REO Property stands for Real Estate Owned property. It represents a very specific class of property that is owned by a financial lender. Typically, these properties originate from foreclosures. When a property is in default, the lender will go through the process of foreclosure and auction. If the property is not sold at this point at a price satisfactory to the lender, the property becomes an REO. The loan is written off the lender’s books and replaced with a non-performing asset for the property value.
REOs are classified as non-performing assets for a reason. The have little value to the lender while they sit on the balance sheet. The property is no longer bringing in interest income on the loans and it’s not bringing in rental income as a lender doesn’t hold it to rent; it doesn’t generate any income. The faster the lender can get it off the balance sheet the better as the properties tie up resources to maintain them for sale without generating any additional cash or income. Lenders are sometimes willing to sell these properties for less than what they are worth or less than what was lost on the foreclosure just to get them off the books. For this reason, they are also not as willing to put money into the property to improve the value before sale.
The lender has the responsibility for maintenance and upkeep on the property and compliance with building and housing codes. Large lenders sometimes have their own REO management departments to maintain these properties, but it is usually outsourced to an REO management specialist. REO asset managers function as a specialized property management company. They maintain the landscaping, clean the properties, pay utilities, etc. At the same time, the REO manager will also act as an agent by listing and showing the property, attempting to sell it on the lender’s behalf. As well as preserving the property, the management company must do what it can to ensure the former occupants don’t return. It will slow down the sales process and ultimately cost much more in legal action and potential property damage repairs if squatters occupy the property and need to be removed. Asset managers are reimbursed for all out-of-pocket expenses to maintain and sell properties and compensated for their property management services.
REOs do have specific rules and regulations they must follow, and the sales cycle is typically much slower than usual. But the accounting to record and report financial transactions is very similar to all other property transactions and property management processes.Written by: Ashley Peth TGG Accounting