Legal Definitions - REO

REO stands for Real Estate Owned.

This term refers to property, typically real estate, that a lender—such as a bank, credit union, or mortgage company—has acquired through a foreclosure process. When a borrower defaults on their loan payments and the lender forecloses on the property, if the property does not sell to a third party at the foreclosure auction, it reverts to the lender's ownership. At this point, it becomes an REO asset on the lender's balance sheet. Lenders usually aim to sell these properties as quickly as possible to recover their losses and avoid the costs associated with property ownership and maintenance.

• Example 1: Residential Foreclosure
  A homeowner falls behind on their mortgage payments for several months. After exhausting all other options, their bank initiates foreclosure proceedings. At the public foreclosure auction, no bidders offer a price sufficient to cover the outstanding loan balance. As a result, the bank takes ownership of the house. This property is now classified as an REO asset on the bank's books, and they will likely prepare it for sale on the open market.

  This example demonstrates REO because the bank, as the lender, acquired the residential property directly after a foreclosure auction where no third-party buyer emerged, making it "Real Estate Owned" by the bank.

• Example 2: Commercial Property Default
  A small business owner defaults on a loan secured by their commercial office building. The commercial lender proceeds with foreclosure. During the foreclosure sale, the highest bid is still less than the amount owed, and the lender decides to take possession of the property rather than sell it for a significant loss. The office building then becomes an REO property for that commercial lender, who will then manage its upkeep and eventual sale.

  This illustrates REO in a commercial context, where the lender takes ownership of a business property following a loan default and foreclosure, categorizing it as an asset they now own.

• Example 3: Bank Portfolio Management
  A large regional bank has a dedicated department responsible for managing a portfolio of properties that have been acquired through various foreclosures. This department's tasks include assessing the condition of these properties, arranging for necessary repairs, paying property taxes, and listing them for sale with real estate agents. All the properties under the management of this department are considered REO properties.

  This example highlights REO from an institutional perspective, showing how a lender actively manages multiple properties it has taken back through foreclosure, all of which fall under the REO classification.