REO is a term that means "real estate owned" and refers to a property owned by a bank after foreclosure. Once an owner of a house stops making payments on the house, the property goes into foreclosure. The inhabitants are evicted and the house sits vacant until sale at auction or at market.

Most houses are not sold at foreclosure auction because the amount owed on the property surpasses the value of the house. Chances are if the owner quit making the house payment, he also quit paying everything else including taxes, water, and other assessments. The bank wants to recoup that money as well so it is tacked on top of what was owed on the mortgage when the owners defaulted. Minimum bid is set at a price to cover the mortgage and all related expenses including foreclosure fees and attorney fees, and there are naturally no bites.

After the unsuccessful foreclosure auction, the REO property will be marketed directly to the public through the use of real estate agencies and other real estate auctions. Sometimes the properties are marketed simultaneously which adds frustration to an already buying situation, from a buyer's perspective.

Most of the time, the properties are represented by a real estate company that specializes in the marketing and negotiating of REO properties. Different rules apply to listing and negotiating these properties which involve strict bank requirements, and no consideration for buyers or anyone involved in selling the property, whatsoever.

Buyers have the misconception that they will walk up, get the house for a steal, and swiftly move on with their purchase as if they just picked up a fantastic item on clearance at the mall. The reality is that the houses are usually in extremely poor condition. If someone has stopped paying for their house, they probably stopped caring for it, as well. Many times the inhabitants deliberately trash the property on their way out, out of spite and anger. Further decay in the house is caused from being vacant. The very cold months cause freezing and cracking, while rainy periods flood basements and bring about mold. REO properties usually require a lot of time and money invested to become livable, which is one big reason why REO deals are not for everyone.

Another difficulty in obtaining the REO property is bargaining misconception. Buyers have heard that REO properties are usually obtained at whatever percentage of a discount is the number of the day. What needs to be understood is that the houses are already marked down by that amount from its actual value to be competitive and aggressive in the sales market. Banks hardly budge from their prices and when they do it is according to a formula they use that demonstrates how much can be discounted at different increments of time on the market. Once you reach the negotiation stage you have to be patient and prepared to lose to a higher bidder. The banks can hold your offer and continue to accept others for as long as they like so if you have a deadline to meet, an REO property might not work for you.

Good deals can be had on REO properties if you adjust your expectations, have patience, and can handle the stress.

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