrower defaults on mortgage payments and the piece of real estate earns a distress status, the foreclosure beneficiary will be interested in determining the amount of the property’s equity. One of the most common methods to arrive at a value for the equity is getting a BPO or Broker’s Price Opinion. Another popular way to do this is to have an appraisal done. The bank will take the equity which is arrived at and use that to come to a decision on whether or not to permit a short sale if the homeowner or borrower makes a request to that effect.

If the homeowner fails to request a short sale, the bank will proceed with the process of foreclosure. In the event the lender does not find a buyer for the property either at a foreclosure auction or through a short sale, the property will then become an REO property.

How Banks Sell Real Estate Owned Properties

A foreclosure beneficiary may attempt to resell a home to the public directly through a real estate agent or subsequent auctions, but it is not uncommon to find banks trying to sell REO properties which they have in their portfolios without going through a real estate agent. Typically, when a bank decides to do this, they would list the properties on their website. Loan officers at the bank may inform customers in search of properties to buy about the real estate owned properties in the bank’s portfolio. In some cases, an asset manager will reach out to REO realtors who specialise in particular zip codes for assistance in finding a buyer for the property.

Typically, banks will attempt to make the property more attractive to potential buyers by doing away with some of the expenses such as liens which might have been accumulated on the property title by the previous owner. Banks don’t typically like to keep homes in their portfolio and may offer real estate owned properties at a discount to interested real estate investors. Government institutions and many large banks have an asset management or REO department in charge of sorting offers and bids, managing sales, and taking care of upkeep.

While no two lenders will work the same way, they can be expected to have similar goals in that they will be out to sell for the best possible price. When a buyer makes an offer to purchase an REO property, a bank would typically respond with a counter offer that may be at a higher price than expected. If the buyer isn’t discouraged or put off at this point and tenders another counter offer, this second proposal will be reviewed by numerous stakeholders, and even after the offer has been accepted, it may still be subject to review.

The Foreclosure Auction

Usually, at a foreclosure auction, the beneficiary will start with an opening bid of an amount that would at least include the loan balance, attorney’s fees, accrued interest, and other costs associated with the process of foreclosure.

For an interested buyer to make a bid at a foreclosure auction, he or she would typically be required to have a cashier’s check in hand for the full amount of their bid. If there is a successful bidder, he or she will be purchasing the property “as is”. Receiving a property “as is” may involve any number of liens against the property, such as someone still occupying the property.

In most cases, a foreclosure auction will not culminate in a successful sale. The lender becomes the owner of the foreclosed property if there are no bidders willing to offer the amount it needs to cover the loan. This would likely be the case when the owed amount is greater than the present market value of the property in question. Upon repossession of the property by the lender, the foreclosed property is categorised as an asset and listed as REO.

Condition Of REO Property

Banks prefer to sell a property “as is”, but will likely make available a Section 1 pest certification if a buyer includes it in their offer. A buyer will be allowed to get all inspections he or she may desire at his or her own expense, but the bank may not be willing to conduct any repairs. It is often advised that a buyer’s offer not leave out an inspection contingency period as this would let them back out of the sale if it is revealed upon completion of the inspections, that there are unexpected damages which the bank will not be willing to correct.

Agreeing to accept a property “as is” does not necessarily mean the bank cannot be given another opportunity to conduct repairs on the property or provide the buyer with a credit upon completion of the inspections. While this is not always the case, they might decide to renegotiate and carry on with the transaction if they are not keen on keeping the property any longer.

Other Real Estate Owned

Other real estate owned or OREO is a term in bank accounting used to describe property owned by a bank but is not directly associated with its business. For regulatory accounting purposes, other real estate owned assets are deemed to be non-earning assets in balance sheet terms. Other real estate owned properties are typically a product of foreclosure due to the borrower’s inability to repay a loan after using the property as collateral. A rise in OREO indicates that a bank’s credit is declining while its non-earning assets are expanding.