While many buyers may assume that there will be no title problems with any property bought from a lender or “from the sheriff” at sheriff’s sale, that is not necessarily true. The following Legal Hotline questions concerning the sale of foreclosure or REO properties examine the road a foreclosure property may travel and title concerns that may be present.

Deed in lieu of foreclosure

How does a deed in lieu of foreclosure work? Do leases survive a deed in lieu of foreclosure? The broker just received listings from a bank. These houses each have a family renting them. The leases are hand-written, very sketchy and do not have many details. Are the leases binding on the bank who is now the owner of the properties? 

A deed in lieu of foreclosure occurs when a property owner in default on his or her mortgage decides to quitclaim the property back to the lender rather than attempt a short sale or go through the foreclosure process. When a deed in lieu of foreclosure is considered, the bank should work with the title company to determine the status of title to the property because any mortgages, judgments or liens filed against the property or created by the borrower will likely remain against the property upon its transfer back to the bank. Thus a deed in lieu of foreclosure is generally used only when title is clear. If other liens have attached to the property, a foreclosure action becomes necessary because a foreclosure removes the liens of all lenders, creditors and other lienholders named as parties in the foreclosure complaint.

Leases would generally survive a deed in lieu of foreclosure because the borrower quitclaiming his interest in the property to the bank would not extinguish the rights of any tenants. It would be helpful if the former owners assigned the leases to the bank so that the bank could, in turn, assign these leases to new purchasers when the broker sells the properties.

A seller told his listing broker that he did a deed in lieu of foreclosure and that the bank now owns the property. The bank’s asset manager has relisted the property with someone else. Does the seller owe the original broker a commission? If so, can a lien be placed on the property? 

The listing contract determines the broker’s right to commission. A commission may be earned when there is a sale of the property or an effective change of ownership or control occurs during the term of the listing. The transfer of property by deed in lieu of foreclosure appears to trigger the seller’s obligation to pay a commission. The agent may discuss how to proceed with a claim for commission with the agent’s broker. If the seller does not pay, the broker may litigate and seek a judgment against the seller for the commission, if the seller has any remaining assets. However, because the property is no longer owned by the seller, any lien would need to be placed on other property owned by the seller, if any, and it would be a voluntary lien signed by the seller. 

Sheriff’s sale

A buyer-client is going to purchase a foreclosure property at sheriff’s sale. Normally the agent would advise the client that secondary liens against the property are not a concern at sheriff’s sale. However, this property has a grant from the city and a grant from community assistance programs from when they did some work on the property that created a lien. Do these liens go with the property at the sheriff’s sale and when the sheriff’s deed is given? 

A client planning to purchase a property at sheriff’s sale needs to be very careful with regard to title. Just because the sheriff’s sale is part of the foreclosure process that involves a court and the sheriff, that does not mean that the title is necessarily clear.

When the lender that started the foreclosure filed its pleadings in court, the lender may have done a good job of checking title and making sure that everyone who had any liens against was named in the foreclosure complaint. All parties named will generally have their liens removed from title when the court confirms the sheriff’s sale and the sheriff’s deed is given. However, many lenders today have their foreclosures handled by asset managers who may at times try to cut corners and not order a full judicial foreclosure commitment from the title company. Consequently, they miss some of the liens against the property.

The sheriff’s deed itself is not a warranty deed. Instead, it is similar to a quitclaim deed. The sheriff’s deed passes the former owner’s title after barring all parties named in the foreclosure action holding liens and encumbrances on the property and barring any parties filing any liens after the lis pendens is filed with the register of deeds.

The agent needs to be particularly cautious about giving advice on the legalities of foreclosure sales. The client, accordingly, should be directed to meet with an attorney to review title and the litigation documents to determine if there are any liens that were not extinguished by the foreclosure.

The client should also be comfortable with the price he or she plans to bid. An appraiser should be consulted if there are any concerns or issues concerning property value.

Auction sale of REO

A buyer is interested in an REO property that the lender is now going to have sold at auction. Can the agent help the buyer buy the property at the auction and still receive a commission? What should the agent and the buyer do to prepare for the auction? 

In an auction sale transaction, a cooperating agent often has the opportunity to register a buyer before or at the auction. If the buyer ultimately purchases the property offered at the auction, the cooperating agent may earn whatever fee or commission was offered by the auctioneer, the auction company, or the listing broker on the MLS.

Often the buyer and the agent must be pre-registered prior to the auction using specific forms and procedures. These steps help eliminate any doubt as to representation and ensure that the agent/broker will be duly compensated for work completed. Agents should verify the specific auction company’s procedures early in the process.

Buyers generally can familiarize themselves with an auction property by carefully reviewing the bidder’s information package available from the auctioneer. The bidder’s package from a Wisconsin-registered auctioneer should contain a current title report with copies of all title exceptions, surveys, service contracts, leases, purchase and sale agreements, floor plans and financial statements, if appropriate.

Most auction properties are usually sold “as is, where is,” with no property condition reports and without warranty or guarantee of any kind (other than clear title), so the buyer should be strongly urged to inspect the property before the auction sale. The buyer may also need to obtain a mortgage pre-approval or line of credit – the purchase agreement from an auction usually does not include a financing contingency.

Cooperating agents should attend pre-auction open houses with buyers, help buyer-clients determine the market value of the property prior to the auction, assist the buyer with auction registration and strategy and attend the auction with the bidder. Commission is generally payable when the property closes.

The July 2007 Legal Update, “Real Estate Auctions,” online at www.wra.org/LU0707, is a valuable resource in understanding auctions, the role of auctioneers and real estate licensees.

Wisconsin foreclosures

For a glimpse into the rate of foreclosure filings in Wisconsin, visit www.city.milwaukee.gov/ImageLibrary/User/jsteve/NSP__Appendix.pdf. 

Debbi Conrad is Director of Legal Affairs for the WRA.