White porcelein piggy bank next to a bank-owned or reo home sitting atop a pile of $20 dollar bills

Real Estate Owned: Everything You Need To Know About REO’s In 2020

Learn about what an REO is and why real estate investors like to keep tabs on Fannie Mae and Freddie Mac where foreclosed properties are concerned.

Introduction to Real Estate Owned by Banks

A foreclosed home that has reverted to the lending institution, or REO, is a term used in the United States to explain a class of residential or commercial property owned by a lending institution. This will usually be a bank, federal government agency, or government loan insurance company– after an unsuccessful sale at a foreclosure auction.

A foreclosing beneficiary will typically set the opening bid at a foreclosure auction for at least the remaining loan amount. If there are no bidders interested, the lending institution will lawfully reclaim the residential or commercial property.

Foreclosed homes failing to sell at auction can be common when the amount owed on the house is higher than the home’s present value. This can be seen with a mortgage made at a high loan-to-value during a real estate bubble (such as the large real estate bubble we had burst in the United States in 2008).

Once the recipient repossesses the residential or commercial property, it is noted on the bank’s or lenders’ books as an REO and categorized as a possession.

What is a Real Estate Owned (REO) Property

An REO property is one where ownership has gone back to the bank or mortgage lending institution. If the debtor with rights to commercial or residential property defaults on the mortgage, the lender can pursue a foreclosure action to reclaim the homeowner’s residential or commercial property in default.

The next step in the foreclosure process on the way to the property becoming an REO is the bank’s attempt to sell the property at a real estate auction.

If the property does not sell at this auction or the lender is the highest bidder, the residential or commercial property is deemed real estate owned, and ownership reverts to the financial institution. At this point, the lender can now list the property for sale as an REO or real estate owned by a bank or financial institution.

Foreclosure Vs. Real Estate Owned – Is an REO the Same as a Foreclosure

There’s one essential difference between a house that remains in the legal process of foreclosure and a home listed as “realty owned” or REO.

A house in the foreclosure process is currently being repossessed by the home mortgage lender, whereas the lender has already repossessed an REO house. When the loan provider cannot complete the sale of the property after foreclosure, ownership reverts to the lending institution, and the property is no longer in foreclosure but is now real estate owned or an REO.

In either case, if you wish to buy an REO home, you’ll be in a situation where you will be dealing with a bank rather than a person who owns the property, so remember to negotiate accordingly!

Difference Between Foreclosures, REO, Short Sales, and Regular Home Sales

These are the People Most Likely to Purchase REO Properties

Think you can guess what types of buyers are most likely to purchase REO homes? I’ll give you a hint; they don’t buy real estate to live in it.

That’s right, real estate investors! Whether you like real estate development over house flipping, or you prefer the long-term passive cash flow of a rental property, real estate investors are the people who are most likely to purchase an REO house. This is likely because of the possibility of a large profit for them, depending on how the property’s auction or sale goes. At times, real estate investors can make well over $100,000 from a good REO deal, which isn’t all that uncommon.

5 Big Advantages REO Properties Offer to Real Estate Investors

  • Advantage #1: You can see what you’re buying.
  • Advantage #2: You’ll usually get a clear title.
  • Advantage #3: You might receive discounted title insurance.
  • Advantage #4: You’ll likely receive a vacant/cleaned out property.
  • Advantage #5: Banks may be likely to make concessions.

-Courtesy of Dave Van Horn, Read the entire article here!

Federal Housing Finance Agency (FHFA) and the REO-to-Rental Pilot Initiative

In late February 2012, FHFA announced the REO-to-Rental Pilot Initiative Targeted to Hardest-Hit Areas, an extremely targeted pilot program with Fannie Mae, to check an asset sales model that could complement the existing sales methods of REO by Fannie Mae and Freddie Mac.

The objectives of this pilot, the REO to Rental Initiative, were to figure out if a bulk sale design idea would create private investment in single-family rental real estate efficiently and successfully to stabilize local markets.

The REO Initiative allows qualified investors to purchase pools of foreclosed properties with the requirement to rent the purchased homes for a specified variety of years. This rental period could provide relief for local housing markets that continue to be depressed by the volume of foreclosed residential or commercial properties, and offer extra rental choices to particular markets. Pre-qualification guarantees investors will have the monetary capacity and operational know-how to handle properties in a manner that is conducive to the stabilization of communities hard hit by the real estate downturn.

To introduce its REO Initiative, FHFA provided a Request for Information: Enterprise/FHA REO Asset Disposition (August 10, 2011) to get concepts for approaches to help existing and future sales of REOs, improve the recovery of financial losses compared to private retail REO sales, assist in stabilizing neighborhoods and local home values, and where possible and suitable, expand the supply of rental real estate for housing purposes.

The FHFA established the request for an initiative in consultation with the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development, considering broad federal government interest in REO disposition, including the sale of residential or commercial properties owned by the Federal Housing Administration (FHA).

