In one line: A home the lender took back at the foreclosure auction and now sells like any other seller.
REO is bank-owned property: at the trustee sale nobody outbid the lender's credit bid, so the trustee's deed went to the lender, which now lists the home through an agent and sells it conventionally.
Buying an REO is ordinary buying with a bank for a counterparty: financing works, escrow is normal, inspections are allowed, and the sale is as-is with no repairs and a slower approval chain. The home may have sat empty through a Las Vegas summer, so the air conditioning and the pool are the first things to check.
REO is the third of the three foreclosure lanes: pre-foreclosure before the auction, the trustee sale itself, and REO after. Most buyers belong in the first or the third.
A worked example
The lender credit-bids its $310,000 balance at the trustee sale and nobody bids higher. The trustee's deed goes to the lender, which lists the home six weeks later at $335,000, as-is, through a local agent.
Questions people ask
Can I get a mortgage on an REO home?
Yes, if the home meets the lender's condition rules. A bank-owned home that sat vacant may need an FHA 203(k) or a conventional renovation loan; the listing usually says whether the bank will accept financed offers.
Are REO homes cheaper?
Often a little, in exchange for as-is condition, no repairs, and a slow approval chain. The comps-based discount on the listing page says how far under its neighbours any one is actually priced.