REO stands for Real Estate Owned. If a property is REO, this means that the bank owns the property as the result of a foreclosure. Read on to learn more about REO properties.
How Does the Bank Become the Owner of the Property?
Foreclosure is the legal process where real estate secured by a mortgage or deed of trust is sold to satisfy a debt. (Learn more about foreclosure, options to avoid it, defenses to foreclosure, and more, in Nolo's Foreclosure topic area. To learn about foreclosure procedures in your state, see our Summary of State Foreclosure Laws.)
At a foreclosure sale, the foreclosing bank can credit bid up to the total amount of the debt, plus foreclosure fees and costs, while any other parties must bid in cash or a cash equivalent, like a cashier's check. In the majority of cases, the bank will be the high bidder at the foreclosure sale.
If the bank is the winning bidder at the foreclosure sale, the property is then considered to be REO. (If a third-party is the high bidder, title to the property is transferred to that party.)
What Happens to the Condition of the REO Property After Foreclosure?
Following a foreclosure, the loan servicer will ensure that the property is secure and will re-key the locks if the property is vacant. It will also make any emergency repairs that are needed to avoid damage to or deterioration of the property.
Generally, by the time the property is REO, the loan servicer will already have sense of the property’s condition and occupancy. This is because once the loan goes into default, and during the course of the foreclosure, the loan servicer will order periodic drive-by inspections of the property.
REO Management Companies
Sometimes, the loan servicer will hire a REO management company to facilitate the disposition of REO property following a foreclosure. REO management companies typically manage:
- eviction services
- redemption (learn more about redemption)
- property maintenance (including debris removal, repairs, and landscape services)
- market analysis
- marketing services
- title services
- sales, and/or
- closing services.
REO Property Occupied by a Tenant or Prior Owner
If the property is occupied, the servicer (or the REO management company) may offer a cash-for-keys deal to induce the tenant or prior owner to vacate the property before completing an eviction.
If a bona fide tenant occupies the property, the Protecting Tenants at Foreclosure Act (the Act):
- permits the tenants to remain in the REO property through the end of their lease (unless the purchaser from the foreclosure sale intends to occupy the property as his or her primary residence or the lease is terminable at will under state law), and
- requires longer notice periods to tenants to vacate the property.
The Act took effect on May 20, 2009, and originally was scheduled to expire on December 31, 2012; however, the Dodd-Frank Wall Street Reform and Consumer Protection Act extended the expiration date to December 31, 2014. Also, some states have adopted additional notice requirements and more protections for tenants occupying foreclosed properties.
For more information on tenant’s rights after foreclosure, see our article Renters in Foreclosure: What Are Their Rights?
Purchasing a REO Property
Once the property is vacant, the servicer or REO management company will then develop a marketing strategy for selling the property. Based on an appraisal or a broker’s price opinion, the potential sales price is set. Usually, banks prefer to sell a property in "as is" condition. If you make an offer to purchase a REO property, it may need to be reviewed and approved by several individuals, like the asset manager and other management, before it is approved. Plus, there may be a counter-offer. Once your offer has been accepted, the servicer or the REO management company will oversee the closing, receipt of proceeds, and transfer of title.
To learn more about buying a house, see Nolo’s Buying a House area.