Information summarized from this fhfa resource on REO’s.

Why is it so Difficult to Find Verifiable Information about REO Properties for Sale Near Me

With so much information on the internet regarding anything and everything under the sun, information overload becomes a serious worry when attempting to find any specific knowledge. Not to mention, it is more often than you might think that properties and their owners dance back and forth between being in pre-foreclosure, and being out of pre-foreclosure, making it difficult to keep a current and accurate log.

Unfortunately, this has never been more obvious than it is in the real estate industry. Over the years, false, unhelpful, misleading, and sometimes downright inhumane information and suggestions regarding the purchase or sale and investment in real estate have made their way around the web.

One area where this is most prevalent in the real estate industry online is with foreclosures and REO property information. Merely trying to find reliable and current information regarding foreclosure auctions and REO listings can be a huge time sink and an even bigger hassle.

This is the most obvious when you realize the last 2 hours you spent navigating through a foreclosure listing site and signing up for all of their newsletters and notifications and “free” services for access to a list of foreclosure auctions and properties for sale near you.

How to Find Real Estate Owned Properties the Easy Way

You do this only to find out the list contains outdated information, or there never even was a list of foreclosed properties or REO auctions to begin!

How to Get REO Listings From Banks

REO’s, Foreclosures, and the FDIC

Other Real Estate

Other Real Estate (ORE) includes real property held for factors other than to carry out bank interests. Banks generally obtain ORE through foreclosure after a borrower defaults on a loan protected by property. Many states have laws governing the acquisition and retention of such assets.

ORE Consists Of

  • All property, besides bank facilities, actually owned or controlled by the bank and any of its subsidiaries, consisting of real estate acquired through foreclosure or deed in lieu of foreclosure, even if the bank has yet to receive title to the property;
  • Real estate collateral in a bank’s belongings, regardless of whether official foreclosure proceedings have been initiated;
  • The residential or commercial property initially gotten for future expansion but no longer intended for that purpose; and
  • Foreclosed real estate is offered under an agreement and accounted for using the deposit method of accounting.

Finding the right Information About FDIC Real Estate Auctions Near You

If you are looking for current, up to date information regarding the purchase of foreclosed or REO properties from the FDIC, look no further for here is your answer:

FDIC Real Estate and Property Marketplace

Benefits of Buying a Bank-Owned Home

Real estate investments provide several advantages concerning the ability to diversify your portfolio and produce higher returns on the money invested. With distressed properties, financiers remain in a position to delight in even more significant advantages in several crucial areas, such as expense, market price, and potential returns.

Purchasing a bank-owned property is not the same as buying a property from the owner, but that’s not always bad. One of the most important distinctions is the truth that the bank will typically take steps to clear any tax liens.

One of the best ways to recognize positive earnings through REO investing is to renovate a distressed property, then offer it for more than the initial purchase rate plus the amount you’ve spent repairing and renovating it.

Flipping homes can be a nightmare on your finances if the house doesn’t sell immediately after completing renovations; however, if done right, an REO resale can net a substantial return on investment for you, your company, or your family. Even as a long term investor in all different types of real estate investments, always make sure to do your due diligence.

-How To Find Distressed Properties To Flip-

Use Extreme Caution When Buying REO or Bank-Owned Homes

Bank-owned residential or commercial real estate isn’t without certain downsides. Lenders typically sell REOs as is, which can affect turn-around time if comprehensive repair work is needed.

Financiers dealing with a restricted budget may see their returns negatively affected if they’re required to invest more than they prepared to get the residential or commercial property ready for rental or resale.

REO properties can also be problematic if an issue with the property title develops after the sale is complete. Financiers would need to acquire a separate owner’s title insurance plan in addition to a lender’s policy to avoid any problems. This would add to the expense of purchasing the property and should be factored into the project’s finances.

In Summary: This is What Real Estate Owned Properties or Post Real Estate Auction REO Property is

The term “REO” stands for “real estate-owned” but is also generally referred to as “bank-owned.” These are homes that have been foreclosed on by banks or lenders.

After a property is determined to be REO, the banks or lending institutions now own and wish to sell them. After the home has completed the foreclosure process, the bank has two choices for selling it.

The first option is to put the home on the marketplace with an indication that states “bank-owned.” Doing so will signal possible purchasers that the owner is the bank, and it wishes to complete the sale of the home as soon as possible.

If the house cannot sell using this method, the bank may decide to put it up for auction. In this situation, it would be sold to the highest bidder. The banks and loan providers owning these residential or commercial properties know that going into REO or real estate auction will mean a considerable loss on the mortgaged property.

For this reason, it is possible to acquire REO houses for below market value. If the house remains in an auction, it is typical for the lender to price the home on the low side. If you want to purchase an REO, whether as an investment or a primary residence, be mindful that these houses are generally in poor condition and need a lot of work. REO houses are most commonly offered “as is,” with the amount of work required to repair each of these houses varying from property to property.

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