What Is the Meaning of a Bank Owned House?

Banks take property when the owner cannot make payments.

A banked-owned house, also called real estate owned (REO), is a property acquired by a bank or other lender because the owner has forfeited the home or is forced into foreclosure.

Function

Banks come into possession of homes when the mortgagee misses too many monthly payments. Sometimes a bank and debtor agree to a short sale. In a short sale, the debtor gives up a home because the value has dropped and the mortgage is more than the value of the property, so the person would rather sell the home and pay less than the entirety of the loan.

Misconceptions

Banks do not immediately slash prices on a home just because it turns into an REO property. Banks attempt to sell the property at its appraised value for 30 days, then lower the price until the property sells.

Significance

Most foreclosed homes become the property of the bank because the mortgage tends to exceed the value of the home, making it very hard to sell at auction.

Warning

When a potential buyer bids on an REO home, the bank will almost always make a higher counteroffer, because it must demonstrate to the IRS and investors that it made a full-faith effort to get the maximum value from the sale.

Considerations

In general, banks don't want to make any improvements to homes and hope to sell them "as is." Banks will allow prospective buyers to perform due diligence on homes but probably will not pay for any repairs unless they're necessary for making the sale.

References

• InvestorWords.com: REO
• RockCliff.com: REO / Real Estate Owned / Foreclosures
• RealEstateABC.com: Buying Bank-Owned Properties (REO)