Definition
Real Estate Owned (REO) refers to properties that have been repossessed by a lender, typically a bank, after an unsuccessful sale during a foreclosure auction. When a property goes into foreclosure, it is auctioned to the highest bidder. If the property does not sell at the auction, it reverts to the bank, becoming part of its REO inventory. These properties are then managed by the bank’s real estate department, which may make necessary repairs and prepare the property for sale to recover some of the outstanding loan balance.
Examples
- Residential Properties: When homeowners default on their mortgage payments, their houses might go into foreclosure. If these houses don’t sell at auction, they become REO properties.
- Commercial Properties: Commercial buildings, such as strip malls or office buildings, can also become REO properties if the business’s owner defaults on the mortgage.
- Vacant Land: Land that was bought for development or investment purposes could become REO if the buyer defaults on the loan.
Frequently Asked Questions
What happens to REO properties?
REO properties are managed by the lender’s real estate department or a third-party asset management company until they can be sold. They may be listed with real estate agents, repaired, marketed, and eventually sold to recover the loan balance.
How can I buy an REO property?
You can purchase REO properties through real estate agents who have contracts with the banks or lenders. These properties are often listed on Multiple Listing Services (MLS) like other real estate for sale.
Are REO properties a good investment?
REO properties can be a good investment as they are often sold at a discount. However, buyers should be prepared for the possibility of repairs and renovations. It’s crucial to conduct thorough due diligence before purchasing.
Are there any risks associated with buying REO properties?
Yes, potential risks include hidden damages, title issues, and the possibility of drawn-out negotiations with the lender. It’s important to obtain a thorough property inspection and title search before buying.
How do REO properties differ from other foreclosures?
REO properties have already gone through the foreclosure auction process and failed to sell, meaning they are now owned by the lender. They are usually sold “as-is,” but the lender may perform some repairs to make them marketable.
- Foreclosure: The legal process by which a lender can repossess a property due to the borrower’s failure to make mortgage payments.
- Short Sale: A sale of a property where the proceeds are less than the amount owed on the mortgage, and the lender agrees to accept the reduced payoff.
- Auction: A public sale in which properties or goods are sold to the highest bidder.
- Asset Management Company: A company that manages the assets, such as properties, of another entity.
- Multiple Listing Service (MLS): A service used by real estate brokers to promote and share information about properties for sale.
Online References
Suggested Books for Further Studies
- “Real Estate Investing for Dummies” by Eric Tyson and Robert S. Griswold
- “Real Estate Investing: Market Analysis, Valuation Techniques, and Risk Management” by David M. Geltner, Norman G. Miller, and Jim Clayton
- “The Book on Managing Rental Properties” by Brandon Turner and Heather Turner
- “Investing in REITs: Real Estate Investment Trusts” by Ralph L. Block
- “The Millionaire Real Estate Investor” by Gary Keller, Dave Jenks, and Jay Papasan
Fundamentals of Real Estate Owned (REO): Real Estate Basics Quiz
### Which of the following best describes an REO property?
- [ ] A property sold directly by the owner bypassing any lenders.
- [ ] A property repossessed by the government due to unpaid taxes.
- [x] A property owned by a lender, typically a bank, after a failed foreclosure auction.
- [ ] A property owned by a real estate investor looking to flip it.
> **Explanation:** An REO property is one that has been repossessed by a lender after failing to sell at a foreclosure auction, typically owned by banks.
### What is the first step in the process that can lead to a property becoming REO?
- [ ] Property inspection
- [ ] Mortgage refinancing
- [x] Foreclosure
- [ ] Bank loan approval
> **Explanation:** The process begins with foreclosure, where the lender attempts to reclaim the property due to the borrower's failure to maintain mortgage payments.
### Are REO properties sold at public auction?
- [ ] Yes, they are always sold at public auction.
- [x] No, they are sold by the lender after failing to sell at auction.
- [ ] Yes, every bank owns an auction house.
- [ ] No, they are only sold through private sales.
> **Explanation:** REO properties have already undergone a foreclosure auction and failed to sell, thus they are managed and sold by the lenders themselves.
### Why might an REO property be sold at a discount?
- [ ] Because they are generally in prime condition.
- [ ] To compete with new properties in the market.
- [x] To quickly recover some of the lost funds from the defaulted loan.
- [ ] Because banks need to clear their inventory.
> **Explanation:** REO properties are often sold at a discount because banks want to quickly recover some of the loss incurred from the loan default.
### What should you do before buying an REO property?
- [ ] Make an offer without any inspections.
- [ ] Assume all repairs will be minor.
- [ ] Pay in cash without any contingencies.
- [x] Conduct thorough property inspections and title searches.
> **Explanation:** It is crucial to conduct property inspections and title searches to uncover any hidden issues or lien problems before purchasing an REO property.
### Who typically manages REO properties?
- [ ] The original owners.
- [ ] Local real estate brokers.
- [ ] Real estate agents and inspectors.
- [x] The lender's real estate department or a third-party asset management company.
> **Explanation:** REO properties are typically managed by the bank’s real estate department or a specialized third-party asset management company until they can be sold.
### Which type of property can become an REO property?
- [ ] Only residential properties
- [ ] Only commercial properties
- [x] Any type of real estate, including residential, commercial, and land
- [ ] Only industrial properties
> **Explanation:** Both residential, commercial properties, and even vacant land can become REO if the mortgage on these properties defaults and they do not sell at auction.
### What is the primary motivation for banks to sell REO properties quickly?
- [ ] They need more space for new properties.
- [ ] They want to hold onto these properties as long as possible.
- [x] To recoup the loan amount and free up financial resources.
- [ ] They are required by law to sell them within 30 days.
> **Explanation:** Banks aim to sell REO properties quickly to recoup as much of the loan amount as possible and free up financial resources tied in the property.
### What is a common characteristic of REO properties regarding their sale condition?
- [x] Sold "as-is" with potential repairs needed.
- [ ] Always sold in perfect condition.
- [ ] Refurbished before being listed.
- [ ] Always requiring significant reconstruction.
> **Explanation:** REO properties are typically sold "as-is", which means they may need repairs and renovations.
### What is one benefit of an REO property transaction compared to buying at a foreclosure auction?
- [ ] Banks provide extensive repair services.
- [ ] Easier loan approvals for these properties.
- [x] Clear title, as the bank handles any outstanding liens or encumbrances.
- [ ] The property always costs much less than market value.
> **Explanation:** One key benefit of buying an REO property is that the lender clears the title, ensuring any prior liens or encumbrances are settled.
Thank you for exploring the intricacies of Real Estate Owned properties (REO) and engaging in our comprehensive quiz. May your real estate investments be insightful and profitable!
