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Real Estate Owned  or REO's is a term used to describe properties owned by a bank, government agency, loan insurer or lender. It becomes an REO property if it does not sell at a foreclosure auction and these properties can normally be purchased at a discount. 

When a homeowner/borrower misses a few mortgage payments, the beneficiary (the bank who services the loan) will want to determine the amount of equity that the property has and this is normally done through a BPO which s broker's price opinion or they will order an appraisal.  

Based on the amount of equity that is determined from the BPO, the bank will decide whether to allow a short sale (if requested by the homeowner). If no short sale is requested by the home owner, the beneficiary will continue the foreclosure process. If the beneficiary is unable to sell the property through a short sale or at a foreclosure auction it will now become an REO property.  

After a repossession from which the property becomes classified as REO, the beneficiary will go through the process of trying to sell the property on its own or obtain the service of an REO Asset Manager. The beneficiary will remove the liens and other debts on the home and try to resell it to the public, either through future auctions, direct marketing through a real estate broker, or by itself.