Foreclosure vs. REOs: Do You Know the Difference?

By Melissa Dittmann Tracey, contributing editor, REALTOR® Magazine

Do you ever tell others that you are “showing a foreclosure?” If so, you’re not using the word “foreclosure” correctly.

Some real estate professionals use the term to refer to all distressed properties, Kathy Mehringer, director of risk management with Coldwell Banker Residential Brokerage, Southern California companies, told attendees at a session last week during the California Association of REALTORS® Expo.

Here are the definitions Mehringer provided to set the record straight:

Foreclosure is a legal process by which a defaulting borrower is deprived of their interest in the property.

Real estate owned (or REO), on the other hand, is a real estate asset owned by the lender that is taken back during the foreclosure process.

You show REOs to clients, not foreclosures. Foreclosures are legal proceedings.

Another common set of terms often confused when discussing short sales and foreclosures: portfolio loan versus servicing agent.

Portfolio loan is an asset owned and controlled by the lender. The decision maker on the loan is in-house.

A servicing agent is hired by the lender to service the loan or is an investor, such as a private investor or government-sponsored enterprise, like Fannie Mae or Freddie Mac. They are often subject to guidelines. (You can’t always find out who the investor of the loan is.)

The short sales process is often easier to facilitate when dealing with a portfolio loan, Mehringer said, since a servicing agent has limited authority and may need to go back to the portfolio loan holder for final approval.

So here’s a good question to ask when you take a short-sale listing: Is this a portfolio loan or through a servicing agent?

Melissa Tracey

Melissa Dittmann Tracey is a contributing editor for REALTOR® Magazine, writing about home & design trends, technology, and sales and marketing. She manages the magazine's award-winning Styled, Staged & Sold blog.

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  1. Realtor for Homeowners

    Our MLS lists properties as foreclosures and REO properties. I guess the staff need to read this. 😉

  2. Why are banks not responsive to reducing their losses on a short sale with only 1 loan?
    Short sale request submitted 9/17/2010.
    Property listed at $579,000 with a loan of $572,000 but is a short sale after closing costs.
    Full price offer submitted on 9/22/2010.
    Banks will not look at the offer until short sale is approved. Bank will not look at the short sale application for 2 months after submission. Bank will not review the short sale request until November or later.
    The current owner has approved the offer, moved out of the home and turned off the utilities, stopped the landscaping and pool maintenance and the home begins deteeriorating. The homes landscape turns brown, the pool green with alge, and the home devalues and will no longer appraise at the offered price. The bank will lose $30,000 due to deterioration and lack of maintenance.
    this all could have been avoided and the bank could have saved $30,000 if someone at the bank could have approved the sale within 1 week of submission? All other buyers must respond within 3 days to a written offer. Why are banks allowed to get away with this unethical and irrational behavior?

  3. justin

    I agree ,it is hard to explain the irational behaviour of banks.One bank person told me that it cannot do better when she has to deal with 65 files simultaneously. I know lots of people ,some past realtors,looking for jobs.

  4. Michelle Kelley

    Lenders are swamped with short sale requests. They must first approve the borrower and determine that they have a legitimate hardship. They review financial statements, bank statements, pay stubs, and tax returns. Then they must order an appraisal and a title search and use them to review the offer price. This process takes many days for each file.

    It does not matter if the seller has approved the offer; in a short sale, the contract is not considered executed until the lien holder has approved the offer. The borrower should do all they can to keep the property from depreciating greatly. The bank may lose $30,000 in the short term, but your clients could potentially be pursued for a deficiency judgement years later. It would definately be worth their time and effort to maintain the property to get the highest price for the lender. Banks will give more consideration if the borrower is being cooperative. Why should they push their file ahead of countless others when they have defaulted on the loan, neglected the property, and caused a $30,000 loss?

  5. Susan

    I also wish someone with authority would answer Brad Hall’s questions. This is a common scenario in real estate today and seems extremely inefficient, expensive, and wasteful when efficiency, lowered costs, and savings are needed. “Hang in there!”

  6. The market has changed since. Banks ARE repairing, renovating, painting etc…before putting back on market. It’s happening. Let’s hope they release these properties slowly.

  7. As a REO agent – we are all about fair market value. We do not advertise or sell any bank owned properties until they have been repaired, cleaned up and damage issues are resolved. Until the MI companies complete the claim process, the back log will rise.
    I know for a fact, that’s what we’re waiting on. Foreclosed properties are out there; they are being stalled by MI companies not settling claims. They’ve not increased staff sizes. BTW, former realtors are “former” for a reason. That does not necessarily mean they’d be good asset managers or qualified for handling a bank’s assets. Just saying…

  8. Wayne

    We are REO agents and we are very concerned about the smaller asset management companies and insolvent banks that are not paying their reimbursals to the agents that are floating their expenses for them. One of my agents got stuck for $3500 bucks. What many agent don’t realize is how expensive it is to run an REO team and how much money it takes to float cash for keys and other expenses for the banks and asset management companies. It ca be typical for an REO agent to have out $40k to $75K at all times. The pay cycles can be brutal too. 45 to 90 days before you get reimbursed at times. We will probably sell nearly 200 houses this year but it is no panacea, believe me. All I can say is if you are still trying to get REO accounts, be very weary and do your due diligence. Chances are, the good REO agents fired that account. You might not get paid…=8 7 [