Timing of sheriff’s sale 

A buyer’s agent wrote an offer for a buyer. After the offer was accepted, they found out that the home is going to a sheriff’s sale due to a bank foreclosure. The sheriff’s sale and judicial confirmation are scheduled to occur before the closing date on the offer to purchase. What can be done for the buyer?

The buyer and seller may renegotiate the closing date on the offer to purchase to complete the transaction before the sheriff’s sale and confirmation. If this is not possible, the buyer may wish to consult an attorney. The buyer may consider purchasing the property at the sheriff’s sale. Alternatively, if the lender is the high bidder at the sheriff’s sale, the buyer may later attempt to purchase the property from the lender. As a buyer’s agent, the agent may help the buyer negotiate with the lender.

This situation might have been avoided with timely disclosures. A seller cannot close a transaction after judicial confirmation of the sheriff’s sale because the seller no longer has title. The listing broker (if there is one) should have disclosed that the transaction outlined in the offer could not close before judicial confirmation of the sheriff’s sale, making the transaction, as negotiated, futile. Licensees are required to disclose material adverse facts, which includes “information that indicates that a party to a transaction is not able to or does not intend to meet his or her obligations under a contract or agreement made concerning the transaction.”

Lender approval 

A listing broker has a property that is on the verge of foreclosure, but the bank may consider a short sale. The bank is requiring the seller to get its approval for a short sale. A number of offers have been received, but the bank has not approved any of them yet. Can the seller accept an offer before the bank approves?

The fact that the bank is willing to consider a short sale may forestall the commencement of the foreclosure action, but it will also limit the terms and conditions under which the seller may accept any offer. If the bank will not give prior approval before the acceptance of an offer, the offer may need to be drafted with a lender approval contingency. The seller may be referred to legal counsel for advice on the most appropriate way to respond to offers and to obtain a lender approval contingency appropriate for the transaction.

The seller is in default on the mortgage for a home the broker has listed. The bank is asking the seller for a deed in lieu of foreclosure and has also agreed to do a short sale. There are two offers, and the bank has told the sellers to do nothing because the bank wants to counter both offers. The seller authorized the broker to talk to the bank. The title is still in the seller’s name, not the bank’s name, so who should sign the counter offers?

Although the seller may need to negotiate with the bank to get approval for a short sale, the bank is not a party to the transaction. As long as the seller holds title, the seller is the party with the authority to counter the offer. The bank may, however, recommend the terms and conditions that would meet with their approval. The seller may then direct the listing broker regarding the provisions and language that should be included in the counter-offer.

If the seller elects to provide the bank with a deed in lieu of foreclosure, then the bank becomes the owner. In such a case, the listing broker would have to enter into a new listing contract in order to continue to provide brokerage services for the property.

Although a licensee may attempt to assist in negotiations regarding the short sale between the seller and bank, this activity is arguably outside the scope of real estate brokerage services. Regarding the deed in lieu of foreclosure, the broker may not provide legal advice to the seller regarding his rights and obligations to the bank and whether electing to accept the deed in lieu of foreclosure is in the seller’s best interest. See Legal Update 07.01, “Avoiding Foreclosure,” online at www.wra.org/LU0701 for more information about the seller’s options when there is a pending foreclosure.

Listings 

Can a broker enter into a listing with a seller if the seller is in foreclosure?

Yes, the property may be listed. However, the seller and the broker may need to work with the lender, the seller’s attorney and potential buyers to create strategies to complete the transaction prior to the completion of the foreclosure action. A prudent broker will begin by asking the seller about the status of the foreclosure, whether the seller has attempted to negotiate with the lender and if they have consulted with a financial advisor. The broker may also order a search and hold from the title company to obtain more information regarding what other liens may be on the property and the seller’s ability to complete the transaction. See Legal Update 04.02, “Listing Procedures for the Prudent Broker,” online at www.wra.org/LU0402.

Timing of disclosures 

If a broker enters into a listing where there is a pending foreclosure, a possible short sale or the possibility of bankruptcy, does that have to be disclosed to all potential buyers?

Whether the possibility of a short sale, foreclosure or bankruptcy needs to be disclosed as an adverse material fact is a judgment that only the broker can make after considering all of the facts and circumstances in the transaction. For example, the fact of a short sale itself may not require disclosure if the transaction is going to come together and close. On the other hand, a short sale may need to be disclosed if it appears that the seller will not be able to complete the transaction. A foreclosure may not need to be disclosed if the buyer can close before judicial confirmation of the sheriff’s sale. A bankruptcy may cause the property to come under the control of the bankruptcy trustee. Although disclosure may not need to be made initially based on the information available at the commencement of the transaction, facts and circumstances may change, resulting in the obligation of the broker to make timely written disclosures.

If the listing broker knows that the seller is not able to or does not intend to meet his or her obligations under the contract, then the short sale constitutes an adverse fact that must be promptly disclosed to the parties in writing. Alternatively, Wis. Admin. Code § RL 24.07(3) states that a broker is practicing competently if he or she promptly discloses the information suggesting the possibility of a short sale, in writing, to all parties, recommends that the parties obtain expert assistance to investigate or evaluate the situation and, if directed by the parties, drafts appropriate contingencies.