REOs are the most popular of the bargain opportunities in real estate. Here you might get a property for 5 to 50 percent off market value. Yet, they are usually considered a safer and easier way to buy real estate than purchasing either directly from the seller before a foreclosure auction or at the auction itself.

Buying an REO means getting it right from the lender. You usually get clear title and perhaps even title insurance. You may get a property that’s been refurbished. And if you’re careful, you can get one that’s way below market price.

By the way, REO, for those new to the field, stands for “real estate owned.” It’s actually a rather strange term because someone always owns real estate. However, it’s particularly applicable here because it refers to lenders, such as banks, or large institutions, such as the Federal Housing Administration/Housing and Urban Development (FHA/HUD) or other organizations, owning real estate. For them this is a no-no because their purpose is to lend (or insure or guarantee the loaning of) money, not to own property. Having to take property through foreclosure indicates a fail­ure of their lending policies. That’s why real estate owned is such a good way of describing a bad thing for the lender but a good thing for you.

Why Don’t Lenders Like REOs?

There are many reasons. REOs don’t pay interest, and lenders are in the business of earning interest. Whenever lenders have money tied up that isn’t producing interest, it shows up as a negative in their bookkeeping. (It’s actually listed as a liability and not an asset.) Too many properties in the REO category can lead to insolvency in a lending institution, and that can lead to its failure. REOs simply don’t look good on the books of a lending institution. They indicate failure rather than success. Finally, REOs take time and effort away from the lender’s main business, which is making money from loans.

For these and other reasons, lenders are always anxious to get rid of REOs as quickly as they can. However no matter how fast they dispose of them, more crop up. During the recent real estate recession, their numbers increased dramatically. There are always plenty for the bargain hunter.

Are There Different Types of REOs?

Yes and no. Generically, the term means any property taken back through foreclosure and owned by a lender. However, properties owned by the fed­eral government are frequently called government repos (although we often refer to the whole field as REOs). Those owned by private companies, such as banks, are strictly called REOs.
HUD may be the biggest owner and seller of REOs in the country, acquired through defaulting FHA mortgages. The Veterans Administra­tion (VA) is also big on REOs acquired through defaulting VA loans. Other branches of government from the Small Business Administration (SBA) to the Marshals Service have REOs that they want to dispose of.

On the other hand, banks large and small make real estate loans that sometimes go bad. And when these are taken back, they are referred to as private REOs. And when an average citizen takes back through foreclosure a house that he or she sold with a second mortgage, these are sometimes called private individual’s REOs.