What is the difference between an REO Property and a Bank Foreclosure?

Real Estate Agent BRE 01723710

Q1.  What is an REO?bank fore closure

A. An  "REO" is an acronym for "real estate owned" by banks.  A bank owns the property instead of individuals.  Once a property is foreclosed upon, the bank typically acquires title to its REO properties. 

Q 2.  What is the difference between an REO sale and bank foreclosure sale?

A. Once a homeowner neglected to pay a mortgage loan, the bank sells that property at a foreclosure sale, usually at an auction.  An REO sale, on the other hand, is the sale of property owned by a bank. An Example: Let's say, Suzie Homeowner has a mortgage loan secured by his home.  If she defaults on her mortgage loan, the lender may initiate the foreclosure process and eventually acquire the property at a foreclosure sale.  Upon the lender's acquisition, the property becomes part of the lender's REO portfolio.  The subsequent sale of that lender-owned property is commonly called an REO sale.  Lenders will  hire Realtors to sell those properties and list them on the MLS.

Q 3.  Why all the REO properties lately?

A. The recent high volume of foreclosure sales in recent years result in a high volume of REO sales. 
A foreclosure in California, is usually handled through a trustee's sale. Those properties are sold to the highest bidder at auctions open to the public.  At this trustee's sale, the foreclosing lender may make a credit bid in the amount of its unpaid debt plus foreclosure costs. The trustee on the other hand, typically requires cash or cash equivalent, on any other accepted bid.  Because of having to pay cash, rarely does anyone outbid the foreclosing lender at the trustee's sale.  This property becomes part of the lender's REO portfolio, once the foreclosing lender acquires title to the property by the trustee's deed.

Q 4.  Why would someone wait to buy a property from an REO lender, rather than acquire it as the highest bidder at the trustee's sale?

A. There is less potential for one to acquire property as the highest bidder at a trustee's sale than the same property from the REO lender after foreclosure.  In most cases,  people are not able to pay all cash for real property as is often required for trustees' sales. That is not true for REO sales. Also REO properties are less risky, as compared to a foreclosure sale where these purchasers often have no opportunity to inspect the interior of the property before buying it, despite the possibility that the property may be distressed  or occupied by tenants or previous owners.  Acquiring title to an REO property may also be less risky because an REO lender is likely to take care of certain title issues, such as unpaid property taxes.  Indeed, it can be very difficult for a buyer to obtain title insurance when acquiring property at a trustee's sale, but not an REO sale.

For more info on this subject-go to: www.car.org


Comments (3)

Robert Machado
HomePointe Property Management, CRMC - Sacramento, CA
CPM MPM - Property Manager and Property Management
Good information for those considering buying a distressed property.  A terminte/dry rot inspection is a must no matter what you pay or you could be in for a nightmare.
May 08, 2008 06:04 PM
Kathy Dyer
Roseville, CA
Roseville Listing, Buyer & Relocation Specialist

Thanks Robert for you comment- you hit a home run on that one- you have to be foolish to neglecta home and pest inspection. I took note of your business and will keep your contact info- always looking for more business associates to refer to! Great services you offer.  Kathy

May 09, 2008 03:14 AM
Blatt + Cutino
Coldwell Banker Realty - Monterey, CA
Broker-Associate 831/206-8070*Call today*

Thanks for the information. I wasn't real clear about the differences but now I am.

Jun 05, 2008 03:09 PM