Real Estate Owned (REO) Insurance

What Does REO Mean?

REO stands for real estate owned. This is a common term used in real estate to denote property that is owned by a lender. In most cases, the lender will be the U.S. government, a loan insurer for the government or, most typically, a bank.

Property ends up classified as REO or real estate owned when a bank forecloses on a home because the homeowner has failed to pay their mortgage for several months. The bank does not want this property, but in a mortgage, the property was leverage against the home loan. For this reasons, most of the time, the bank will attempt to auction the home off so that they can make their money back. But it is often the case that an auction like this is unsuccessful and does not sell the home. And in this situation, this means that the bank will then own the home.

Again, this is not an ideal situation for banks who simply want to get rid of the home and get their money back. For this reason, they will decide to sell the home as quickly as possible. The auction did not work, so they will discount the price of the home and sell it for under market value. REO property may be residential, but it may also be in the form of commercial buildings.

What Is REO Insurance?

Banks, government agencies, and other financial institutions often end up as the owners of properties that they don’t necessarily want. These can fall into their hands at any time when a loan that they provided previously to the former owner of the property goes into default. Mortgages that go unpaid for long periods of time go directly to the lenders.

This causes numerous problems for the banks, government agencies, and other financial institutions that now own these properties. Firstly, they will want to get these properties off their hands so that they can simply have the money that the properties are worth. Naturally, this takes time. In many cases, preliminary auctions for lender owned properties are not successful, and the properties never sell at auction. Even listing a lender owned property well below the market price can prove unsuccessful for selling off the property. Usually, after some time has passed, all properties will sell.

But in the interim, it is important that banks, government agencies, and financial institutions are able to protect the investments that they have. In lieu of money, they now have these commercial or residential properties, and they need to ensure that they are not lost to disasters, broken in to, or victim to other accidents. All of these incidents will lower the price of the property, and this will lose the bank, financial institution, or government agency even more money than they have already lost. This is where REO insurance comes into play.

REO insurance is also known as lender placed property insurance or foreclosure insurance. This insurance is in place to protect the assets of a bank, government agency, or a financial institution. When property assets fall into the hands of these entities, it can be extremely difficult to know what insurance will be best for them. You know they need to be protected from serious accidents and other unexpected perils, but what’s the best insurance plan for properties that you don’t expect or want to hold onto for long.

In addition, the properties usually fall these entities’ hands at the last minute and all at once. This creates another dilemma for financial and government institutions. Namely, it’s difficult to get an insurance plan in place all at once. In other situations, you often have months at a time before purchasing a home or residential property. This gives you multiple months or at least weeks to get your insurance plan in order. On the other hand, when properties are foreclosed upon, it often happens extremely quickly, which means that insurance must be procured quickly as well. This is where a convenience, well-organized REO insurance plan will help.

What Types of Losses Does Lender Owned Insurance Protect Against?

Just like any personal owned property or commercially owned property, accidents can happen to lender owned property. Until you are able to dispose of the property and get it off your hands and out of your liability, it’s important that you protect it from floods, fire, vandalism, and other possible accidents and incidents. In order to do this, you need foreclosure insurance or REO insurance.

Here are some of the main coverage option features that are generally included with lender placed property insurance:
    • Optimization of Internal Resources and Cost Control • Protection From Uninsured Losses • The Option for Liability Coverage
You will want to be covered in the event that someone on your newly obtained property is injured or killed, and this is what liability coverage will take care of.

Wind Coverage

In many areas of the United States, wind coverage is essential. This is mostly true for areas that are on the coasts. Wind coverage covers named storms. This generally includes hurricanes only.

In addition to these forms of coverage, you may also opt to purchase these additional, available coverage options:

Coverage for Earthquakes

Earthquakes are more likely to occur in certain areas of America, and if your newly acquired property is located in one of these places, it’s important to protect your investments from possible earthquakes. Small quakes may only cause a few problems in a home or commercial building, but it’s anyone’s guess when a large quake could cause irreparable damage to a home’s foundation and structure. It’s important to cover all your bases and make sure that earthquakes are a part of your foreclosure coverage if one of these events is a possibility.

Coverage for Floods

In many regions of the U.S. it is essential to have coverage for possible flooding. Water damage can be severe and render a once-perfectly fine home completely ruined. Like earthquakes, water damage can ruin foundations and ruin all belongings, furniture, and woodwork in a home. All of this can happen within a few hours. If you live in an area that is prone to flooding, do not go without this important form of insurance.

Coverage for Vacant Land

If any property that you own after a foreclosure is vacant land, you’ll need special protection for this land.
    • Independent Contractor Liability Coverage (Usually With Limits) • General Liability Coverage (Usually With Limits)
There are two types of coverage plans that can be purchased with REO insurance:

REO Insurance for Residential Properties

This insurance is for homes that are foreclosed upon and returned to the lender. It includes all-risk dwelling coverage and includes malicious mischief and vandalism as well as settlement provisions. In terms of settlement provisions, you will receive the lesser of these two options: cost to repair settlement or full replacement. REO insurance for residential properties may have some differences when it comes to protection.

