BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
REO Sales – Representing Buyers
“REO” stands for “real estate owned” which is how banks and other lenders categorize real property that they have taken back on either a foreclosure or a “deed in lieu” of foreclosure. Representing a buyer on an REO sale will present the agent with many differences from a normal transaction. For example:
1. SELLER DISCLOSURES: REO sellers are exempt from some disclosure requirements such as the TDS, Mello-Roos and 1915 Bond Districts, Supplemental Tax Disclosure and Industrial Use Zones.
A. However, other disclosures apply to REO sellers, such as Agency Disclosure Forms, death on the property in the last 3 years (if known), FIRPTA seller disclosure, and Water Heater Bracing and Smoke Detector Statement of Compliance.
B. REO sellers, like all other sellers, must also disclose all material facts as actually known to the REO seller, as well as all copies of all reports that the REO seller has about the property.
C. REO sellers do not have to complete the NHD Statement, but do have a duty to make a disclosure about the six major disclosures which are in that Statement (e.g., Seismic Hazards Zone, Earthquake Fault Zone, State Fire Hazard Responsibility Area, Very High Fire Hazard Severity Zone, Special Flood Hazard Area, and, in some cases, Areas of Potential Flooding), so it is still advisable to order an NHD Report from a reporting company on these properties.
Confused? See the CAR Legal Memo entitled Natural Hazard Disclosure Statement at http://www.car.org/index.php?id=MTY1NQ and a summary in the Legal Memo entitled “REO Transactions” cited below.
D. If the REO seller refuses to make the required disclosures, and some do, you should remind them of their required disclosures as set forth in the above Memorandum.
See “Disclosure Chart for Trustee, Foreclosure and REO Property Sales (Residential 1-4 Unit Properties) at http://www.car.org/index.php?id=Mzc2Mjk as well as the Legal Memo “REO Transactions” cited below.
2. CONTRACT FORMATION: Remember that a contract for the sale of real property is not binding until the parties have signed the agreement for the sale, and have delivered the last, unchanged offer or counter-offer to the other side. In many REO transactions, the lender may verbally state that they have accepted the buyer’s offer but take some time to actually return the signed offer to the buyer’s agent.
There even have been cases where the REO seller bank never signs the contract. In those cases where the listing agent or seller is stating that you have a contract and should proceed, you should recommend that your buyer discuss this situation with a good real estate attorney.
3. CONTRACT ADDENDA: Some REO sellers are requiring special addenda to be added to the purchase agreement. Some of these contain “As Is” clauses, releases, and waivers of liability. Advise your buyer that you are not able to interpret the effect of such addenda, and the buyer must consult with a good real estate attorney for an opinion as to whether to sign such an addendum. You are not licensed to explain the legal or practical effects of documents created by these REO sellers. Document your file that you have given this advice to your buyer.
4. CONTINGENCIES: In several cases, the REO seller had an inspection contingency paragraph, which overrode the standard clause in the purchase agreement, creating a passive contingency removal. This is a trap for the unwary buyer’s agent who is not aware that, at the end of the contingency period in the contract, the contingency is automatically removed unless the contract is cancelled. Some REO sellers will not even allow an inspection contingency.
5. LACK OF SELLER KNOWLEDGE: Advise your buyers that, even though you are receiving documents from the REO seller, that REO seller may have little or no actual knowledge about the property. Thus, their disclosures, to the extent given, may reveal little about the property’s condition. Thus, the buyer should conduct all inspections that they desire as permitted by the purchase agreement.
For a detailed discussion on REO sales, see CAR Legal Memorandum:
“REO Transactions” at http://www.car.org/legal/foreclosure-short-sale-folder/reo-transactions/
PRACTICE TIPS:
Give your buyers the following “REO Property Advisory for Buyers” to read and sign. This Advisory is not a part of the purchase agreement, but is a separate Advisory of some of the things of which a buyer of REO property should be aware.
Also, as is specified in the Advisory, recommend that your buyer consult with an attorney regarding any questions they may have about the process, the contracts, the disclosures or the process
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.
(INSERT BROKER NAME HERE)
REO PROPERTY ADVISORY FOR BUYERS
“REO” stands for “real estate owned” which is how banks and other lenders categorize real property that they have taken back on either a foreclosure or a “deed in lieu” of foreclosure. As a buyer of an REO property, you should be aware of several issues that make this type of transaction different from a usual real estate purchase.
1. The lender/seller may have little or no knowledge of the property. They do not have to complete a Transfer Disclosure Statement (“TDS”), as do most sellers. While lender/sellers still do have to disclose any conditions or defects affecting the value or desirability of the property (just not on a TDS), and make other required disclosures, those disclosures may be of little value in light of a lender’s limited knowledge of the property.
2. The lender/seller may take a long time to respond to your offer to purchase and, in the meantime, even consider or accept other offers.
3. The lender/seller may give you a verbal “acceptance” of your offer. Such acceptances are generally not binding, in the absence of other writings sufficient to constitute an agreement to sell. If you are in doubt as to whether you have a binding agreement, you should consult your own real estate attorney.
4. If you commence incurring expenses, such as for inspection reports or for loan applications, prior to receiving a signed purchase agreement, you may be risking the loss of that money, which may not be recoverable from the lender/seller.
5. REO lender/sellers usually will attach a lengthy Addendum to the standard form purchase agreement, or may even require the use of their own contract form. These addenda and contracts have been drafted by the attorneys for the lender/seller and generally are drafted to favor the lender/seller. It is strongly recommended by your agent that you review this Addendum or contract with an attorney, because real estate licensees are not qualified or competent to give you advice on legal documents drafted by attorneys for other parties.
6. If you receive such a lender/seller Addendum or contract, read it thoroughly for understanding since it will affect your contractual rights. Some clauses may limit to take away your legal rights in certain circumstances, or limit your recovery against the lender/seller. Some clauses may impose per diem charges for delays in closing. Other clauses may require you to hold the lender/seller harmless and release the lender/seller from certain potential liabilities. Again, your agent strongly recommends that you get any questions you may have answered by your attorney.
7. Many lender/sellers refuse to pay all or many of the expenses of escrow and closing that may typically be paid by sellers, or customarily be split by sellers and buyers. Such expenses may include title insurance, escrow fees, transfer taxes, home warranty plans, costs of repairs to the property, etc. While such items may normally be the subject of negotiation in a real estate transaction, you may encounter a lender/seller who refuses to negotiate or to pay for these items. This should be calculated into your overall cost of purchasing the property when making your offer.
8. Inspections: Most of these lender/seller Addenda and contracts contain an “As Is” clause. Because the lender/seller has limited knowledge of the property, it is highly recommended that you have all inspections necessary for you to understand the condition of, and any matter affecting, the property. These should be in the form of inspection contingencies if allowed by the lender/seller. Or, some lender/sellers will allow only informational inspections. If an informational inspection during escrow discloses adverse information not previously disclosed, you are advised to seek guidance regarding this matter from your attorney.
9. Review the Preliminary Title Report for liens, encumbrances and assessments. Many of these will have been expunged or paid off during the foreclosure, or deed-in-lieu, process by which the lender/seller came to own the property. Yet, certain rights of others against the property may continue after the sale to you. You should discuss this possibility and the Preliminary Title Report with your attorney.
I/We acknowledge receipt of this Advisory
________________________________ Date: ______________, 201__
Buyer
________________________________ Date: ______________, 201__
Buyer