What Is a Bank-Owned Property?

Bank-owned property, also known as real estate owned (REO) property, is a designation given to properties that were not sold during a foreclosure sale, and thus are added to that foreclosing bank's inventory.

Key Takeaways

  • Bank-owned property, also known as real estate owned (REO) property, is a designation given to properties that were not sold during a foreclosure sale, and thus are added to that foreclosing bank's inventory.
  • Bank-owned properties tend to have low interest rates and low down payments.
  • Buying a bank-owned property may take longer to finalize than a non-bank-owned property.

Understanding Bank-Owned Property

Bank-owned properties are properties taken into a bank's inventory when not sold during a foreclosure sale. A bank-owned property is acquired by a financial institution when a homeowner defaults on their mortgage. These properties then sell at a discounted price, much lower than current home prices, as buyers are wary of the costs of potential repairs that might be needed.

A bank-owned property is a type of real property taken by lenders after a borrower defaults on his or her mortgage and the subsequent foreclosure auction yields no buyers. Bank-owned properties tend to have low interest rates and low down payments. Potential home buyers and investors can find listings of bank-owned properties through the online service "RealtyTrac" or directly through lenders. Also, large national lending institutions have loss mitigation departments that sell these properties.

When a borrower fails to uphold his or her mortgage obligations, the mortgaged property is transferred back to the lender. The lender might be a bank, credit union, or other financial institution offering loan services, such as mortgages. Typically, the process will begin by following the lender's policy for transitioning into foreclosure. The lender may have a certain grace period, for example, for missed payments before the property is transferred into foreclosure. The missed payment schedule can vary among lenders and may encompass as little as three missed payments. From there, if the lendee fails to pay their mortgage payments, the property is auctioned off. Once a property fails to sell at a foreclosure auction, the property is then transferred to the bank—the new owner of the property.

Once a property is transferred to the bank, the bank may clear the title​​​​​​​. Therefore, it is prudent for investors to verify that the title is clear before proceeding with any financial aspects of improving or managing the property. Under the bank's ownership, the lender may make necessary structural and cosmetic repairs to the property and even relist it for sale with a real estate company that specializes in foreclosures or with a general real estate company for sale.

If you are looking to purchase a bank-owned property, beware that the proceedings can take longer than typical real estate transactions. Oftentimes, the timeline is extended and completing the sale can be a long process as the bank wants to make sure the transaction is secure to avoid going into foreclosure again, as well as to minimize losses and maximize profit.