Glossary: Residential REO & Distressed Property Terms

A

Appraisal: A professional estimate of a property’s market value, which banks use to determine the sale price.

As-Is / As-Is Condition: Indicates a property is sold in its current state without repairs or warranties. Most REO properties are sold “as-is,” meaning the bank will not make repairs before sale.

Asset Manager: A person or company hired by the bank to manage and sell its REO properties.

Auction: A public sale where a foreclosed property is offered to the highest bidder.

B

Bank / Lender: The financial institution that takes ownership of a property after an unsuccessful foreclosure auction.

Borrower: The person who defaulted on their mortgage, leading to the foreclosure.

BPO (Broker’s Price Opinion): An estimate of a property’s value provided by a real estate broker on behalf of the lender.

Buyer: The individual or investor purchasing the REO property.

C

Capitalization Rate (Cap Rate): A metric used to evaluate investment returns, calculated by dividing annual net operating income by the property’s value.

Carrying Costs: Ongoing expenses associated with holding a property, such as taxes, insurance, maintenance, and utilities, incurred until the property is sold.

Clear Title: The bank’s responsibility to clear any outstanding liens or taxes before the sale, ensuring the buyer receives ownership without prior claims.

Closing: The final stage of the transaction when ownership is officially transferred from the bank to the buyer.

Collateral: An asset pledged as security for a loan. In real estate, the property itself serves as collateral, allowing the lender to recover losses in case of default.

D

Deed in Lieu of Foreclosure: A transaction where the borrower voluntarily transfers ownership of the property to the lender to avoid foreclosure and settle the loan balance.

Default: Occurs when a borrower fails to meet the terms of a loan, typically by missing payments. This is the first step that triggers foreclosure.

Deficiency (Deficiency Judgment): The difference between the loan balance and the amount recovered after a foreclosure sale. A lender may pursue a court order to collect the shortfall.

Delinquency: A state of being behind on payments, which precedes the formal foreclosure process.

Distressed Property: A property in poor condition or financial trouble, which is a common characteristic of REOs.

E

Escrow: A neutral third party that holds funds and documents for both the buyer and the bank during the sale process.

F

Failed Auction: Occurs when no one bids high enough to cover the outstanding mortgage debt, causing the property to become REO.

Foreclosure: The legal process where a lender takes ownership of a property from a defaulting borrower.

Foreclosure Auction: A public sale where foreclosed properties are offered to the highest bidder. If no bid meets the debt owed, ownership reverts to the lender as REO.

Force-Placed (Lender-Placed) Insurance: Insurance purchased by a lender when a borrower fails to maintain required coverage, ensuring the property remains protected.

I

Inspection: The process of examining a property for potential issues, which is critical for “as-is” sales.

L

Lien: A legal claim against a property for an unpaid debt. Banks must address these before selling an REO.

Loan Servicer: A company that manages the mortgage on behalf of the lender, including collecting payments, managing escrow, and handling foreclosure actions.

M

Multiple Listing Service (MLS): A cooperative database where real estate professionals share property listings. It provides comprehensive data for brokers, agents, and lenders.

N

Non-Performing Asset: A loan or property that is not generating income for the bank, prompting a quick sale to recover capital.

Non-Performing Loan (NPL): A loan in which the borrower has not made scheduled payments for an extended period (typically 90+ days), indicating likely default.

Notice of Default (NOD): A formal notice recorded by the lender to inform the borrower that they are in default on their mortgage, beginning the foreclosure process.

O

Occupied: Indicates a property that still has the previous owners or tenants, often requiring a formal eviction process before resale.

OREO (Other Real Estate Owned): A classification on a bank’s financial statements for real estate assets that are not part of its primary business operations.

P

Property Preservation: Services that secure and maintain a bank-owned property, including rekeying locks, removing debris, and maintaining landscaping.

R

Real Estate Owned (REO): A property that has gone through foreclosure and is now owned by the lender because it did not sell at auction.

REO Agent / Broker: A real estate agent who specializes in handling transactions involving bank-owned properties.

S

Short Sale: An alternative to foreclosure where the owner sells the home for less than the mortgage balance, subject to lender approval. If unsuccessful, the home may become REO.

T

Title Insurance: Insurance that protects the buyer and lender against losses from defects or liens on the property’s title.

U

Underwater Mortgage (Negative Equity): When a property’s mortgage balance exceeds its current market value, leaving the borrower with negative equity.

Underwriting: The process of analyzing a loan or transaction to assess financial risk. In REO sales, underwriting ensures the transaction moves efficiently toward closing.