Real estate owned properties, or REO properties, are houses that have been seized by banks or other lenders from people who are unable to pay their mortgages. When lenders offer mortgage loans, they see them as an investment, because they will earn money from the interest on the loan. So to salvage their investment, banks foreclose on homes with unpaid mortgages and sell the properties at foreclosure auctions. If a home doesn’t sell at auction, it becomes an REO property.
Why foreclosure auctions don’t always work
Many foreclosure auctions fail to bring in any bids. Banks or other mortgage lenders do not set foreclosure prices according to the home’s market value. The lenders try to cover their losses and fees. The foreclosure minimum bid price usually includes the balance of the unpaid mortgage loan, interest owed, attorney’s fees, and costs generated by the foreclosure process. Especially in a soft real estate market, the asking price could tower above market value. Hence, a bank can easily end up with a real estate owned property that they still need to sell.
When foreclosures become REO properties
Once a property becomes an REO, the lender will prepare the house for sale, including removing the occupants, clearing liens on the property, and determining a price. Generally, lenders do not do any upgrades or repair work on REO listings, which are sold “as is.”