Real estate owned, or REO, is a term used in the United States to describe a class of

property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, r ...

owned by a

lender A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...

—typically a

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

, government agency, or government loan insurer—after an unsuccessful sale at a

foreclosure Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Formally, a mort ...

auction. A foreclosing

beneficiary A beneficiary (also, in trust law, '' cestui que use'') in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example, the beneficiary of a life insurance policy is the person w ...

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 repossess the property. This is commonly the case when the amount owed on the home is higher than the current market value of the foreclosure property, such as with a mortgage loan made at a high

loan-to-value The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. In Real estate, the term is commonly used by banks and building societies to represent the ratio of the first mo ...

during a real estate bubble. As soon as the beneficiary repossesses the property it is listed on their books as REO and categorized as an asset. (See ''

non-performing asset A non-performing loan (NPL) is a bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full. Non-performing loans represent a major challenge for the banking sector, as it reduces the profitability of banks, and ...

'').

Origin

The term originates from the term ''other real estate owned'' (OREO), which is used on financial statements to account for real estate assets which are owned by a financial institution but are not directly related to its business. Such institutions are normally lenders, who are primarily in the business of making loans with the intent that nearly all of those loans will be repaid in full with interest. Seizing, managing and reselling real property collateral in order to recover unpaid loan balances is secondary to lenders' primary line of business. In balance sheet terms, OREO assets are considered non-earning assets for purposes of regulatory accounting. In the context of

national bank In banking, the term national bank carries several meanings: * a bank owned by the state * an ordinary private bank which operates nationally (as opposed to regionally or locally or even internationally) * in the United States, an ordinary p ...

s in the U.S., the term OREO is legally defined by the

Office of the Comptroller of the Currency The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury that was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national ...

in regulations promulgated pursuant to , specifically in and .

Process

As soon as a property goes into a distressed status (the borrower/home owner misses mortgage payments) the beneficiary will want to determine the amount of equity that the property has. A popular method to determine the equity is to obtain a Broker's Price Opinion (BPO) or order an appraisal. Based on the amount of equity that is determined from the BPO, the bank will decide whether 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 it will now become an 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 future auctions, direct marketing through a real estate broker, or by itself. The asset manager may also try to contact REO realtors that specialize in certain ZIP codes to help sell this bank owned property.

Real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...

investor An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Typ ...

s will often purchase these properties because of discounts offered to compensate for the condition of the property. Many larger banks and government institutions have REO/

asset management Asset management is a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings ...

departments that field bids and offers, oversee up keep, and handle sales. Some REO properties on the open market will be listed in

MLS Major League Soccer (MLS) is a men's professional soccer league sanctioned by the United States Soccer Federation, which represents the sport's highest level in the United States. The league comprises 29 teams—26 in the U.S. and 3 in Canada ...

by the

broker A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...

who performed the BPO.

Property preservation

Bank REO properties are generally in poor condition and need repairs and maintenance, both to satisfy property upkeep laws and to preserve and prepare the property for sale. Maintenance is generally the responsibility of the

mortgage servicer A mortgage servicer is a company to which some borrowers pay their mortgage loan payments and which performs other services in connection with mortgages and mortgage-backed securities. The mortgage servicer may be the entity that originated the mor ...

and is often in turn provided by a specialized property preservation company. These property preservation services include: securing a property (changing locks, boarding up), debris removal, property maintenance (winterizing, cutting grass, repairing or tarping roof leaks), and

rehabilitation Rehabilitation or Rehab may refer to: Health * Rehabilitation (neuropsychology), therapy to regain or improve neurocognitive function that has been lost or diminished * Rehabilitation (wildlife), treatment of injured wildlife so they can be retur ...

.Property Maintenance & Management: Property Preservation Matrix
, 2010,

Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...

In addition to preventing damage to the property, securing a property is used to prevent or discourage re-entry by former occupants or by squatters, which can both damage the property and require legal proceedings to remove, further complicating a sale.

Swimming pool A swimming pool, swimming bath, wading pool, paddling pool, or simply pool, is a structure designed to hold water to enable swimming or other leisure activities. Pools can be built into the ground (in-ground pools) or built above ground (as ...

s must also be secured to prevent deaths or injuries from

drowning Drowning is a type of suffocation induced by the submersion of the mouth and nose in a liquid. Most instances of fatal drowning occur alone or in situations where others present are either unaware of the victim's situation or unable to offer a ...

and falls. Lenders may purchase "real estate owned" insurance to protect against loss and liability relating to lender-owned properties. REO insurance differs from "forced placed" insurance (also "lender placed" insurance), which a lender purchases for borrower-owned property when the borrower does not insure the property.
Forced Placed insurance
', Virginia State Corporation Commission

Bulk real estate owned

Bulk REO or bulk real estate owned, from a

real estate investor Real estate investing involves the purchase, management and sale or rental of real estate for profit. Someone who actively or passively invests in real estate is called a real estate entrepreneur or a real estate investor. Some investors actively ...

’s point of view, is like investing on wholesale real estate properties. On the other hand,

s or lenders sell or open their assets in group for

auction An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition ex ...

at a very low price compared to their

market value Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market value'', although the ...

References

{{DEFAULTSORT:Real Estate Owned Real estate terminology Foreclosure

Origin

Process

Property preservation

Bulk real estate owned

See also

References