Real estate owned
Encyclopedia
Real estate owned or REO is a class of property
owned by a lender typically a bank
, government agency, or government loan insurer, 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 outstanding loan amount. If there are no bidders that are interested, then the beneficiary will legally repossess the property. This is commonly the case when the amount owed on the home is higher than the current market value of this foreclosure property, such as with a high loan-to-value mortgage following a real estate bubble
. As soon as the beneficiary repossesses the property it is listed on their books as REO and categorized as an asset (non-performing asset
).
term Other Real Estate Owned (OREO) used on financial statements as a classification of real property owned by an entity which is financial institution not directly related to its business. In balance sheet terms, OREO assets are considered non-earning assets for purposes of regulatory accounting. With regard to national banks in the U.S., the term OREO is legally defined by the Office of the Comptroller of the Currency
in regulations promulgated pursuant to 12 U.S.C. § 29.
(BPO) or order an appraisal
. Based on the amount of equity that is determined from the BPO, the bank will decide whether to allow a short sale
(if requested by the homeowner). If no short sale is requested by the home owner, the beneficiary will continue the foreclosure process. If the beneficiary is unable to sell the property through a short sale or at a foreclosure auction it will now become an REO property.
After a repossession from which the property becomes classified as REO, the beneficiary will go through the process of trying to sell the property on its own or obtain the service of an REO Asset Manager. The beneficiary will remove the liens and other debts on the home and try to resell it to the public, either through future auctions, direct marketing through a real estate broker, or by itself. The asset Manager may also try to contact REO realtors that specialize in certain zip codes to help sell this bank owned property. Real estate
investor
s will often purchase these properties because of discounts offered to compensate for the condition of the property.
Many larger banks and government institutions have REO/asset management departments that field bids and offers, oversee upkeep, and handle sales. Some REO properties on the open market will be listed in MLS
by the broker
who performed the BPO. In the contraction that resulted from the S&L crisis, a common problem in many areas involved the listing broker "pocket listing
" the transaction and not putting it out on the open market. Agents who have a pocket listing will put the listing on the MLS but will sometimes not field legitimate offers in the hopes of selling it themselves, quite often contrary to the beneficiaries wishes. To combat this, REO exchanges and government foreclosure outlets have been developed to overcome this problem.
and is often in turn provided by a specialized property preservation company. These property preservation services include: securing a property (changing locks, boarding up
), debris removal, property maintenance (winterizing, cutting grass, repairing or tarping roof leaks), and rehabilitation.
In addition to preventing damage to the property, securing a property is used to prevent or discourage re-entry by former occupants or by squatters, which can both damage the property and require legal proceedings to remove, further complicating a sale. Swimming pool
s must also be secured to prevent deaths or injuries from drowning
and falls.
’s point of view, is like investing on wholesale real estate
properties. On the other hand, banks
or lenders sell or open their assets in group for auction
at a very low price compared to their market value
. One benefit of investing on REO's in bulk is that a buyer can get good discounts upon purchasing them. However, the downside would be the incurred expenses from the closing amounts of the properties that the investor needs to pay.
For instance, a real estate investor purchased four REOs for $600,000 by borrowing an amount of $500,000 and paying $100,000 as down payment. Each property costs $150,000 and the down payment is allocated equally among them at $25,000. The remaining balance for each property will then be $125,000 which is financed through blanket loan
for $500,000. Each property will still have a release clause of $125,000 so that it can still be sold separately without affecting the blanket loan. Thus, in case one has sold a property for $300,000, one only needs to pay off the release amount of $125,000 taking home the profit of $175,000.
Most Bulk REOs have these common characteristics:
Typically, Bulk REOs are found in low to non-residential areas with low to moderate income residents. Most are abandoned, have no appeal and only incur cost to the lender or bank. Generally, these properties sell for 40 to 60 percent lower than the actual market value. However, some investors consider these criteria as an opportunity by bringing them back to life and offering best deals to consumers.
