REO stands for real estate owned, an accounting term for property a lender ended up owning because nobody outbid it at the foreclosure sale, and an REO listing is that property being sold like any other, with a bank for a seller.
The phrase comes off a bank's balance sheet. A lender's business is loans; a house is not a loan, so when one arrives it is booked separately as real estate owned. The term stuck to the property and then to the whole category of listing.
The glossary defines it in a paragraph. This page is about how a home ends up in that category, what the lender does to it before it is listed, and what changes for a buyer.
How a house becomes REO
At the foreclosure auction the foreclosing lender may bid the amount it is owed without producing cash, which is called a credit bid. It sets the floor. If a third party bids above it, that bidder owns the property and there is no REO; the lender is paid and goes away.
If nobody does, the trustee's deed goes to the lender. The loan is written off, the house appears on the books as an asset, and the institution now has a problem it is not organised to solve: a vacant building in another state with a pool, a lawn and property taxes.
That is the whole explanation for how REO sales behave. Every oddity in one follows from a seller that does not want the item, has never seen it and is measured on how fast it leaves.
What happens before it is listed
The property is assigned to an asset manager, usually at an outsourced servicing company, who hires a local listing broker. Occupants are removed if any remain, sometimes through a cash-for-keys agreement instead of an eviction. The house is secured, the locks changed, the debris removed, and in cold climates the plumbing winterised.
Value is set from a broker price opinion or an appraisal rather than from what the loan balance was, because the balance is now irrelevant to anybody. Some institutional sellers run an owner-occupant first-look window during which investor offers are not considered, and where that applies the listing says so.
Repairs are the exception rather than the rule, and where they happen they are cosmetic and aimed at making the property financeable rather than nice: a missing water heater replaced, a hole patched, carpet where the appraiser needs flooring.
Buying one
Mechanically it is an ordinary purchase. Financing works, escrow and title are normal, the inspection contingency is real, and the buyer receives a grant or special warranty deed with title insurance rather than the bare trustee's deed an auction bidder gets.
The differences are in the paperwork and the pace. The bank's addendum is attached to the contract and overrides it where they conflict, commonly disclaiming warranties, selling as-is, restricting the seller's obligations to repair, and charging a per-diem penalty if the buyer does not close on time. Responses take longer than a private seller's because the decision goes through a chain, and an offer accepted verbally is not accepted until the corporate signature arrives.
There is usually no seller's disclosure. Nevada exempts a sale by foreclosure under NRS chapter 107 from the disclosure form requirement at NRS 113.130(2)(a), and instead requires the trustee and the beneficiary of the deed of trust to give the purchaser written notice of any defects they are actually aware of. Since a bank is rarely aware of any, the buyer's own inspection is the only real record of the property's condition.
What the foreclosure cleared, and what it did not
The usual claim is that a foreclosure wipes the title clean. It is truer than not, and it is not true enough to rely on without checking.
A completed foreclosure generally extinguishes interests junior to the lien being foreclosed. It does not touch interests senior to it, does not clear property taxes, and does not necessarily dispose of an association's assessment lien, which in Nevada carries a super-priority portion that a first deed of trust does not automatically clear. Some federal liens carry their own redemption rights after a sale.
None of that is a reason to avoid an REO. It is the reason a preliminary title report and an owner's policy of title insurance are the parts of the transaction to read rather than skim.
Where REO sits among the distressed lanes
There are three, in time order. Before the auction the owner still holds title, which is the pre-foreclosure lane and includes short sales: an ordinary sale with a slow approval attached. At the auction the property is sold by the trustee for cash, without inspection, to bidders buying a lien position. After the auction, if the lender took it back, it is REO and the property is on the market again in a normal way.
The first and the third are ordinary purchases with unusual counterparties. The middle one is a specialist activity. Most buyers who say they want a foreclosure mean one of the outer two.
Questions people ask
Is an REO cheaper than a normal listing?
Sometimes, and less often than reputation suggests. The seller is motivated by carrying costs rather than desperate, prices from a current valuation, and knows the market it is selling into. Where a real discount exists it is usually compensation for condition, for the as-is terms, or for the fact that the buyer inherits every unknown in a house nobody has lived in for a year.
Can you get a mortgage on an REO?
Yes, and most REO sales are financed. The constraint is condition rather than category: an appraiser working on an FHA or VA file flags safety and habitability items that have to be corrected before the loan can close, and a bank that will not make repairs can leave that loan with nowhere to go. A renovation loan or conventional financing is the usual answer.
What is the difference between REO and a foreclosure auction?
Timing and what you receive. The auction happens at the end of the foreclosure, takes cash on the day, allows no inspection and conveys a trustee's deed with no title insurance behind it. REO is what the lender lists afterward, sold through escrow with financing, an inspection period and a policy of title insurance.