After a property in the United States has been auctioned by a county sheriff or other court officer for the unpaid balance of a mortgage, and after the statutory redemption period has ended, the former owner loses all rights and claims to the property. This is known as the post-foreclosure phase.

If a real estate investor was the successful bidder at auction, he or she now can fix up the property, use it as collateral for loans, and even sell it like any other investment property. If the mortgage lender that initiated the foreclosure proceedings was the successful (or sole) bidder at auction, the property belongs to the lender.

Real Estate Owned (REO)

When a lender obtains title to real estate that had served as collateral for a mortgage loan, the property is designated real estate owned (REO) on the lender’s books. The lender considers REOs to be nonperforming assets, in other words, assets that accrue or return no interest or other income.

No lender wants a glut of REOs on its books. Similar to the “toxic assets” so often mentioned in the discussion about the current state of the banking industry, REOs are a drag on a lender’s value. Not only do they not produce any income, they cost the lender money to maintain.

Lenders Manage REOs

It used to be that lenders virtually ignored the condition of their REOs. The properties would sit empty and neglected, sometimes for years. Times changed and new realities set in. With the rate of foreclosures at record highs, mortgage lenders are getting stuck with larger inventories of REOs. At the same time, because of the record amount of homes on the market these days, lenders have started to realize that if their REOs are to compete for the attention of the small number of available buyers, the REOs cannot fall into severe disrepair.

Still, pouring money into the upkeep of a nonperforming asset is no guarantee to the lender that an REO will sell soon or at all. This situation produces opportunities for real estate investors who want to add properties to their portfolios at below-market prices and who are financially prepared to take an REO off a lender’s hands.

Advantages REOs offer to Investors

Unlike bidders at foreclosure auctions, investors who are interested in REOs are able to inspect the properties. If repairs are needed, investors can negotiate with the lender-owners over this issue. There are two other key advantages to buying post-foreclosure property from a lender. To pass title that is free and clear to the buyer of an REO, the lender-owner must arrange for the removal of any secondary liens on the property. Moreover, before placing an REO on the market, the lender-owner must evict any occupants on the property.

Although these proactive steps by lender-owners add to the price of an REO, many investors welcome the freedom from the uncertainty, time, and expense that those steps represent and that are not present in the pre-foreclosure and foreclosure phases.

Finding REOs

Many lenders do not advertise their REOs. Instead, they may dispose of their REOs by means of specific real estate agents or networks of private investors. For the novice investor in foreclosed properties, it is advisable to develop relationships with various lenders to become part of such a network of private investors. It is also prudent to cultivate relationships with real estate agents and brokers who specialize in marketing REOs.

There are also many online services that list bank-owned REOs (some for a fee). These services are readily found by searching the term “finding REO properties.” However, these listings may not be updated as frequently as an investor may want.

For a good guide to the foreclosure process, see HGTV’s frontdoor.com, which includes video clips.