There are broad ways of explaining REO but just to simplify the term, REO stands for Real Estate Owned. These are properties owned by banks or financial institutions most of the time it is a group of houses.
There are two options on how the banks sell the property either tagged it as "bank owned" which would tell that the lender is ready to sell the property as soon as possible. Or either put the property on auction status and attempt to sell the house at auction to the highest bidder.
Unfortunately even an auction sales will not satisfy the lender to agree on sale of the home and would not be able to get any bids.
Banks usually puts the property on REO status if not being able to close the deal in auction sales, they normally wouldn't want to keep the property with them to avoid maintenance of the property which could cost them too much.
Then, REOs will be marketed towards investors like large real estate companies as high price cut. The lender reduces the price of the homes by removing any liens and fees associated with the pending mortgage. And most often companies like this buy the property at once. This gives them good investment they get the property on a low price and would make profit by either remodeling or reselling the property in a value they wanted to regain the money spent on the property.
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