An REO (Real Estate Owned) is the term used in the banking world to describe a property that goes back to the mortgage company after an unsuccessful foreclosure auction. This is common because most of the properties up for sale at these auctions are worth less than the total amount owed to the bank. The minimum bid in most foreclosure auctions equals the outstanding loan amount, the accrued interest and any costs associated with the foreclosure sale including attorneys' fees. After an unsuccessful auction, the bank will go through the process of trying to sell the property on its own. It 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 Realtor. Generally speaking, bank REO properties are in poor shape in terms of repairs and maintenance; however, real estate investors will often go after these properties as banks are not in the business of owning homes and so, in some cases, the low price can more than compensate for the condition of the property. Once a property is REO, the bank or lender will try to get rid of the property by either selling it directly themselves or through an established broker.

These are accounts where attempts to collect have been unsuccessful and the account is simply not paying at all. It is in arrears with back payments and other expenses due. Often, lenders in need of cash liquidity are willing to steeply discount the amount they will accept for the sale of their sub-performing or non-performing loan accounts (the promissory notes). These problematic accounts are a drain for the lender both monetarily and from a human resources standpoint. For astute real estate investors, opportunities can be created by acquiring these secured loans, which can then be "scrubbed" up and become performing again or simply foreclose and repossess the collateral securing the loan. Lenders sell these notes to create liquidity and get these loans off their books.