Real estate owned, commonly referred to as REO, is a type of property asset possessed by lenders - such as banks and large financial institutions - that failed to sell during a foreclosure auction.
When a homeowner defaults on a loan, forcing the property into foreclosure, the asset is then transferred back to the originator of the loan. At this point, most lenders will seek to value the asset since a price cannot be determined in the market. To establish how much equity the asset has, the property owner may obtain a Broker Price Option, commonly known as a BPO, or have an appraiser value the property as is.
When the loan originator repossesses the property, they will either attempt a short sale - selling the property for less than it is worth - or through at a foreclosure auction. To facilitate the sale of non-performing assets, banks will oftentimes remove some features which may have prevented buyers from previously purchasing the distressed property. A bank may remove some legal claims on the property (liens) and other expenses that were previously linked to the asset.
If at this point the bank is still unable to sell the property and does not wish to hold the property on the balance sheet, it may seek out a REO realtor that specializes in managing and disposing distressed properties. Administering REO properties differs from traditional real estate asset classes in that a broker must be able to analyze local markets to determine if homebuyers/investors are willing to be compensated for distressed assets via reduced prices.
