What is REO (Real Estate Owned)?
REO (Real Estate Owned) refers to properties that have been taken back by a lender through the foreclosure process after failing to sell at the foreclosure auction. When no outside bidder meets the minimum bid at the trustee sale (usually the outstanding loan balance plus fees), the lender becomes the owner. The property then enters the lender's REO portfolio and is typically listed for sale through a real estate agent or asset management company.
REO properties represent a specific niche in the distressed property market. They're past the uncertainty of pre-foreclosure and the risk of auction bidding. The bank now owns the property and is motivated to sell because holding real estate costs money (maintenance, insurance, property taxes, potential vandalism) and is outside their core business of lending. Banks want to liquidate REO inventory quickly, which creates opportunities for investors.
How REO sales work
After taking ownership through foreclosure, the lender typically hires a local real estate agent or asset management company to handle the property. The agent assesses the property's condition, recommends a list price (usually based on comparable sales and the property's as-is condition), and lists it on the MLS and other platforms. The listing usually specifies that the property is sold "as-is" with no seller disclosures.
Offers on REO properties go through a specific review process. The listing agent submits all offers to the lender's asset manager, who evaluates them based on price, financing type (cash offers are preferred), closing timeline, and contingencies. Banks strongly prefer clean, fast closings with minimal contingencies. A cash offer with proof of funds and a 14-day close will typically beat a higher financed offer with a 45-day close.
REO vs. other distressed property types
| Stage | Seller | Typical discount | Inspection allowed? |
|---|---|---|---|
| Pre-foreclosure | Homeowner | 10-30% | Usually |
| Auction | Trustee/court | 20-40% | No |
| REO | Bank | 5-20% | Yes (as-is) |
| Short sale | Homeowner (bank approves) | 10-25% | Limited |
REO properties generally offer smaller discounts than auction purchases because the bank has had time to assess value and list at a market-supported price. However, REO purchases are far less risky: you can inspect the property, get title insurance, and use normal closing processes. For investors who want below-market deals without auction risk, REO properties offer a middle ground.
Tips for buying REO properties
Submit clean offers with proof of funds, short closing timelines, and minimal contingencies. Don't ask for repairs, credits, or seller concessions -- the bank is already selling at a loss. Have your financing pre-arranged so you can close quickly. Build relationships with REO listing agents in your market, as they often have advance notice of upcoming listings. And be patient: banks sometimes take days or weeks to respond to offers due to bureaucratic approval chains.
For wholesalers, REO properties present a challenge because most bank listing agreements prohibit assignment of the purchase contract. You would need to use a double close or have an entity purchase the property and then sell the entity. However, the margins on REO purchases may not support the additional costs of a double close. REO properties are generally better suited to buy-and-hold investors and flippers who intend to close and hold or renovate the property themselves.