“REO” refers to real estate owned properties. In today’s market, lenders may acquire REO properties through foreclosure or a deed in lieu of foreclosure. The following questions and answers reflect the most frequently asked questions of the Hotline about REO transactions.
Verbal offers and acceptances
The agent working with the buyers wrote an offer on an REO property. The agent was told that the bank will get to the offers (there are several), “when their schedule permits.” The agent had warned the buyers before writing the offer that oftentimes in an REO situation the bank does not always respond by the deadlines in the offer. If the bank would accept this offer after the binding acceptance date, are the buyers obligated to purchase the home?
REO asset managers may negotiate verbally, but there is never a legal binding contract under Wisconsin law until there is an agreement signed by both parties; licensees should never mislead buyers into thinking otherwise. If the bank would accept the offer after the deadline for binding acceptance, the buyers would not be bound.
REALTORS® in these transactions may need to have new offers drafted or use a counter-offer. If a listing broker tells a REALTOR® that an REO has “verbally accepted” an offer, that licensee should caution the buyer that Wisconsin law requires that an offer be signed and delivered before it is valid.
REALTORS® should, as always, monitor acceptance deadlines and refer the parties to legal counsel if these deadlines are not met or if the buyer has any questions regarding the buyer’s legal rights or the status of the offer.
REO offer forms
What should be done if the REO seller provides his own blank offer to purchase form for the sale?
Some REO companies ask licensees to “fill-in the blanks” on a pre-printed offer provided by the REO seller. Wis. Adm. Code § RL 16.04, however, requires Wisconsin licensees to use Wisconsin-approved forms if an approved form is available for that purpose. One alternative is for the licensee to negotiate the terms of the offer, but then have the parties or an attorney draft the offer, including completion of all blanks.
REO addenda
An agent is working with a buyer and has received a REO addendum in a counter-offer from the seller. The agent has questions about the language used and whether the buyer should sign it.
One of the challenges that arises in REO transactions is providing brokerage services without engaging in the unlicensed practice of law and giving the buyer legal advice. The agent may share general information or explanations about REO transactions — for instance, that REO addenda are notorious for shifting the risk of the transaction to the buyer — but may not give legal advice.
The agent may review the REO addendum, ask the listing agent if the seller is likely to accept any offers from buyers who do not agree to the addendum terms and refer the buyer to legal counsel with specific questions. It will be the buyer’s decision whether to agree to the terms and conditions of the REO addendum. At the same time, REALTORS® should not lose sight of the fact that it is unlikely that the buyer will successfully purchase the property if the REO is rejected or countered.
The REO seller has asked that cooperating brokers complete the REO addendum when submitting any offers. Can the broker fill in the REO addendum?
Licensees may use the REO addendum only if it complies with Wis. Adm. Code § RL 16.06 (5). Wis. Admin Code § 16.06(5) allows a licensee to use a pre-prepared addendum that supplants or alters the printed provisions of an approved form only if: 1) the addendum has been drafted by an attorney who is identified by name on the form, 2) there are no optional or multiple choice provisions in the addendum and 3) the only blanks or fill-in provisions are for the parties’ signatures and those that connect the addendum to the approved form. If the REO addendum does not meet these criteria, the buyer or the buyer’s attorney will need to complete it.
The REO seller has signed the buyer’s offer, but the listing broker also forwarded an addendum that the broker says must be signed. Does the buyer need to sign the addendum? Is there a binding contract?
The simultaneous delivery of an accepted offer and an REO addendum may be considered a counter-offer or an accepted offer with an offered amendment. The cooperating broker should ask the listing broker what the seller intended, which may give the broker some direction as to how to proceed.
REALTORS® must be careful not to say the buyer is required to sign the REO addendum. To do so likely would be a misrepresentation and constitute the unauthorized practice of law. A REALTOR® should deliver the addendum per the seller’s request and explain to the buyer that he or she has the option of accepting or rejecting the REO addendum, and refer the buyer’s questions to legal counsel. The buyer will need to decide whether he or she wants to sue the REO seller to try to enforce the accepted offer without the REO addendum.
"As-is," "where-is"
The REALTOR® is the listing agent for an REO property. An interested buyer investigated the property and called to inform the listing agent that the neighbor told him that there was severe hail damage from a past storm that was not repaired. The seller (REO) does not believe there is an obligation to disclose, and the property is being sold “as-is” with no warranties or representations being made. Further, the seller feels the information is hearsay coming from a potential buyer. Do the listing agent and the seller have an obligation to disclose facts such as this to potential buyers regardless of the source?
REO transactions are often “as-is, where-is” transactions. That means that the seller will not provide a Real Estate Condition Report (RECR) or make any other property condition disclosures. It also means that the REO seller or asset managers will rarely, if ever, make any repairs from the seller’s funds.
At the time of the listing, the listing broker is required to inspect the property and ask the seller to complete a written report regarding the property condition. If the seller refuses to complete a report, the listing broker should obtain a Seller Refusal to Complete an RECR for the file. If either the listing or cooperating broker knows or is aware of information suggesting the possibility of a material adverse fact, Wis. Admin. Code § RL 24.07(3) states that a licensee will be practicing competently if the licensee makes timely written disclosure of the information suggesting the material adverse fact to all parties to the transaction, recommends the parties obtain expert assistance to inspect or investigate for the possible material adverse fact and, if directed by the parties, drafts appropriate inspection or investigation contingencies. The buyer may then include property inspection contingencies and otherwise address the damage issues in the offer.
See “Expectation Management: Purchasing a REO,” in the December 2008 issue of the Wisconsin Real Estate Magazine at www.wra.org/WREM/Dec08/PurchasingREO.
Lead-based paint disclosures
The listing company says the REO sellers have not provided an Addendum S even though the home was built in 1965. The lender acquired the home through foreclosure, has no knowledge regarding the condition of the property and is selling the property as-is. The seller says this transaction is exempt from federal Lead-Based Paint (LBP) law. Is that true?
While a foreclosure is exempt from the federal LBP law, there is no exclusion when a home acquired through foreclosure is subsequently resold. The lender that forecloses on a home must comply with the LBP disclosure rules when the home is resold to a buyer.
Because the WRA Addendum S is not a required form, the seller may include federal LBP provisions elsewhere in the contract. An attorney may review the contract to determine if there are provisions that comply with LBP law requirements. The buyer may initiate an LBP addendum, if needed, to comply with the law. The cooperating broker may include a cover letter recommending the parties and the listing broker obtain legal advice regarding compliance with the federal LBP law and caution them that the fines for failure to comply can be up to $10,000. More information about federal LBP law is available in Legal Update 99.08, online at www.wra.org/LU9908.
Tracy Rucka is a Staff Attorney for the WRA.