Do You Need REO Insurance?
"Real estate owned" can be a misleading term for people who are new to the deal. Isn't all real estate owned by somebody? The difference between owned real estate and real estate owned, or REO, is that the latter refers to real estate that is owned by the lender. This could mean real estate that's owned by a bank, a loan insurer, a private lender or a government agency. In other words, REO is usually invoked as a three letter word for "repossessed."
REO property is usually the result of a foreclosure, and will typically be the result of a home with a lower market value than the amount owed on the home. We saw a lot of these in the real estate crash in the 00's, with many homes becoming REO properties following an epidemic of bad loans. It's also common to see many REO properties hitting the market following a real estate bubble.
So, from the sound of it, it seems like REO is a bit of a burden to bear, right? If you own an REO property, then that means that your borrower isn't paying you back, and the home is worth less than you put down to cover it in the first place. REO insurance can, at the very least, help to ensure that the investment isn't a total loss.
Step 1: Determine the Equity on the Property
Once the property goes into a distressed status, such as the borrower missing mortgage payments, the lender will need to determine the equity on the home. You can do this with a BPO, or Broker's Price Opinion, or you can order an appraisal. From here, the borrower may request a short sale, or the foreclosure process will begin.
Step 2: Foreclosure Auction
If you can sell a home through a foreclosure option, then it never becomes an REO property, and will still be covered by homeowner's insurance.
Step 3: Comparing Quotes and Buying Coverage
From here on, buying foreclosure insurance is just like buying any sort of property insurance. You compare quotes from lender placed property insurance providers, select the package that best suits you, and you're set.