With the increase in lender owned properties (REOs), agents are being asked to list and sometimes provide property management services for REO properties which are usually vacant. Last month, we talked about becoming an accidental property manager in the context of renting listed properties. This month, we look at sellers requesting brokers to provide property management services addressing the physical condition of these properties. Next month, the Hotline Q and A will focus on REO listings, offers and addenda used in REO transactions.

Securing the property 

REO owners (lenders, asset managers) often ask the listing agent to arrange and pay for utilities and other services needed to maintain a vacant REO property. The agent then pays the bills and forwards the bills to the REO company. What is the agent’s obligation to secure the property for the REO owner? Can the reimbursement check be sent directly to the agent or must it go through the brokerage? What if the seller does not pay? 

Brokers are being asked to provide a myriad of services for REO sellers: to clean out personal property from the property, arrange for weatherization, hire contractors to make repairs, change locks, frequently drive by the property to assure it remains vacant, turn off power, change power into the agent’s name, shovel, plow, mow, pay association fees or dues, etc.

The responsibility for performing and paying for this work depends upon the circumstances and the contract(s) entered into with the lender. Physical property management-type services, which do not require a real estate license, may be performed under the name of the brokerage as one of the company’s services, or this may be an activity performed by the agent as a business that is completely separate from the brokerage.

If the services are part of the listing contract, then the payment goes through the listing broker because a Wisconsin licensee may not receive commissions or fees from anyone other than the employing broker. If, on the other hand, the services are contracted with an independent entity and not the brokerage, fees are paid per that separate contract. 

Before agreeing to conduct property maintenance services for the REO seller, the agent may wish to review company policy to determine if such services may be offered by the real estate brokerage company or by an independent company. Office policy may address the situations wherein the property does not sell or the agent leaves the listing company before the transaction is complete.

Brokers and agents sometimes report difficulty in obtaining seller reimbursement and should consider which remedies they would have if the owner does not reimburse them before entering into a REO property maintenance agreement. It may be prudent to work with an attorney to create contractual remedies and whatever other protective measures are possible.

Winterizing properties 

The broker is listing a lender-owned property. The lender asked the broker to go to the property and turn off the power. How to proceed? 

No news for us Wisconsinites: Winter is cold in the north! However, some lenders do not take into consideration the effects of freezing temperatures and Wisconsin winters on vacant REO properties. Before the power is turned off during freezing months, the property must be winterized to avoid freezing and breaking pipes. Any other liquids that could freeze should also be removed. The owner should also consider that sump pumps don’t pump and fans for radon mitigation systems don’t run when the power is off. For more information about winterizing properties, see the December 2010 edition of Legal Update at www.wra.org/LU1012.

Home inspections 

The data sheet for the listed property states the property has been winterized. The broker heard of a buyer who bought a property and discovered broken pipes when they turned on the power and water after closing.  How can the buyer protect himself when an REO property is being sold as-is? Is the seller required to turn on the power and water for the inspection?  Who pays for this? 

Unfortunately, the standard home inspection contingency in the WB-11 Residential Offer to Purchase does not address this situation or refer to winterized properties. When the water and power are off, buyers may discuss this with their home inspector before writing the offer to find out exactly what the home inspector will need. The buyer can then draft the offer to specifically address: (a) Who will turn on the power and the water and who will pay for this; (b) When this will be done; (c) Who will re-winterize the property and pay the costs; and (d) Who will be responsible for any damage that occurs during the period when the power and water are on.

"As-is" sales 

The broker has focused on foreclosure/distressed properties and lately has seen an increase in new and inexperienced licensees who are listing REOs and not disclosing blatant adverse facts. When asked why they did not disclose the adverse facts, their standard response is “it’s a foreclosure, so it is sold ‘As-Is.’” Doesn’t “As-Is” still require broker disclosure of material adverse facts? 

All listing brokers are required, prior to listing the property (including REO properties), to conduct a reasonably competent and diligent inspection of accessible areas of the structure and the immediately surrounding areas  to detect observable, material adverse facts. In addition, the broker is required to ask the seller for a written statement regarding the property condition. Granted, REO sellers may refuse to complete a Wisconsin Real Estate Condition Report; however the broker is required to ask. 

The listing broker is then to disclose material adverse facts and potential material adverse facts to the parties in writing. This is not waived in “As-Is” sales. In fact, where the buyer is purchasing “As-Is” it is very important for the buyer to know the condition of the property. Generally, the buyer has expert contractors inspect the property as a condition of the offer to purchase, but this does not excuse the licensee from his or her duty to assure that all known material defects are disclosed in writing to the buyer, and that any affirmative statements made are, in fact, true.

If the seller provides a condition report, the broker compares the report to the broker’s observations from the inspection. If there are inconsistencies between the report and the broker’s observations, the broker must disclose the inconsistencies to the parties in writing, as well as any material adverse facts the broker observed. The fact that the seller will sell the property “as-Is” does not relieve the broker from conducting inspections and making disclosures. A sample material adverse fact disclosure is available on page 26 of the October 2009 Legal Update, “Diligent Disclosure,” at www.wra.org/LU0910 or on zipForm^®.

An REO seller has an “As-Is” clause in its addendum to the offer. Does this mean the buyer cannot have a home inspection?

REO transactions are often “as-is, where-is” transactions. The seller often will not provide an RECR and will rarely make any repairs. REO sellers may not disclose major ongoing problems like frozen or leaking pipes or a failed septic system, even if they have specific notice. The use of an “as-Is” clause, however, does not necessarily mean that the seller may still not need to make some disclosures about the property or that the seller cannot be liable for misrepresentations about the property. Generally, an “as-Is” clause alerts the buyer that he or she is responsible for determining the condition of the property being purchased. The buyer retains the right to conduct a home inspection unless the offer specifically provides otherwise. More information about REO transactions is available on pages 7-8 of the December 2009 Legal Update at www.wra.org/LU0912 and in the February 2008 Broker Supervision Newsletter, “Listing and Selling REO Properties,” at www.wra.org/News/BrokerNews/Broker_Supervision_Issues/.

Listing protection and the sheriff’s sale 

An agent wrote an offer for the buyer when the first broker had the property listed. The offer didn’t go together before the sheriff’s sale where the lender bought the property. The lender listed the property with a second listing company. The buyer still wants to purchase the property. Is this buyer a protected buyer with the first company? The agent wants to know if she can write an offer and receive commission. 

The first listing contract was an agreement between the seller and the listing broker. When the title of the property transferred by sheriff’s deed to the lender, the lender became the new seller. The buyer protection with the first listing agent is really a non-issue as there is no way the foreclosed seller could convey title now that the bank is the legal title holder. The agent should submit a new offer to the bank’s listing agent. If the second broker has the property in the MLS, the cooperating broker may earn the MLS offer of compensation if the cooperating broker is procuring cause. If the property is not in the MLS, the cooperating broker may negotiate a commission agreement with the new listing broker.

For a review of the mortgage foreclosure process, read the May 2005 Legal Update, “Mortgage Foreclosures,” at www.wra.org/LU9905 and the March 2009 Legal Update, “Working with Distressed Sales,” at www.wra.org/LU0903.

Tracy Rucka is Director of Professional Standards and Practices for the WRA.