What Is an REO Property in Real Estate Terms?
REO stands for "real estate owned" by a lender or bank. REO properties are also known as bank-owned foreclosures. A foreclosed property that fails to sell at a trustee sale, or auction, becomes an REO. REOs are assets that the bank usually wants to sell. They do this by enlisting the services of a third-party REO servicing company or asset management service that handles legal paperwork and the "dirty" work, such as eviction of occupants, repairs, property management and sales negotiations.
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Significance
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Although REOs typically proliferate in down markets, when property values are low, they can occur in all markets, good or bad, as there are always people defaulting on mortgages and being foreclosed. For lenders and homeowners taking the loss, REOs are negative, but for real estate investors and some buyers, they can be positive, as REOs tend to be inexpensive inventory.
Types
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REOs are often owned by Fannie Mae or Freddie Mac, government-sponsored enterprises. The Federal Housing Administration also has REO properties, which it obtains by paying an insurance claim to the lender that foreclosed. It then transfers the property to the Department of Housing and Urban Development, according to reohud.org. The Department of Veterans Affairs also acquires REOs as a result of foreclosures on VA-guaranteed loans. These departments as well as many banks list their assets in online databases.
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Considerations
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"Almost any home you look at will have room for improvement. But the more that needs to be done to a home, the less you're going to have to pay for it," says HUD of its REO inventory. REOs, whether bank or HUD-owned, are typically marketed and sold in "as-is" condition, meaning the seller will not do any repairs to the property in order to sell it. REOs are often known as "fixer-uppers" or "handyman specials," but despite their condition, REOs can often be an affordable opportunity with outstanding value, according to HUD.
Theories/Speculation
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REOs held by banks and disposed of at a slow rate are problematic, according to Realtor.org. They are part of a larger "shadow inventory" problem, distressed property that has yet to hit the market and whose numbers are difficult to estimate. "Experts state that many of the REOs in high-demand areas (such as California) are being 'bundled' in hundreds and sold to investors," says the National Association of Realtors. Real estate professionals have accused sellers of hoarding or "hogging" REOs rather than releasing them for sale on the market.
Warning
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Though REOs can make great investments for handy investors, they may not be the best option for a first-time buyer who needs a move-in-ready home. Lenders are hesitant to lend money on REO properties in disrepair, so the loan-approval process for REO purchases is often more rigorous. REOs are best left for buyers who can afford to make necessary repairs, ensuring safety and habitability. In addition, sellers will likely not sign your real estate disclosures. They will usually only supply a buyer with minimal disclosures required by state law.
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References
- Photo Credit old home image by Dennis Carrigan from Fotolia.com
