Real estate owned or REO is a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction. A bank will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount.
If there are no bidders that are interested, then the bank will legally repossess the property. This is usually the case as the amount owed on the home is probably higher than the value of this foreclosure property. As soon as the bank repossess the property it is listed on their books as REO and categorized as an asset (non-performing).
After a repossession from which the property becomes classified as REO, the bank will go through the process of trying to sell the property on its own or obtain the service of an REO Asset Manager. The bank will remove some of the liens and other expenses on the home and try to resell it to the public, either through future auctions or direct marketing through a real estate broker.
Bank REO properties are generally in poor repair and maintenance. Real estate investors will often purchase these properties, as banks are not in the business of owning homes and the low price may compensate for the condition of the property
With foreclosures, there is a process in which the owner is given every opportunity to bring their payments current. At the end of the day, if they are not able to do so, they lose all legal and equitable interest in the property, which is turned over to the bank.
With a short sale, the owner is typically 120 to 180 days behind in their payments. They're also upside-down on the property, which means the value of the property is less than what's currently owed. Plus, we have to negotiate with both the seller and lender, who will very often allow the property to be sold for less than the current value since the loss might be less than what they'll face in foreclosure.
Sellers can't profit from short sales, which have to be arm's length transactions, meaning the property can't be sold to a family member. There's also been talk in the past about deficiency judgments, but Florida legislature has decided that the seller doesn't have to pay tax on the forgiven amount.