REO, or real estate owned, is a property which is classified as one owned by a bank or lender.
Such kinds of property are a result of default payments by the mortgagee and subsequent foreclosure auction by the bank.
Once a mortgagee starts defaulting and is unable to pay the monthly installments; the bank shall deem the property fit to be put up for foreclosure through an auction.
The base price is fixed as the amount that is to be repaid by the borrower.
In case no higher bids are available, the bank shall legally be deemed to be owner of the property.
This is when the property gets classified as REO.
As soon as a property goes into a distressed status; where-in the borrower starts missing the mortgage payments, the bank shall determine the exact equity that the property has in the market.
A method to determine the equity is to obtain an opinion from a broker or an appraisal company.
Once this report is ready, the bank shall fix the minimum price that it ought to get, and then decide on future action.
The action may be foreclosure auctions or in case this does not yield required results, a short sale option is also explored.
Foreclosures are sometimes a starting step towards REO property.
While foreclosures tend to bring a minimum amount of profit to the lender by way of auction sale, real estate owned property becomes a liability to the bank.
The bank shall then try to sell the property, after removing all present liabilities on the property, by ay of unpaid taxes or maintenance charges.
Once the property is clear of all the unpaid dues, it shall be free to be sold in the open market.
Some banks have asset management departments which take care of such assets, which have been confiscated due unpaid mortgage payments.
This department shall be responsible for disposing these assets.
In some cases, where banks do not have such departments, they either use the services of a real estate broker or use classified advertisements in newspapers or internet sites to sell off such properties.
The methodology adopted could either be open auctions or sealed bids, depending upon the policies and regulations of the bank.
Most listings that appear on internet sites are normally put up by brokers who act on behalf of banks or lenders.
Real estate owned properties are treated as a liability because the banks do not want to spend their time and money to manage assets, as this certainly is not their core operation.
They would rather sell these assets and make profits, as the mortgage departments are specifically designed to do such kind of work and have no or very less experience in managing real estate assets.