Confusion about foreclosed properties VS REO properties!

12 Replies

There are some websites that list properties for sale as Foreclosure.

Meanwhile I read that:

Foreclosures are NOT sold by Realtors. Foreclosure properties are auctioned at a Trustee Sale at the Court House in the County where the property resides. Foreclosure properties must be paid for in full, with a cashiers check at the time of the auction

Aren’t they supposed to be auctioned off at a court house and not in a website?

Or are they actually REO properties that are mistakenly listed as foreclosure?

Here is an example:

http://www.ziprealty.com/property/406-MCKELVEY-AVE-BAKERSFIELD-CA-93308/4914299/detail

Properties become "foreclosure properties" when a notice of default is recorded (in California).

The final step in the foreclosure process is the public auction on the courthouse steps (where the purchase is paid in full at the time of the auction via cashiers checks).

The lender will place the first bid. If no one outbids the lender, the property becomes owned by the lender (REO). At some point after this occurs, the REO will be listed by a real estate agent on the MLS, and may appear on websites for sale.

Right or wrong, the terms "foreclosure" and "REO" are commonly interchanged.

Originally posted by Brian Burke:

The lender will place the first bid. If no one outbids the lender, the property becomes owned by the lender (REO). At some point after this occurs, the REO will be listed by a real estate agent on the MLS, and may appear on websites for sale.

Right or wrong, the terms "foreclosure" and "REO" are commonly interchanged.

So technically speaking, what we see in that link is actually a REO and not a forclosure ?

If It's a " foreclosure property" and listed with an agent, it's an REO, or sometimes a short sale. People use the terminologies differently, and incorrectly, all the time.

Originally posted by Wayne Brooks:
If It's a " foreclosure property" and listed with an agent, it's an REO, or sometimes a short sale. People use the terminologies differently, and incorrectly, all the time.

Generally speaking correct except for the fact that this can not be a short-sale.

In a Short Sale situation, the home owner's name is still on title of the property and they are the official owners who are trying to sell the property. In a foreclosure, the lender takes possession of the house and as a result, the homeowner is no longer a party in the sale.

Alex,
I understand the difference.. Your question was about terminology. Agents/ companies intermingle the terminologies all the time. When you see someone advertising a " list of foreclosure properties for sale", they are referring to REO's. You should be able to figure the difference easily.

So the property is owned by the owner, until the lender bids on it, then the lender pays ... who? Itself? Why would the lender bid on it?

Originally posted by Dawn Anastasi:
So the property is owned by the owner, until the lender bids on it, then the lender pays ... who? Itself? Why would the lender bid on it?

The lender has already "paid" for it, by funding the loan originally, and paying the fees and interest for missed payments, and legal fees, and court costs, etc. The lender places a bid so that the next bidder bids high enough for the lender to recover as much of what the lender is owed as the lender is hoping to see.

Just to add to everything above, a lot of people try to stay away from the terminology "foreclosure," as it's very ambiguous (as you can see).

Generally, you'll hear "pre-foreclosure" for a property going through the foreclosure process but not yet sold at auction, "trustee" sale for a foreclosed property being sold at auction and REO for a foreclosed property that didn't sell at auction and is now being sold by the lender in an open-market sale.

Originally posted by J Scott:
Just to add to everything above, a lot of people try to stay away from the terminology "foreclosure," as it's very ambiguous (as you can see).

Generally, you'll hear "pre-foreclosure" for a property going through the foreclosure process but not yet sold at auction, "trustee" sale for a foreclosed property being sold at auction and REO for a foreclosed property that didn't sell at auction and is now being sold by the lender in an open-market sale.

Interesting point J Scott

So trustee sale means property is being auctioned off at court steps ?

Yep. Or, at the trustee's steps in some states.

Alex, REO Stands for "Real Estate Owned" another common term used is ORE "Other Real Estate" and it reflects the accounts on the bank or lender's books.

Until the property is acquired through foreclosure it is carried on the books in "Loans" (different accounts, performing, delinquent, etc) but it is an asset on the books.

A foreclosure is a judicial or non-judicial process to secure collateral for the amounts due.

The entry amount to be paid for the collateral goes to the balance of the loan and allowed costs of collection under state law.

If and when the property sells for an amount above that entry bid funds will be paid first to costs of the sale and then applied to the lender's balance. If the amount received is not enough to pay the amount due then the lender may seek a deficiency against the borrowers and guarantors. While not common, if a bid is made that is close to the entry bid, the trustee may accept the amount and the lender will accept a loss, depending on state law. If the amounts are in excess of amounts due the lender that is equity due the borrower/owner. See below.

If there is no bid above the entry amount the property does not sell but reverts to the lender as secured collateral and then becomes ORE or REO property. This is not a purchase of any kind. It is collateral in trust.

The balance due the lender is subtracted from the assets in "Loan Accounts" and credited or added to the "Other Real Estate" or "Real Estate Owned" account on the books of the lender. These accounts are carried to identify the properties being different from other properties owned by the bank/lender, such as bank property for the bank building and branches as collateral property is not owned in the same manner bank property.

At this point, the bank has a duty to protect the property and may add additional expenses in holding the collateral property to the amounts owed.

Recently, I might add, loan servicers, managers were (and still do to a lesser extent) were carrying out activitives designed to charge the account with excessive fees and increase earnings. Regulatars cracked down on such practices. I won't go into who was benefiting from the fees but such charges ate away at any possible amounts of equity still available to the past owner borrower. Keep in mind the lender does not own the property as a buyer would they have title as a collateral interest with the power of sale.

They list the property to ensure an open market sale to obtain the highest price in that market. Again, the lender has a duty to protect the property and equities available, so they MUST list the property to avert any claims arising with self dealing or favorite buyer issues.

When the property sells cash is received and credited to cash and the same amount on the ORE/REO account is subtracted or debited. If an excess amount was received from the sale, that amount is a credit to the borrower, if funds were not sufficient to pay amounts due, that amount is carried as uncollected and again the lender may seek a judgment from the borrower or guarantor according to state law.

It's important to understand for those interested in buying notes that a lender or note holder does not buy the property from loan proceeds, they have a collateral interest at all times. This interest flows through the entire process as amounts are accounted for on the books of the lender, being held seperately and apart from owned property. The accounting required by a lender is based upon the legal interest held in any collateral property.

And, how does a past owner collect over payments or equities? In some states the lender is required to give notice of any sale of collateral to the borrower and some lenders will send a check, if not required to do anything but give notice, the borrower will need to make the demand (request) payment. Where notice of sale is not required it is on the owner to investigate the sale and request or demand amounts due. A borrower can sue the lender for failure to provide notice required and/or remit excess equity amounts due.

A brief simplified view of ORE/REO.... :)

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here