What is a REO Property?
Real Estate Owned or REO property is a class of property owned by a lender—typically a bank, government agency, like HUD or VA, or government loan insurer, following an unsuccessful sale at a foreclosure auction.
How a Foreclosure Auction Works
The lender holding the lien on the property, also called the foreclosing beneficiary, will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If no bidders are interested, the foreclose beneficiary will legally repossess the property.
This is very common when the amount owed on the home is higher than the current market value of the foreclosure property, such as with a high loan-to-value mortgage following a real estate bubble. As soon as the foreclosure beneficiary repossesses the property it is listed on their books as REO and categorized as a non-performing asset.
Process to Becoming a REO Property
When a home owner (borrower) misses several mortgage payments, the beneficiary (lender) will begin the process of determining the amount of equity the property has. Equity is determined through a Broker’s Price Option (BPO) or an appraisal. Equity is the difference between the amount owed on the mortgage and the market value of the home. At this point the property goes into distressed status.
Based on the amount of equity that is determined from the BPO, the lender will decide if they want to allow a short sale (if requested by the homeowner). If no short sale is requested by the home owner, the beneficiary will continue the foreclosure process. If the beneficiary is unable to sell the property through a short sale or at a foreclosure auction, the property becomes an REO property.
What Happens When a Property Becomes a REO Property?
After a repossession from which the property becomes classified as REO, the beneficiary will go through the process of trying to sell the property on its own or obtain the service of an REO Asset Manager. The beneficiary will remove the liens and other debts on the home and try to resell it to the public, either through real estate auctions, direct marketing through a real estate broker, or by themselves. The asset manager may also try to contact REO realtors that specialize in certain ZIP codes to help sell the bank owned property.
Who Can Buy REO Property
Anyone can buy a REO property but, Real estate investors will often purchase these properties because of discounts offered to compensate for the condition of the property.
Typically, REOs are found in need of repair and in areas with low to moderate income residents. Most are abandoned, have no appeal and only incur repair and maintenance expenses to the lender or bank. Generally, REO properties sell for 40 to 60 percent lower than the actual market value.
Realty Fox REO Property Specialists
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