Real Estate Owned or REO is a class of property owned by a lender typically a bank (Banked Owned), government agency, or government loan insurer, after an unsuccessful sale at a foreclosure auction (sheriff sale). A foreclosing beneficiary 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 beneficiary will legally repossess the property.
This is commonly the case when the amount owed on the home is higher than the current market value of this foreclosure property, such as with a high loan-to-value mortgage following a real estate bubble. As soon as the beneficiary repossesses the property it is listed on their books as REO and categorized as a non-performing asset.