REO properties: what they are and why banks sell them cheap

REO stands for Real Estate Owned, the technical term – used both in Spain and internationally – for the properties a bank owns after being awarded them as the result of a mortgage foreclosure. Understanding what an REO asset is and why banks want to get rid of them so quickly is key to negotiating well.

How a property becomes an REO asset

The process is simple: someone takes out a mortgage, can't pay it, the bank enforces its security, the property goes to a court auction, and if nobody bids enough (or there are no bidders), the bank is awarded it. From that moment on, the property appears on the bank's balance sheet as an REO asset.

Why banks are under pressure to sell them

Holding REO assets on the balance sheet isn't free for a bank. It creates several problems:

• Accounting provisions: The Banco de España (Spain's central bank) requires banks to make provisions (set aside capital) against the value of repossessed assets, which ties up resources that could be used for lending.
• Maintenance costs: The bank has to pay the IBI (the local property tax), the owners' association fees, insurance and basic maintenance for every asset.
• Regulatory pressure: European banking supervisors keep a close eye on the portfolio of problem assets (NPAs). Holding high volumes of REO hurts how the bank is perceived.
• No return: An empty property generates no income. Only costs.

The result: the longer an asset has been on the balance sheet, the more pressure there is to sell it, even at a discount.

How to use this to your advantage as a buyer

How long an asset has been in the portfolio is your best indicator of a potential discount. An asset listed 3 months ago has little leeway. One that has gone 18 months without selling has real room for negotiation that the bank is willing to use. Servicers often tag assets as "reduced price" once the price has already been lowered, but you can go further with a well-argued direct offer.

See also: The real pros and cons of bank repossessions. To see REO assets available now, go to RadarPro's property search.