“Real estate owned,” or REO (not the SpeedWagon), is a term we use to describe a property that a bank has foreclosed on...but then couldn’t sell at auction.
Let’s say that Bucolic Bank extended a home loan to Greg for his new $250,000 house, but then Greg’s life hit some unexpected speedbumps, and he ended up not being able to make his mortgage payments. Eventually, Bucolic Bank had to foreclose on Greg’s house, which means they basically took possession of it for nonpayment. When banks do this, they usually turn around and try to sell the house at auction so they can recoup some of their losses. But in this case, Bucolic Bank heard from a friend who heard from a friend who heard from another that this house just was not going to sell. So they took it off the market, and it became theirs. In other words, it became an REO property.
The good news is that REO properties don’t just vanish off the market forever. Banks will almost always re-list them, usually at a steep discount. So if we’re messing around online and find an REO property that we just have to have because we can’t fight our feelings about it anymore, we can usually work out a pretty sweet deal with the bank and buy it.
Related or Semi-related Video
Finance: What is REIT?8 Views
finance a la shmoop what is a REIT all right people let's start with the basics
the letters reet real estate investment trusts it's basically a mini mutual fund [REIT written on chalkboard]
for real estate investments think a chain of old age homes which might carry
a market value of a million bucks each but which throw off 80 grand a year in
net cash profits that is the entire chain of old-age homes throws off 80 [People with homes for heads appear]
grand a year in cash profits all right in melding together a whole bunch of old
age homes at least in theory the volatility of anyone home dying that's [Heart rate monitor appears]
the risk of it and then affecting the creditworthiness of the entire portfolio
of real estate holdings is lowered with scale a REIT can then borrow money more
liquidly or easily let the transaction cost $4 or a lot less and it can [Coins falling]
leverage its legal obligations and its meds buying process with scale because
it's a lot cheaper per pill to buy four million aspirin a month in just four
hundred along with volume deals on diapers and dentures that you know [Piles of diapers and dentures appear]
across a much bigger swath of buyers well REITs have been around for a while
ironically they came into existence as an extension of the cigar excise tax in [Man smoking]
1960 and extend as far in ownership as warehouses commercial office buildings
shopping malls where piercings happen in strange places and apartment complexes
of all shapes and sizes well to qualify as a read a company must invest at least [An apartment complex]
75% of its assets in real estate re there that they re NRB holding cash or
US Treasury bonds with the intent of investing in real estate it has to
receive at least 75% of its gross profits from real estate rentals it has
to pay out at least 90% of its taxable profits as dividends to its shareholders
annually and basically the government is saying well if you're gonna act like a [Man talking in congress]
REIT you actually have to be one you can't have 75 percent of your gross
profits in like oil dividends or dividends from tech companies if those
even exist well a REIT has to have at least a hundred shareholders and have
its ownership diversified such that at least half of its ownership shares are
held by five or more individuals like it has to actually look like a fund it
can't just be a shell corporation put up by one guy to uh you know take advantage [Man stood outside of Shell co.]
of the system well REITs are publicly available for
Joe Schmo to invest in they tend to pay a very high dividend and they grow asset
values at a modest premium to inflation like a few percent a year that is they
don't grow much but they pay a lot of cash dividend out and that's nice for [Cash falling]
old people so most of their payback to investors is
quote bond-like unquote and that's a REIT now keep an eye out for those bulk
diaper deals for grandpa and good luck dealing with the bulky diapers [Diaper throw into trash and woman appears]
Up Next
What is real estate tax? Depending on the state in which you reside, real estate and property are subject to state and municipal taxes, which are c...