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What is the Difference Between a REO and a Foreclosure?
Foreclosures are homes that the bank does not own yet. The borrower still has ownership of the property but has fallen behind on their mortgage payments to the lender. In the event that they cannot reach an arrangement with the lender to resolve their delinquency, foreclosure proceedings may be started. Foreclosure procedures and timelines vary from state to state, and just because a foreclosure action has been started does not guarantee that an auction will take place. However, the final stage of a foreclosure in any state is the public auction of the property. It is important to know that the lender cannot sell a property to an interested buyer while the foreclosure action is still in progress. The borrower retains ownership of the house until foreclosure is complete.
REO (Real Estate Owned) is an industry term that refers to a property that ownership has reverted back to the lender through some means. A property can be surrendered to the bank in order to avoid the completion of a foreclosure or the bank may be forced to complete the entire foreclosure process. If a foreclosure auction is scheduled on a property the bank will determine the amount of money they have invested into the property which is referred to as their total payoff. If the auction takes place and there are no bids placed higher than the bank’s maximum bid, the bank takes the deed to the property.
If a property is purchased at public auction it is sold in “As-Is” condition and potential purchasers usually cannot inspect the property before the sale takes place for potential occupants, severe property damage or other defects which may exist. If the property is purchased as an REO, it is still sold in “As-Is” condition but a viewing of the property can be arranged through the bank’s selling agent before an offer is made ensuring that you are fully aware of any possible defects within the property before committing to purchase.
Remember, throughout this process the bank is simply trying to recover their investment in the asset. They are not in the property management business and do not want to delay recovery of their investment any longer than necessary.