Real estate owned (REO) is real estate property owned by a lender, such as a bank, that did not successfully sell at a foreclosure auction. A lender (often a bank or government entity such as Freddie Mac or Fannie Mae) takes ownership of a foreclosed property when it fails to sell at the amount sought to cover the loan.
When a mortgage borrower defaults on their mortgage, the pre-foreclosure period often involves either a real estate short sale or a public auction. If neither goes through, the foreclosure process can end with the lender (often a bank or government entity such as Freddie Mac or Fannie Mae).
For example, say Blanca bought a home with a $400,000 mortgage but lost her job and still owed $300,000. After a few months of missed payments, her lender issues a notice of default (NOD). As a result, the lender loses the $300,000 that it lent to Blanca, but could recoup it by selling the property.
Blanca’s lender then tries to sell the property at a public auction, but it does not sell. At that point, the home became REO property and the lender puts it up for sale.
A few days later, Jamal, a prospective home buyer, sees the REO listing and submits an offer. When Blanca’s lender accepts the offer, Jamal takes ownership of the home, which means it is no longer considered an REO property. In this scenario, Jamal’s payment helped Blanca’s lender recover the amount that it lost with Blanca.
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