Property
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
owned by a lender typically a bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
, government agency, or government loan insurer, after an unsuccessful sale at a foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
auction. A foreclosing beneficiary
Beneficiary
A beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example: The beneficiary of a life insurance policy, is the person who receives the payment of the amount of insurance after the death of the insured...
will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If there are no bidders that are interested, then the beneficiary will legally repossess the property. This is commonly the case when the amount owed on the home is higher than the current market value of this foreclosure property, such as with a high loan-to-value mortgage following a real estate bubble
Real estate bubble
A real estate bubble or property bubble is a type of economic bubble that occurs periodically in local or global real estate markets...
. As soon as the beneficiary repossesses the property it is listed on their books as REO and categorized as an asset (non-performing asset
Non-performing asset
A Non-performing asset is defined as a credit facility in respect of which the interest and/or instalment of principal has remained ‘past due’ for a specified period of time.-Identification:...
).
Origin
The term REO originates from the GAAPGaap
In demonology, Gaap is a mighty Prince and Great President of Hell, commanding sixty-six legions of demons. He is, according to The Lesser Key of Solomon, the king and prince of the southern region of Hell and Earth, and according to the Pseudomonarchia Daemonum the king of the western region and...
term Other Real Estate Owned (OREO) used on financial statements as a classification of real property owned by an entity which is financial institution not directly related to its business. In balance sheet terms, OREO assets are considered non-earning assets for purposes of regulatory accounting. With regard to national banks in the U.S., the term OREO is legally defined by the Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
in regulations promulgated pursuant to 12 U.S.C. § 29.
Process
As soon as a property goes into a distressed status (the borrower/home owner misses mortgage payments) the beneficiary will want to determine the amount of equity that the property has. A popular method to determine the equity is to obtain a Broker's Price OpinionBroker's Price Opinion
A Broker’s Price Opinion is the process a hired sales agent utilizes to determine the selling price of a real estate property. BPOs are popularly used in situations where lenders and mortgage companies believe the expense and delay of an appraisal to determine the value of properties is unnecessary...
(BPO) or order an appraisal
Real estate appraisal
Real estate appraisal, property valuation or land valuation is the process of valuing real property. The value usually sought is the property's Market Value. Appraisals are needed because compared to, say, corporate stock, real estate transactions occur very infrequently...
. Based on the amount of equity that is determined from the BPO, the bank will decide whether to allow a short sale
Short sale (real estate)
A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens' full amounts, whereby the lien holders agree to release their lien on the real...
(if requested by the homeowner). If no short sale is requested by the home owner, the beneficiary will continue the foreclosure process. If the beneficiary is unable to sell the property through a short sale or at a foreclosure auction it will now become an REO property.
After a repossession from which the property becomes classified as REO, the beneficiary will go through the process of trying to sell the property on its own or obtain the service of an REO Asset Manager. The beneficiary will remove the liens and other debts on the home and try to resell it to the public, either through future auctions, direct marketing through a real estate broker, or by itself. The asset Manager may also try to contact REO realtors that specialize in certain zip codes to help sell this bank owned property. Real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s will often purchase these properties because of discounts offered to compensate for the condition of the property.
Many larger banks and government institutions have REO/asset management departments that field bids and offers, oversee upkeep, and handle sales. Some REO properties on the open market will be listed in MLS
Multiple Listing Service
A multiple listing service is a suite of services that enables real estate brokers to establish contractual offers of compensation , facilitates cooperation with other broker participants, accumulates and disseminates information to enable appraisals, and is a facility for the orderly...
by the broker
Broker
A broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
who performed the BPO. In the contraction that resulted from the S&L crisis, a common problem in many areas involved the listing broker "pocket listing
Pocket listing
A pocket listing is a real estate industry term used in United States which denotes a property where a broker holds a signed listing agreement with the seller, whether that be an "Exclusive Right to Sell" or "Exclusive Agency" agreement or contract, but where it is never advertised nor entered...
