BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Listing REO Properties
Q: I am an agent who is about to take my first REO listing. I note that the lender/seller is requiring that I sign a long addendum to the standard listing agreement. As part of my duties, I have to get the property ready for sale and maintain the condition of the property until it sells. This seems easy enough. With the increase in REO properties in my area, this seems like a good source of business. What should I be concerned about?
A: Lenders who engage listing agents for their REO properties typically ask the agent to sign a lengthy addendum to the listing agreement. This addendum is written by attorneys for the lender/seller and virtually all of the clauses favor the lender.
The listing agent may be asked to:
A. Repair any damage to the property, with contractors hired by the agent.
B. Deal with, and maybe help remove, existing tenants.
C. Hire vendors to mow the lawn, take care of landscaping, pool, etc.
D. Turn on the electricity, gas, water, etc. in the agent’s name.
E. Stage the property for showing.
F. Front the money for these efforts and be reimbursed by the lender.
G. Make regular inspection visits to the property and submit written reports on the condition of the property, needed repairs, etc.
Many of these activities constitute property management activities. If you are thinking of taking such listings, here are some things that you, and your broker, should consider prior to proceeding:
LISTING AGENTS:
1. GET BROKER APPROVAL: Review with your manager or broker the Addendum to the listing agreement which is submitted to you by the lender. Obtain your broker’s approval before proceeding.
2. REPAIRS AND MAINTENANCE: If you are going to be hiring any contractors to do needed repairs (and many REO properties are “trashed” by vacating owners or tenants), or to maintain the property, make sure that all such contractors are licensed and have adequate Workers’ Comp and civil general liability insurance policies in force. All such work should be done with all required permits, pulled and finalled by the contractor.
Do not use “handypersons” or unlicensed contractors.
See Weekly Practice Tip entitled “Recommending Licensed or Unlicensed Contractors”
Also, review CAR’s form “Property Management Agreement” for issues related to managing properties. Use this form in addition to the listing agreement if the lender will allow it.
3. PROPERTY INSPECTIONS BY LISTING AGENT: If the Addendum from the lender requires you to make regular inspection visits to the property, and report to the lender, be sure that you are aware of and meet these requirements.
4. TENANTS: If the Addendum from the lender requires you to terminate existing tenants (which lenders in many/most cases have a right to do), or even the prior owners who refuse to leave, get the lender’s permission to retain a competent real estate attorney to handle an eviction. If there is a lease, it is not a good idea to attempt to do an eviction, or “buy out” a tenant on your own. Also, proceed with caution, and an attorney, in any rent-controlled city.
If a tenant has left behind personal possessions, you must follow certain procedures in disposing of these personal property items.
For more information, see CAR Legal Memorandum “Abandoned Personal Property: Disposition of Items Left Behind After Termination of a Tenancy” at:
http://www.car.org/index.php?id=MTI1Nw
5. LENDER DISCLOSURES: REO lender/sellers are exempt from the requirement of completing a TDS, but all sellers, even lenders, must disclose any material facts known to them that affect the value or desirability of the property. Many lenders refuse to do any disclosures at all. For example, lenders may have information in their files that should be disclosed, such as your reports of inspection of the property. Remind your lender/seller in writing of this requirement. They may still refuse, but you are on record as having told them of their duties.
6. AGENT DISCLOSURES: If the lender will not disclose this information, inform the lender that you must disclose the information in those reports to buyers. Also, if there were any repairs made to the property, particularly those for which you hired the contractors, you must disclose to buyers the condition or defect that was repaired; as well as any reports or estimates of contractors or others who bid or actually did the repairs. Be sure that your agent’s disclosure includes any information, including information which was included in your broker price opinion (“BPO”) or CMA, regarding the condition and/or defects of the property affecting value or desirability.
For more information, see CAR Legal Memorandum: “Foreclosure and REO Sales Disclosure Chart” at: http://www.car.org/index.php?id=Mzc2Mjk=#PDF
7. CONTRACT FORMATION: Many lender/sellers do not even sign the purchase agreement, addenda or counter offers. They may simply give the listing agent the terms on which they may sell the property to the buyer. Or, they may just post this information on their website. Many listing agents then have no choice but to copy/paste this information into a counter-offer. In such case, inform the buyer’s agent that this is the best you can get from the lender/seller, and if buyer has any concerns about whether there is a contract, then buyer must seek his/her own counsel on that issue.
As a listing agent, be aware that these factual situations may not be sufficient to form a binding valid contract. Some courts have found that “writings,” other than the signing of a purchase agreement, were sufficient to bind the parties to a valid contract. However, each such case turns on the specific facts involved. Be aware that you may be forced by your lender/seller to proceed without a clear resolution of this issue.
8. FRONTING THE MONEY: Many of these listing Addenda require the listing agent or broker to front the money for the repairs, maintenance, and utilities. It may be necessary to actually turn on the utilities in your name and pay the fees involved. Be sure to confirm with the lender/seller which of these costs are reimbursable, and which ones require prior approve prior to their being incurred.
LISTING BROKERS:
1. BROKER APPROVAL: Require all agents to have the broker/manager review all REO listing agreements prior to entering into the agreement with the lender/seller.
2. INSURANCE: Many of these Addenda from lenders require that the listing broker maintain minimal level of Errors & Omissions and civil general liability insurance. Be sure you meet these requirements, or you may be in breach of the listing agreement the day you sign it. Also, make sure that these insurance policies cover “Property Management.” Many of these policies specifically exclude property management activities. Brokers can typically purchase insurance policy riders to cover property management for an additional cost. If you are taking REO listings, you must have this coverage.
3. WHO DOES THE PROPERTY MANAGEMENT?: Determine, as a company policy, whether you want your individual agents to be engaging in the above activities at the agent level; or whether you want to handle and control the property management functions at the broker/company level. Many agents do not have the experience to handle property management. Property management is licensed activity best left to those with experience in that field.
See Weekly Practice Tip entitled: “Property Management”
If you don’t have an in-house property management department or expertise, it may be possible, and even preferable, to affiliate with an outside, licensed property management company to take care of these responsibilities. Obtain the written approval of the lender/seller in advance.
4. INDEMNITIES: Many of the lender’s listing Addenda contain written indemnities by the listing broker in favor of the bank. Check with your E&O carrier since many of those policies exclude coverage for written indemnities. If so, seek to have these clauses excluded from the listing Addendum. If not possible to do so, then make the business decision whether to proceed.
5. SUPERVISE AGENT ACTIVITIES: Because many agents do not have property management experience, and are doing so under the broker’s license, this type of activity requires enhanced supervision. Review all of the agent’s responsibilities under the listing Addendum and as set forth in the CAR legal memorandum below, to be sure that the listing agent is complying with the listing contract and applicable property management practices.
For further information see CAR Legal Memorandum entitled “REO Transactions” at http://www.car.org/index.php?id=MzgyNDM
While REO listings may be a significant source of business and revenue, it is important to remember that there are increased duties, responsibilities and potential liability. All of these factors must be considered when embarking on this area of the real estate brokerage business.
This Weekly Practice Tip is attorney-client privileged and for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
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