REO stands for Real Estate Owned. To be more specific, REO refers to bank repossessed properties that didn’t get sold at a foreclosure auction. All the residential homes and properties that become part of a bank’s REO inventory have been through the home foreclosure process.
When a homeowner defaults on his mortgage, the property is subjected to foreclosure proceedings according to the laws in that state. This process usually culminates in a foreclosure auction. At this auction if a property doesn’t sell, the mortgage note holder (lender or bank) overtakes the property. At this stage, the bank’s main objective is to minimize its losses and recover as much as it can from the property’s sale. This entire REO process is handled either internally by their own department or usually outsourced to a company that specializes in handling these matters. These niche companies that manage all aspects of bank owned homes are called REO Asset Management Companies.
Due to the severe financial crisis and ensuing recession, market prices of both commercial and residential properties in the entire country witnessed rapid declines. The boom in real estate values that preceded this bust was driven primarily by loose lending guidelines that required little or no down payment. Due to this many new home buyers and investors had very little or zero equity in the homes they were buying. When the prices started declining, most of these homeowners were already underwater (negative home equity) when looked against their outstanding loan amounts. The recession simultaneously caused severe job losses and accelerated property declines nationwide. Homeowners unable to meet their payment obligations began to default in droves, which eventually resulted in the massive increase in the current inventory of repossessed REO homes at nation’s banks and mortgage lenders.
REO properties once in the possession of the bank are handled by their internal asset-recovery department or outsourced to REO asset managers. These companies handle the maintenance and upkeep along with the listing and selling of these forclosed repo properties through local real estate agents. Many first time homeowners and real estate investors are taking advantage of the opportunity presented by the current crisis to find undervalued, discount priced REO properties, which only just a few years ago were almost double their current asking price. The complete listings of REO properties for sale can be found on the websites of the various companies that are handling them.
The states with the most number of bank foreclosed homes are the same ones that led the nation in price increases during the real estate boom. States such as California, Nevada, Arizona and Florida are reeling under the weight of all the REO homes flooding the market. Savvy investors with enough liquidity are able to partner with banks and scooping up properties in bulk at a substantial discount to their already depressed market values. Small investors are also able to work with hard money financing sources to secure the necessary funds to buy these properties and also rehab them.
Many people who stayed away from the real estate market during the boom years are actively buying up REO homes. The FHA 203(K) loan program allows them to not only buy a property but also finance the necessary cost for repairs and renovation. The process of buying a REO home from a bank is not as linear as buying from a seller who owns the property. Real estate agents who handle REO properties might be hard to get in touch and work with. They may have a vested interest in working with a few investors that usually buy up all the properties they list. To be successful, it is beneficial to work with those companies that mostly handle all the REO listings in your locality or in the neighborhood in which one is seeking to buy.
The opportunity is too big to pass up for anyone with interest in real estate as an asset class. The tide of foreclosures and REO homes is not going to subside for the foreseeable future. The significant equity and value offered from picking up REO property makes it worthwhile to get familiarized by studying relevant material and involving with the entire process. Working with REO agents with good established relationships with various national banks disposing REO homes can give you significant edge. Investors will need to find good sources of hard money or private financing in order to quickly take advantage of the opportunity presented by undervalued REO.