The following questions concerning foreclosure transactions were recently asked of the WRA Legal Hotline

Listing foreclosure and pre-foreclosure properties

Can a broker list a property knowing that the seller may be in foreclosure or is late in making mortgage payments?

Before listing the property it is prudent practice to determine whether the owner will be able to convey title in the event a buyer can be found. When considering listing a property that is in foreclosure or pre-foreclosure, the prudent broker will take into consideration the property owner’s debts, judgments, liens and other encumbrances on the property. Obtaining a search and hold from the title company and completing the WRA Listing Questionnaire Regarding Title Issues will help the broker and seller determine whether listing is in the seller’s and broker’s best interests. More information about listing properties in foreclosure is available in the January 2008 Broker Supervision Newsletter, “Listing Foreclosure Properties,” online at www.wra.org/BSNJAN08. The Listing Questionnaire is available in the September 2003 Legal Update at www.wra.org/LU0309quest as well as on zipForm.

Disclosure

A broker has listed a home and just learned the seller is in foreclosure. Is the broker obligated to tell the buyers that a foreclosure action has been filed? Or is the listing broker obligated to not disclose this information?

Whether the possibility of foreclosure constitutes a fact the broker needs to disclose as an adverse material fact is a judgment that only the broker can make after considering all of the facts and circumstances in the situation. For example, a foreclosure action may not need to be disclosed if the buyer can close the sale before judicial confirmation of the sheriff’s sale. Although disclosure may not initially need to be made based on the information available when the listing is taken or when an offer is written, facts and circumstances may change to the point where the broker must make timely written disclosure of the facts.

If the broker, as a competent licensee, knows that that the seller will not be able to meet his or her obligations under the offer, then the issue constitutes an adverse material fact. Wis. Admin. Code § RL 24.07(2) requires the broker to timely disclose adverse material facts in writing to all parties to the transaction, even if the broker’s client would direct the broker not to disclose. For additional information, the broker may refer to the January 2007 Legal Update, “Avoiding Foreclosures,” online at www.wra.org/LU0701.

Foreclosures and short sales 

The sellers have a pending foreclosure and have authorized the broker to disclose this to potential buyers because they want to try to negotiate a short sale with the lender. A cooperating broker, who was informed of the possible short sale, wrote an offer for the buyer. The sellers decided to accept the offer; however, the offer did not mention the short sale. Can the seller accept the offer and then give notice to the buyer that the offer is a short sale and subject to the seller's lender’s approval? Or does the offer have to be countered with this language?

The seller cannot unilaterally change the terms and conditions of the offer after acceptance. The seller needs a short-sale contingency included in the offer. The best way to achieve that result is for the sellers to counter the buyer’s offer and add the short-sale contingency. Brokers may obtain short-sale contingency language from the lender or legal counsel advising the seller. Although brokers may play an important role in short-sale transactions, brokers should be cautious not to give legal advice when acting as an intermediary between a seller and a lender. See Legal Update 08.01, “Short Sales – A Risky Business,” at www.wra.org/LU0801.

Listing protection

A home is listed that is in foreclosure and the sheriff’s sale is scheduled for later this month. If the lender is the highest bidder at the sheriff’s sale, are protected buyers still protected for one year when the bank lists the property?

Timely delivery of a list of protected buyers extends a listing contract beyond its expiration date with the seller of the property. However, listing protection ends once the property is transferred to a new owner/seller. When the lender acquires the property at the judicial confirmation of the sheriff’s sale, there will be a new seller and no listing protection for previously interested buyers. The lender may list the property for sale with any broker.

Procuring cause

A buyer wrote an offer with a broker on a property before the property was foreclosed. The buyer understands the lender now holds title to the property and wants to write an offer as soon as it is available. The first offer was drafted with another agent before it became a bank-owned property. Since the bank is now the seller, can the buyer write the offer with a different agent? Which agent will be the procuring cause?

Procuring cause results when there is an uninterrupted series of events that results in the sale of the property. Had the first offer resulted in a successful transaction, it appears the first broker would have been the procuring cause. However, once ownership is transferred to the lender and there is a new listing and new MLS offer of compensation, there is a new series of events. The prior MLS offer of compensation and listing contract are terminated upon the transfer to the lender. Once the bank lists the property and places it in the MLS, a new series of events for procuring cause begins.

Deed in lieu of foreclosure

The broker was notified that the listed property was turned over to the bank. If the broker understands correctly, the listing is now void and the home can be listed with another firm since the bank now owns the property. It was deeded over in lieu of foreclosure. Is the listing broker owed a commission since it was a transfer and not a foreclosure? Can the firm go after expenses since the seller transferred his property to the bank?

A property owner facing foreclosure may deed the property to the lender as an alternative to sale or completion of the foreclosure. The transfer of title may be exchanged for the cancellation of the mortgage debt. Whether a lender will participate in such a process will depend on the borrower’s financial situation and any debts, liens or judgments on the property. If the seller has provided the lender with a deed in lieu of foreclosure, the lender has become the new seller.

The broker could pursue a commission per the commission provisions of the listing contract. See lines 51-57 of the 1999 WB-1 Residential Listing Contract. The transfer of title to the property is arguably a sale because the seller received consideration – the forgiveness of his mortgage loan debt. It may also be considered a transaction that caused a change in ownership or control.

Being practical, one must wonder whether the sellers have money or assets to collect if the commission claim is successful. It may just be a case of the old saying, "You can't beat a dead horse." The broker may discuss this matter with his attorney or the firm’s legal counsel if he wants to consider legal action for the commission.

Tracy Rucka is a Staff Attorney for the WRA.