Accounting for OREO By: Robert L Hamby, CPA Date: 11/5/09 ACQUIRING OREO Upon receipt of the real estate, a bank should record Other Real Estate Owned (OREO) at the fair value less estimated selling costs.  This fair value (less cost to sell) becomes the new cost basis for the OREO.   Any remainder of the recorded amount of the loan that exceeds the fair value (less cost to sell) of the OREO is a loss and should be charged to the Allowance for Loan and Lease Losses at the time of foreclosure or repossession.  While it is possible to realize a gain on foreclosure, it is a rare event and should be skeptically examined.  In order to establish the fair value of the property at the time of acquisition, banks should obtain a current appraisal.  Subsequent declines in the value of the property are expensed to a valuation allowance account.   If the real estate property acquired is under construction, the Bank can capitalize costs to complete construction, but cannot exceed the "as completed” fair value less estimated selling costs.  Any expenses related to the acquisition of OREO property must be expensed as incurred. SELLING OREO When the bank sells OREO, gain or loss on the sale is based on the net proceeds received from the transaction.  If the bank finances the loan for the buyer to purchase the OREO property, the bank is only allowed to recognize an immediate gain under the full accrual method if the buyer/borrower meets certain down payment requirements, which vary depending on the type of property, as set forth in Statement of Financial Accounting Standard 66 (SFAS 66).  If there is not an adequate down payment by the buyer/borrower to qualify for the full accrual method, there are several other methods to account for the transaction, but normally any profits from the sale are deferred.  Any loss on the sale of OREO is recognized immediately.