“REO” is a commonly used name for “Real Estate Owned” by banks. Instead of an individual owning the property as in a typical resale transaction, the bank owns the actual property. The bank usually acquires title to its REO properties through a foreclosure process. REO properties may also be acquired in other ways, such as a deed-in-lieu (when the homeowner agrees to turn the home over to the bank) or a tax sale. When purchasing a home, an REO property is usually a faster transaction than a short sale because the bank has completed its BPO (Broker Price Opinion = homes value) and they are ready to sell. The price is already set and approved for sale. As soon as the beneficiary repossess the property it is listed on their “books” as REO and categorized as a non-performing asset.
When a property goes into a distressed status (the homeowner misses mortgage payments) the beneficiary will want to determine the amount of equity that the property has – if any. The common method to determine the equity is to obtain a Broker Price Opinion (BPO). 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 the homeowner doesn’t request a short sale 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, where the property becomes classified as an 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. If there are any liens and other debts on the home the beneficiary will remove them and try to resell the home 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.
Is REO sale the same thing as a foreclosure sale?
No, they are not. A foreclosure sale is the sale of a real property most likely at an auction generally triggered by a homeowner’s inability to pay their mortgage payment. REO sale is the sale of a property owned by the bank itself. Here’s an example – John Doe, homeowner has a mortgage loan secured by his home. If John Doe defaults on his mortgage obligation his lender could initiate the foreclosure process and acquire the property at a foreclosure sale if he doesn’t make full restitution of owed payments. Now the lender owns the property, its part of the lender’s REO portfolio. The subsequent sale of a lender owned property is commonly called an REO sale.
What is a short sale?
If the market value of your home is less than what you owe on your current mortgage, you may qualify for a legal, lender approved solution known as a short sale. A short sale can be accomplished by negotiating with your bank or lending institution to accept a sale of your property to a third party buyer for less than what you currently owe on your mortgage balance.
The short sale is not a questionable practice in today’s softening real estate market it may be a necessity. The short sale transaction is a legal and much more beneficial alternative to foreclosure or even bankruptcy. Lenders are motivated to accept short sale offers to for a number of good reasons. The short sale of your home can result in a win-win-win situation for all parties involved
Benefit #1: You win by getting out of a financial predicament via a clean transaction and a salvaged credit score. Your property is saved from foreclosure, thus helping you to save your credit rating and avoiding a foreclosure. Allowing your home to proceed into foreclosure may adversely affect your credit for up to 7 years.
Benefit #2: The lender wins by avoiding timely and very costly foreclosure proceedings, which could lead to an even more costly expense of ownership of the real estate by the bank.
Benefit #3: The buyer of your property wins by getting a solid property at a good market value.
Benefit #4: You can buy a home again in as little as 3 years as opposed to a much longer timeframe if you let your home go into foreclosure.
If you are considering engaging in a short sale transaction, you should fully educate yourself about the mechanics of the process and the related legal and ethical issues and work only with legitimate professionals.