Also referred to as REO, real estate owned is a term used to describe real estate that is acquired by a lender when an attempt to sell the property at an auction has failed. A situation of this type usually occurs after the lender has foreclosed on the property after the borrower has defaulted. When there are no acceptable bids offered at the auction, the lender assumes full ownership, and may seek to recoup part of the loss in some other manner. Until the property is disposed of in some manner, it is carried on the accounting books of the lender as a non-performing asset.
Once a borrower defaults on a mortgage, the lender will normally consider two strategies for recouping the investment. One approach is to attempt to arrange a short sale, based on the equity of the property. There is also the option of selling the property at a foreclosure option. With both options, the goal is to recover whatever remaining investment the lender has in the property, based on the current amount of equity and the remaining balance due on the mortgage. In the event that the property does not sell, it is classified as real estate owned, meaning that the lender now has full title to the property.
Once the property is classified as real estate owned, the lender will attempt to minimize the loss in some manner. This may involve renting or leasing the property, with the understanding that the real estate is actively for sale. There is also the possibility that the lender will place the property with what is known as an REO asset manager. A professional of this type will take on the task of attempting to sell the holding on behalf of the lender. This often begins with notifying local realtors who specialize in selling real estate owned properties, and attempting to broker a deal.
The lender may choose to directly initiate contact with realtors, especially if the lender is a bank or mortgage company that already has the resources in house to coordinate efforts with REO realtors. Often, the value of the real estate owned property will be reassessed, and a purchase price established. That purchase price is usually at least sufficient to allow the lender to break even on the investment, while also in keeping with the current condition of the real estate market. In situations where a prolonged economic downturn exists, the lender may have to settle for a price that is below market standards in order to generate any type of sale.