REO Insurance for Commercial Properties

This insurance is for apartment complexes, business buildings, factories, and other commercial buildings that must be covered in the event of an accident or incident that causes damages. This is named peril coverage, and it includes coverage for malicious mischief and vandalism as well as value loss settlement provisions in real cash. In addition to this form of insurance coverage, you will also have the option to purchase commercial business property coverage. Keep in mind that this is only applicable if the building is insured in the first place, and it’s important to remember that there is a fee with this additional protection as well.

The Benefits of REO Insurance or Foreclosure Insurance

Here are the key benefits and reasons why purchasing REO insurance or foreclosure insurance is essential:

It protects the lender.

The primary entity that is protected by REO insurance is the lender. In situations where this type of insurance is necessary, it’s the lender who needs the insurance to protect their property. This insurance will ensure that all calamities possible on this newly acquired investment property will be covered so that the worth of the property is unchanged.

It protects the borrower.

Most people think that only the banks are protected with the purchase of lender-placed insurance. In fact, lender-placed insurance does mostly benefit the bank, government agency, or financial institution that has procured new property or that is purchasing insurance to keep the property in good shape. But it also affects and benefits the borrower. In some cases, borrowers simply cannot pay their mortgage or their home insurance, and naturally, even if they are still in the home or commercial building, their property is without protection against possible calamities. REO insurance protects the investment of the lender, but in the even that the borrower were to take back their home and make up lost payments, it protects them and their investment as well.

It’s easy to obtain.

Getting lender-placed insurance is a fairly straightforward process that doesn’t involve too much work. All you need to do is speak with a reputable insurance agency to discuss your plan options with you. Explain to them what kinds of properties you are looking to insure, and they can help you find a plan. In addition, remember that there are often bulk insurance options that can be purchased. This is discussed more below.

You can get it quickly.

As stated above, properties like vacant land, residential homes, and commercial properties often land in the hands of banks, government agencies, and other financial institutions quickly. It’s important to get on top of this quickly so that you can.

You can buy insurance in bulk if and when you repossess numerous properties through foreclosure.

Finally, one of the most overlooked options for REO insurance is buying in bulk. You can purchase multiple plans at once and in larger quantities if necessary. This creates options for you as a lender so that you don’t have to go through the process of purchasing a new plan for each and every entity that you repossess. Large financial institutions can possibly repossess numerous properties all at once or over time. Leaving the insurance and protection of these properties up to a bulk plan can save you time, energy, and even money.

Steps to Purchasing REO Insurance

Are you a bank, government agency, financial institution, or other lender who needs to purchase REO insurance? Here are the steps that you should take to buy this type of insurance at a great rate and in a timely manner:

Find out the property’s equity.

Here’s where you start. As soon as the property enters distressed status, you’ll need to figure out what the home or building’s equity is. Distressed status means a situation where, for example, the borrower is unable to make their mortgage payments.

Most agencies will go about this process by using a Broker’s Price Option or BPO. But some agencies prefer to have an appraisal of the property done. In some situations, a borrower can ask for a short sale. If not, however, the process of foreclosure will go forward, and in this case, you as the lender will own the property.

Have an auction.

This is the next step. If you are able to have a foreclosure auction and sell the property, you don’t have to go through the process of getting REO insurance because the home or commercial building will still be covered by the insurance of the homeowner.

If, however, you are unable to sell the home or commercial building in a foreclosure auction, then you will need to plan to get the home or building off your hands in another way. And in the mean time, it’s important to have an REO insurance plan that will cover the investment property.

Compare Quotes for REO Insurance

When it comes to purchasing REO insurance, you can purchase it in the same way that you would purchase any other type of insurance plan. You will want to buy foreclosure insurance that meets all of your needs and covers every applicable possible accident or detrimental circumstance. See above for typical coverage options that are available for REO insurance or lender placed property insurance.

Make sure to get quotes from a few different insurance agencies so that you can know you are getting the best possible deal. Find a package and plan that suits your needs, and purchase it through your agent. You’ll be all set with coverage and protection for your properties in the event that an accident occurs. Keep in mind that you can cancel your plan and payments for your plan when you eventually sell the property and get it off your hands.

Talking to an Insurance Agent About REO or Lender Placed Property Insurance

You will want to speak with a reputable insurance agent in your area to discuss your options when looking for a lender placed property insurance or REO insurance plan. As a financial institution or government agency, there are numerous insurance companies that can help you find an REO insurance plan that will work for you and give you proper coverage to protect your investments.
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