Banks own real estate because the banks have acquired the homes through foreclosure. Homes on a bank’s books are called REOs, which is an acronym for “real estate owned.” Realize that when banks receive property deeds to homes through foreclosure, it’s because no one showed up on the courthouse steps to bid the minimum amount of the existing mortgage(s).
On the surface, it might not sound as though foreclosures are profitable, especially if the bank wants to sell its inventory on the open market for the amount that was once owed to the bank by the previous mortgagor. However, here are at least two reasons why an REO can be profitable to you:
• If two loans were secured to the property (which is common these days), the second lender sometimes does not foreclose. If the second lender does not make up the back payments to the first lender and commence its own foreclosure proceedings, the second lender gets wiped out in the foreclosure. Many second mortgages comprise 20% or more of original market value..
• The bank does not want to sit on its inventory. Since it did not receive its minimum bid from an investor or home buyer during the foreclosure sale at the courthouse, the bank is likely to price that REO home for less, just to get rid of it.