The following questions the legal hotline hears and answers every week.Inspection Contingency: Notice vs. Amendment

The buyer should decide

An offer has a standard inspection contingency and the seller has the right to cure. The home inspection is completed and the report shows many items that appear to be defects. Should the broker give a notice of defects or an amendment?

Let the buyer decide! The role of the real estate licensee is to explain the inspection contingency and the buyer’s options, and then let the buyer make an informed decision. In most situations, the buyer basically has three choices:

1. Do nothing
   The buyer accepts the property in its current condition and the parties proceed to closing.
   
2. Give a notice of defects
   This is essentially a demand that the seller repair all of the items listed in the notice. Remember that the buyer should only list items from the home inspection report that fit the definition of a defect, as stated in the inspection contingency. Remember to include a copy of the report with the notice.
   
   Upon receipt of a notice of defects, the seller may:
   • Elect, in writing, to cure all listed defects in a good and workmanlike manner
   • Prepare an amendment to propose a different way to handle the listed defects, e.g., repair only some of the defects, give the buyer an allowance for repairs and/or reduce the purchase price
   • Elect, in writing, not to cure and allow the offer to become null and void
   • Do nothing and allow the offer to become null and void
   
3. Propose an amendment providing a different way to address the items listed in the inspection report
   Rather than making a list of the defects to which the buyer objects and having the seller repair them all in a good and workmanlike manner, the buyer may propose a price reduction, repair allowance or escrow, specify repair techniques or contractors or any combination thereof. The seller may then:
   • Accept the amendment
   • Propose a different amendment
   • Do nothing and the underlying contract remains in place unless the buyer gives a notice of defects before the applicable deadline
   
   As time allows, the buyer may use a combination of these strategies. The buyer may not unilaterally make the offer null and void if the seller has the right to cure.
   
   For more information about the home inspection contingency, see Legal Update 99.10, “Home Inspections,” online at
   www.wra.org/LU9910 and Legal Update 04.08, “Effective Home Inspections,” online at www.wra.org/LU0408.

Personal purchases

Licensees do not earn commission on personal purchases

An agent who wants to buy a property for him or herself often asks, “How much commission will I earn if I buy this property?”

The answer is almost always “none.” As a principal in the transaction, that is, the buyer, this individual is not providing a brokerage service to another person for which a commission may be earned.

The first step when an agent wants to buy a property for him or herself is to check company policy regarding personal purchases. If that policy allows the buyer/licensee to proceed independently, the buyer/licensee may write his or her own offer (as the buyer, not as a licensee) and negotiate an incentive from either the listing broker or the seller. An incentive from the seller may be requested in the offer to purchase. An incentive from the listing broker, on the other hand, should be negotiated separately outside of the offer to purchase because the listing broker is not a party to the offer to purchase. It may be prudent to establish the incentive before submitting the offer to the listing broker and the seller must consent to the incentive in the offer.

Buyer agency and the commission

The buyer’s agent is not automatically procuring cause

When a buyer begins to work with one agent to buy a property and then decides to hire an agent from another company as a buyer’s agent, is the buyer’s agent the procuring cause of the sale?

Not necessarily. The buyer does not dictate which cooperating broker receives compensation offered on the MLS. Procuring cause is determined by reviewing the uninterrupted series of events that resulted in the sale of the property to the buyer. Provided the first broker introduced the property to the buyer and did not abandon or estrange the buyer, the first broker might be procuring cause, depending upon the circumstances.

The good news for the buyer’s broker is that the buyer’s broker still may be entitled to the fee specified in the WB-36 Buyer Agency/Tenant Representation Agreement. Before the buyer enters into a buyer agency agreement, the agent should explain that choosing buyer agency might increase the cost of the transaction for the buyer, depending on how the contract is drafted and whether the buyer agency fee is paid by the listing broker or seller.

For more information on buyer agency, see Legal Update 05.09, “Buyer Agency Practice,” online at www.wra.org/LU0509. For more information about procuring cause, see Legal Update 02.04, “What is Procuring Cause?” online at www.wra.org/LU0204.

Is it Mortgage Fraud?

Use the sniff test

This question takes on many forms: the mortgage broker wants an amendment to raise the purchase price and create a second mortgage that will be forgiven after the closing, the lender wants the price raised and the seller to give the buyer funds on the side, or the lender has a limit on the amount of pre-paids and closing costs.

Mortgage fraud occurs anytime a participant in a real estate transaction misrepresents facts, or is coaxed into misrepresenting facts, with the intent to bilk another party out of its money. Mortgage fraud can be committed by any of the participants in a transaction including sellers, buyers, real estate brokers and salespersons, mortgage brokers, mortgage bankers, appraisers, and loan originators. Fraud may occur when there are two sets of offers drafted, one representing the “real deal,” and the other the fraudulent transaction. Fraud can also occur when the parties have inflated the sales price by using a “forgivable” second mortgage, phony work orders or money passed under the table at closing.

A real estate licensee cannot participate in fraud. Wis. Admin. Code § RL 24.085 provides that “No licensee shall draft or use any document which the licensee knows falsely portrays an interest in real estate.”

The Department of Financial Institutions (DFI) admits there is no black and white test to determine if there is fraud, and suggests that brokers apply the sniff test: if it smells funny, carefully examine the transaction. If it appears to be fraudulent, submit a detailed account to DFI.

Other effective tactics include:

• Prepare any rewritten offers to purchase to be 100 percent accurate, indicate that it is a rewrite of a previous offer, and reference the original offer, purchase price and dates therein.
• Ask for the lender’s request in writing and submit that documentation to the DFI.
• If the lender and/or others persist with a fraudulent scheme, issue a written memo or letter to the parties, the lender and other involved providers warning of the fraud and urging them to consult with their attorneys and rectify the fraud. If they do not, the broker may need to cease participation.

Bump notice

Time starts running upon the buyer’s actual receipt, not delivery

A buyer’s agent called the buyer and told him that she had received a bump notice via fax. However, the buyer’s agent did not take the notice to the buyer until some time later. When does the 72 hours start?

According to the continued marketing provisions of the WB-11 Residential Offer To Purchase, the time runs from the buyer’s actual receipt of the notice. The bump notice must be delivered according to the delivery methods in the offer and the buyer must have actual physical receipt of the notice (even if the buyer was told about it) before the 72-hour period starts to run.