Legal Definitions - real estate owned

Real Estate Owned, commonly abbreviated as REO, refers to property that a financial institution, such as a bank or mortgage lender, has taken possession of. This typically occurs when a borrower defaults on their loan, and the lender goes through a legal process, most often foreclosure, to reclaim the property. Once the lender successfully reclaims the property, it becomes an REO asset on their books, held in satisfaction of the unpaid debt.

• Example 1: Residential Foreclosure
  A family falls on hard times and can no longer make their monthly mortgage payments on their home. After several missed payments, their bank initiates foreclosure proceedings. If the bank is the highest bidder at the foreclosure auction (or if there are no other bidders), the bank takes legal ownership of the house.

  Illustration: At this point, the house becomes a Real Estate Owned (REO) property for the bank. The bank now owns the property directly, having acquired it through the foreclosure process to recover the outstanding loan balance.

• Example 2: Commercial Property Default
  A small business owner used their commercial office building as collateral for a business expansion loan. When the business faces unexpected financial difficulties, they default on the loan. The lender, a credit union, then forecloses on the commercial property to recover the funds owed.

  Illustration: Once the credit union completes the foreclosure and assumes ownership of the office building, that building is classified as an REO asset on the credit union's balance sheet. It is property the lender now owns due to a loan default.

• Example 3: Undeveloped Land Acquisition
  A developer secured a loan from a regional bank to purchase a large parcel of undeveloped land for a future housing project. Due to unforeseen zoning issues and market changes, the project stalls, and the developer defaults on the land loan. The bank then forecloses on the undeveloped land.

  Illustration: The undeveloped land, now owned by the regional bank after the foreclosure, is considered an REO property. The bank holds this land as an asset it acquired to satisfy the defaulted loan.