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Bank owned real estate also known as Real Estate Owned (REO) is simply a property that is owned by the lender, most likely due to the fact that the borrower defaulted on the loan and the property did not sell at the foreclosure auction.
When a property is offered at a foreclosure auction, the bank will set the opening bid.  Often, the bank will set the minimum bid price at the outstanding balance of the loan or loans on the property.  Should the bank fail to sell the property at the auction since no bidders were interested, the property will then become a Real Estate Owned on the bank’s balance sheet.  The property will be classified as a non-performing asset, and it will then be handled by an asset manager at the bank.
For obvious reasons, the bank does not want to hold on to a non performing asset and would like to liquidate such assets, so it can go on about its business of lending money.  Consequently, the bank will list the REO property for sale, but the property may be sold to an investor before it will ever hit the MLS. 
If the bank chooses to list the property for sale with a licensed broker that specializes in REO properties, then the property may be listed in the MLS unless the listing broker sells it before it can be listed in the MLS (not ready to be shown is one reason).

If you are interested in a property in Orange County or Los Angeles that has just become Real Estate Owned (Bank Owned) over the last few day and you do not want to wait to see if it will get listed in the MLS, one way to get more information is to contact a real estate agent that specializes in contacting the asset managers at the bank and getting more information on the property that you are interested in. 
Be prepared to have your ducks in order before you contact the real estate agent, so the agent knows you are serious.  In order to do so, you must provide the agent with loan pre-approval and proof of funds, so when the agent contacts the asset manager on your behalf, the agent can present a non-binding “inquiry” to the banker in the tune of:

Hypothetical inquiry: “Hello Mr. Asset Manager, I have a client that is interested in your property on 12345 street that became REO (in the last 72 hours).  My client is pre-approved for a loan in the amount of X dollars by a direct lender.  My client has proof of funds for the down payment in the amount of Y.  We would like to know how you plan to dispose of this property.”

This conversation can continue to the tune of negotiating a price, and the agent would say something like this to the banker:  “I have conducted a Comparative Market Analysis (CMA) for the property and see that the average sale price is x dollars.  I am interested to know where your BPO (Broker’s Price Opinion) is priced.  As you know, I specialize in this area, and my client is very serious about this property.  However, my client may also be looking at a few other properties as well and will most likely purchase the property that is priced the best.”

Copyright © 2010 Tony Oz.  All Rights Reserved.  Reprinted with Permission.