What is REO?

One term that you are likely to hear more and more often as a home buyer is REO properties. As with many terms in the industry today, your impression of REO properties and the opportunities they afford will be formed according to the information you read. Some people swear by them, others urge you to stay away. Let's explore what REO properties are.

REO stands for Real Estate Owned properties. These are properties whose titles are now in the hands of lending institutions who loan people mortgages.

The lending institutions ended up as the owners of these properties because the former owners, to whom they loaned the mortgage, failed to live up to the payment terms. This led to a foreclosure.

Now, before a foreclosure is complete, the property must first be put up on the auction block at a property auction. Many times, for various reasons, the property fails to sell at these auctions. The title is then passed from the owner to the lender. Lenders are most commonly banks, but are always bodies with an interest in financial capital rather than real property. The lender must pay any outstanding fees incurred against the property by the former owners, including homeowner association fees and tax liens.

That makes REO an expensive proposition for lenders, and we're only in the beginning stages. The lender must now have individuals who can manage and maintain the property, pay for its upkeep, not to mention the process of selling it as well. Needless to say, most lenders are eager to get these assets off their hands in return for cash as soon as possible.

Unfortunately, the hype over REO properties usually stops here. What buyers don't hear about is the fact that although lenders usually have no real interest in the property, they are not out to lose out on the sale. They still often have a deficit to make up from the previous mortgage, fees incurred during the foreclosure process, and additional investing. Thus, many institutions will have entire departments given over to the managing of their REO properties.

Those departments know their business, and it takes time, patience, and several tactics to make a successful offer. Don't believe the hype and expect a steal when you are out buying investment properties. Instead, approach them with a level head and some education.