What does REO property mean?

Question: Dear Kari, I've been renting for quite a while and am now ready to purchase a home. Could you please explain what an REO property is? Answer: Great question! REO stands for "real estate owned" and refers to homes that have been repossessed by a lender after going through the foreclosure process. In California, lenders are allowed to foreclose on deeds of trust or mortgages in default with the methods of judicial or a non-judicial foreclosure process. However, the process used most often is non-judicial foreclosure or also referred to as trustee's sale. When a home borrower stops making their monthly payments to the lender they are deemed to be in default. The lender will contact the borrower, but action may not be taken for several months or longer. Let's face it, banks are not in the real estate business to buy homes, they want to lend money so folks can buy homes. The banks don't really want to take back a home. They may try to create a solution to get the homeowner back on track and catch up on the payments. In the event this is not possible, then lenders may begin foreclosure proceedings. The foreclosure process starts with a Notice of Default, referred to as an NOD. Then the lender or the trustee for the lender files the NOD with the county. The homeowner may be delinquent on payments for 30 days or more than one year. Typically, the homeowner is allowed a certain time period to resolve this issue; this is often referred to as the reinstatement period. The homeowner may reinstate the loan during this time period by making the delinquent payment current right up until a few days before the sale of the home. In case the homeowner is not able to redeem the home, then the bank will evict them through the proper process. At this point, the home is deemed a bank-owned property. The home is sold "as is" without making any repairs at all. This situation can cause issues because the home may have been vacant for months or even years without running water or gas. In this situation, the prospective REO homebuyer should beware. It would be wise to consider that if an owner of a home does not have means to pay their mortgage then it might be fair to assume they have not been able to attend to necessary maintenance on the property such as plumbing leaks, roof maintenance, hot water heater problems, electrical problems, etc. In addition, homeowners have been known to become so embittered with the fact they are losing their home they vandalize the homes. In one such case, a disgruntled homeowner poured cement down the toilet bowls and sinks. Another possible issue with bank-owned properties is that previous homeowners may have made repairs while cutting corners, or they may have completed work without obtaining the required permits. On the flip side, an REO property could be and has been known to be an equity maker for buyer pocketbooks. If you are so lucky to find an REO with minor issues, then you may have found a good treasure. If you're a first-time homebuyer considering a bank-owned property, it's highly recommended to pay for a home inspection and a pest/termite inspection, and to review those reports carefully with your agent. Your agent may also suggest additional inspections or getting bids from specialists if needed. It's wise to invest the time and money up front rather than dealing with costly regrets later. I wish you the best!