" the transaction and not putting it out on the open market. Agents who have a pocket listing will put the listing on the MLS but will sometimes not field legitimate offers in the hopes of selling it themselves, quite often contrary to the beneficiaries wishes. To combat this, REO exchanges and government foreclosure outlets have been developed to overcome this problem.
Property preservation
Bank REO properties are generally in poor condition and need repairs and maintenance, both to satisfy property upkeep laws and to preserve and prepare the property for sale. Maintenance is generally the responsibility of the mortgage servicerMortgage servicer
A mortgage servicer is the company that borrowers pay their mortgage loan payments to. Mortgage servicers either purchase or retain mortgage servicing rights that allow them to collect payments from borrowers in return for a servicing fee...
and is often in turn provided by a specialized property preservation company. These property preservation services include: securing a property (changing locks, boarding up
Boarding up
Boarding up is the process of installing boards on the windows and doors of a property to protect it from storm damage or to prevent unauthorized access by squatters, looters or vandals....
), debris removal, property maintenance (winterizing, cutting grass, repairing or tarping roof leaks), and rehabilitation.
In addition to preventing damage to the property, securing a property is used to prevent or discourage re-entry by former occupants or by squatters, which can both damage the property and require legal proceedings to remove, further complicating a sale. Swimming pool
Swimming pool
A swimming pool, swimming bath, wading pool, or simply a pool, is a container filled with water intended for swimming or water-based recreation. There are many standard sizes; the largest is the Olympic-size swimming pool...
s must also be secured to prevent deaths or injuries from drowning
Drowning
Drowning is death from asphyxia due to suffocation caused by water entering the lungs and preventing the absorption of oxygen leading to cerebral hypoxia....
and falls.
Bulk real estate owned
Bulk REO or Bulk Real Estate Owned, from a real estate investorReal estate investor
A real estate investor or a real estate entrepreneur to a lesser extent is someone who actively or passively invests in real estate. An active investor may buy a property, make repairs and/or improvements to the property, and sell it later for a profit. A passive investor might hire a firm to...
’s point of view, is like investing on wholesale real estate
Wholesale Real Estate
Wholesale real estate Most homes are purchased by individuals who go through a local real estate agent. A smaller percentage purchase a home that is offered for sale by the homeowner, without intervention of an agent....
properties. On the other hand, banks
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
or lenders sell or open their assets in group for auction
Auction
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
at a very low price compared to their market value
Market value
Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some...
. One benefit of investing on REO's in bulk is that a buyer can get good discounts upon purchasing them. However, the downside would be the incurred expenses from the closing amounts of the properties that the investor needs to pay.
For instance, a real estate investor purchased four REOs for $600,000 by borrowing an amount of $500,000 and paying $100,000 as down payment. Each property costs $150,000 and the down payment is allocated equally among them at $25,000. The remaining balance for each property will then be $125,000 which is financed through blanket loan
Blanket loan
A blanket loan, or blanket mortgage, is a type of loan used to fund the purchase of more than one piece of real property. Blanket loans are popular with builders and developers who buy large tracts of land, then subdivide them to create many individual parcels to be gradually sold one at a time...
for $500,000. Each property will still have a release clause of $125,000 so that it can still be sold separately without affecting the blanket loan. Thus, in case one has sold a property for $300,000, one only needs to pay off the release amount of $125,000 taking home the profit of $175,000.
Most Bulk REOs have these common characteristics:
- Marginal location - low population rate or poor commercial activities;
- Low or no market demand
- Not qualified for conventional financing
Typically, Bulk REOs are found in low to non-residential areas with low to moderate income residents. Most are abandoned, have no appeal and only incur cost to the lender or bank. Generally, these properties sell for 40 to 60 percent lower than the actual market value. However, some investors consider these criteria as an opportunity by bringing them back to life and offering best deals to consumers.