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.
Foreclosure is the legal process where real estate secured by a mortgage or deed of trust is sold to satisfy a debt. Depending on state law and the circumstances, a foreclosure will be judicial or nonjudicial. With either option, at the end of the process, the property is sold so that the lender can recoup the amount it loaned to the defaulting borrower.
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. But if a third-party is the high bidder, title to the property is transferred to that party.
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 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 servicer will order periodic drive-by inspections of the property.
Sometimes, the servicer will hire a REO management company to facilitate the disposition of REO property following a foreclosure. REO management companies typically manage:
If the property is occupied, the servicer (or the REO management company) might 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):
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. The federal law came to an end on December 31, 2014, but was restored on June 23, 2018, as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act.
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?)
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 might need to be reviewed and approved by several individuals, like the asset manager and other management, before it's approved. Plus, there might be a counteroffer. 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 Foreclosed Properties area.