What Does REO Stand for in Real Estate?

by Tricia Chaves, Demand Media

Overview

REO stands for Real Estate Owned properties, which get reclaimed by the bank or government agency which financed their mortgage after failing to sell at a real estate auction. Generally, REO properties get sold on the open real estate market using a real estate agent or in bulk sales to investors. REO properties generally get sold at a discounted price when compared to comparable properties.

History

Foreclosures in the United States date back to the early 1930s. Following the stock market crash in the fall of 1929, unemployment rose and caused the housing and bank markets to fall. At the same time, a sandstorm- and drought-filled season caused farmers' businesses to fold. By 1933, almost 0.73 percent of the homes in the United States became bank REO properties with about a thousand occurring daily. The nation's first REO auctions, referred to as "penny auctions," forced profit-hungry banks to purge unsold properties, which became liabilities.

Features

An REO property can be any age or style, in virtually any neighborhood. The majority of REO foreclosed properties require work to rehabilitate or repair problems. Typical REO property issues include damaged walls, missing fixtures or appliances and faulty mechanical components. A former property owner's unwilling and unhappy departure coupled with a long period of vacancy is a recipe for property damage.

Benefits


Eager banks may offer attractive financing programs to buyers to unload REO properties. Some REO loan incentives include zero percent or a reduced down payment when compared with conventional loans, lower interest rates, less stringent credit criteria, faster approval and financing for homes which other lenders may not approve.

Negotiation


Vacant REO homes are a profit drain on bank owners, resulting in an urgency for sales. When a buyer makes an offer to purchase a REO home, it can seem less personal and less emotional than a transaction with a traditional homeowner-seller. In an REO home offer, the bank representative simply considers the bank's bottom line and generally makes a fast decision, which can result in a smooth and quick closing.

Warning

Banks typically sell REO properties "as-is." As a buyer, a professional property inspection allows you to make an educated offer for purchase considering the costs involved to repair any existing defects. A buyer may offer less or request the bank make a repair in the instance of major home systems such as electrical, plumbing and mechanics, and the bank may agree to facilitate a sale.