For the novice real estate person, the terminology surrounding real estate and real estate investing can be difficult to understand at best. Real estate agents spend many years studying these terms and words. When trying to better understand real estate, the term REO may come up. An REO refers to a bank owned piece of real estate but can be a bit more complicated than that.
An REO stands for real estate owned. An REO is more than a single home; it is a group of homes owned by a bank or a lending institution. After a home is foreclosed upon, the bank has two options for selling that piece of property. The first option includes listing the property on the market, with the tag "bank owned". This will often tell the potential buyer that the lender is in dire straights and ready to sell the home in a very short time. If this tactic does not work, the bank will move the home into auction status and attempt to sell the home at auction to the highest bidder.
Unfortunately, for some properties, even an auction will not bring enough money to the lender to agree on the sale of the home. This leaves the lender in a tight situation. Banks are not in the business of real estate. The longer they hold on to that unsold home, the longer they are not getting money back for that property. It is during these cases that a bank or lending institution will turn the home to REO status.
REOs are often grouped together as a lot of homes. These homes are marketed towards investors as high price cuts. The lender is willing to go very low on the loan or even lose money on the deal if the investor is willing to buy up several properties at once from the lender. The lender reduces the price of the homes by removing any liens and fees associated with the pending mortgage.
REO real estate is often in mediocre to poor condition and investors pick up the properties often in hopes of remodeling and reselling or renting to regain the money spent on the properties. Investors have a higher chance of turning a profit, because the nature of investing is time. Banks, on the other hand, have no time to hold on to the home and no means through which to modify the home for a quicker sale. Investors, on the other hand, are happy to lift the property from the bank at the heavy discounts being offered.
Real estate REO sales are rarely, if ever purchased by individuals. Once a property enters REO status, the bank just wants to get rid of the property as quickly as possible and is often only willing to sell to a cash buyer like a real estate investor or large company. On rare occasions, the banks will be willing to sell a home or two off of a larger lot if the buyer has an approval from another lender ready for the deal upon the introduction of the sale contract.