An REO example
A bank forecloses on a property after the borrower falls several months behind on their mortgage following a job loss caused by a recession. Although the lender tries to work with the borrower, they're unable to bring the loan current. Meanwhile, the property's value has declined significantly due to the market downturn. As a result, the borrower cannot sell the property for enough money to satisfy their remaining loan balance. They've also fallen behind on repairs.
Following a failed foreclosure auction, the property becomes an REO. The bank quickly relists the property, which sits on the market for a few months due to the downturn. The bank finally receives an offer for about 15% less than the remaining loan balance from a real estate investor. The bank takes the deal and sells the REO to the real estate investor.
Before listing the property, the investor completes the needed repairs and renovations to make it more appealing to buyers. Given the continued real estate downturn, the investor decides to rent the property and wait for the market to recover before selling. They sign a lease with a tenant to earn some rental income and then refinance the property, pulling out some of their equity investment.
