Real Estate Owned transactions will be a significant part of the market for the foreseeable future. REO sellers, who are often asset managers, tend to be located in other states, frequently have their own forms, do not understand Wisconsin law and often refuse to use Wisconsin forms. The following questions and answers from the Hotline relate to the contracts and documents used in REO transactions.
Seller-Provided Listing Contract
The REO seller sent their own listing form because they refuse to sign the Wisconsin form. Can the broker use an REO listing?
It is a matter of broker discretion whether to enter into an REO-provided listing contract. Wis. Stat. § 240.10 sets forth the minimum requirements for an enforceable listing contract. Wis. Stat. § 240.10(1) provides:
Every contract to pay a commission to a real estate agent or broker or to any other person for selling or buying real estate shall be void unless such contract or note or memorandum thereof describes that real estate; expresses the price for which the same may be sold or purchased, the commission to be paid and the period during which the agent or broker shall procure a buyer or seller; is in writing; and is subscribed by the person agreeing to pay such commission, except that a contract to pay a commission to a person for locating a type of property need not describe the property.
It is recommended that the broker have the company attorney review the contract since many important broker protections that appear in the DRL-approved forms may not be included in the seller’s form. For example, the broker must provide a Broker Disclosure to Clients form as required under Wis. Stat. § 452.133(2) and request the client’s written acknowledgment that the client has received the form if the property is residential (1-4 units). The WB state-approved forms incorporate these statutory disclosures. If the broker executes an REO listing contract the broker should incorporate the Broker Disclosure to Clients into the REO listing or concurrently use a separate Broker Disclosure to Client form.
The broker may sign the seller-drafted listing contract, but may not fill in any blanks. Wis. Admin. Code § RL 16.02(5) prohibits the “use” of unapproved forms; “use” is defined to mean completion of a form by filling in the blanks. If the broker signs a listing contract presented by the REO seller to the broker on an unapproved form the broker is not “using” it under the rules by signing the contract. A great resource for this discussion is pages 10-13 of the September 2006 Legal Update, “Contract Law Basics,” online at www.wra.org/LU0609.
Real Estate Condition Reports
The broker is working with a bank to sell a bank-owned property (REO). The property is being sold in an “as-is” condition. Does the bank still have to fill out a condition report?
Wis. Admin. Code § RL 24.07(1)(b) requires listing brokers to inspect property prior to entering into a listing. The listing broker is required to ask the seller for a written statement regarding the property condition. If the seller elects not to provide this, the broker may ask the seller to sign the Seller Refusal to Complete Real Estate Condition Report form.
There is no exemption from the Wis. Stat. Chapter 709 seller disclosure law based solely on the fact that the owner does not live in the property. Such owners might include the owner of a rental duplex or a bank that has acquired a home by foreclosure (REO). A seller in this position can either (a) complete the Real Estate Condition Report (RECR) to the best of his or her knowledge; (b) retain a professional to provide an inspection report to be used as the basis for completing the RECR; (c) refuse to complete the RECR and sell “as is,” risking buyer rescission; or (d) refuse to complete the RECR and sell “as is,” refusing to accept any offers from buyers who do not waive their Chapter 709 rescission rights.
Note that the requirement to provide the lead-based paint disclosure for target housing (WRA Addendum S, for example) does not exempt REO property.
Disclosure of Material Adverse Facts
The cooperating broker scheduled a showing on an REO property. The listing broker stated that there was no property condition report. When the broker went to the property there were broken pipes and water standing in the basement. When this was reported to the listing broker, he replied that the property is being sold “as-is.” Don’t brokers still need to disclose material adverse facts in “as-is” sales?
Although the seller has elected not to complete a RECR, the listing broker and the cooperating broker are still required to make timely written disclosures of any material adverse facts. The fact that the seller will sell “as-is” does not release the brokers from compliance with Wisconsin license law and the obligation to disclose material adverse facts and information suggesting the possibility of material adverse facts.
A sample disclosure form and additional disclosure pointers are available in the October 2009 Legal Update, “Diligent Disclosure,” at www.wra.org/LU0910.
Lead-Based Paint
The REO seller made no Lead-Based Paint (LBP) disclosures prior to the buyer writing the offer, so no LBP forms were submitted with the offer. The REO seller provided a lengthy counter-offer including a Property Condition Addendum with a lengthy paragraph titled “Lead-Based Paint Disclosure” with a blank for the buyer’s initials immediately after the paragraph. The buyer has accepted the counter-offer. Does this cover the LBP requirements?
The obligations per the federal LBP law may be met by using a WRA Addendum S or by a party-provided addendum. The content of a particular addendum provided by a seller may need to be reviewed to see if the following LBP law seller requirements are satisfied:
- Give the EPA-approved information pamphlet regarding the identification and control of LBP hazards, “Protect Your Family from Lead in Your Home.”
- Disclose any known information concerning LBP or LBP hazards. The seller or landlord must also disclose additional available information such as the location of the LBP and/or LBP hazards, and the condition of the painted surfaces.
- Provide any records and reports on LBP and/or LBP hazards which are available to the seller or landlord (for multi-unit buildings, this requirement includes records and reports concerning common areas and other units, when such information was obtained as a result of a building-wide evaluation).
- Include an attachment to the contract (or use language inserted in the contract itself) which includes the mandatory Lead Warning Statement and confirms that the seller has complied with all notification requirements. This attachment is to be provided in the same language used in the rest of the contract. Sellers and all agents, as well as homebuyers, must sign and date the attachment.
- Sellers must provide homebuyers with a 10-day period to conduct a paint inspection or risk assessment for LBP or LBP hazards. Parties may mutually agree, in writing, to lengthen or shorten the time period for inspection. Homebuyers may waive this inspection opportunity in writing.
See “Addendum O, Addendum S, & LBP Issues” in the August 1999 Legal Update online at www.wra.org/LU9908, “Lead-Based Paint Disclosure Implementation” in the April 1996 Legal Update at www.wra.org/LU9607, and “Lead-Based Paint Disclosures” in the April 1996 Legal Update at www.wra.org/LU9604 for further discussion of the LBP law and Addendum S.
REO Addenda to the Offer to Purchase
The buyer submitted an offer and the lender said that they accepted it, but when it was returned there was an additional multi-page REO addendum attached. How should the broker proceed?
By adding an addendum, the seller is making a counter-offer for the buyer’s consideration. The seller may not accept and simultaneously make unilateral changes to the buyer’s offer. Instead, the seller may counter the buyer’s offer to add or modify the terms and conditions.
A listing broker, knowing the seller will require additional terms and conditions or an addendum for the transaction, may be wise to provide these to the buyer in advance. This gives the buyer, the cooperating broker and the buyer’s attorney the time to review the addendum to determine if the buyer is willing to purchase the property subject to the REO addendum provisions.
When the buyer submitted an offer to the REO seller, the buyer requested a home warranty. In the counter-offer it was countered out by the REO addendum. When the buyer mentioned it at closing the buyer’s agent said not to worry, but the listing agent reminded the buyer there was no home warranty. How to proceed?
It is prudent for the licensee to refer the buyer to legal counsel to review any REO addendum and provide legal advice regarding the buyer’s rights given the modifications made in the addendum. In general, REO addenda are drafted by the seller’s attorney with the seller’s interest in mind. Frequently, these addenda modify the standard language used in DRL-approved forms.
Real estate licensees are reminded not to engage in the unlicensed practice of law. It is appropriate to have an attorney review the sometimes intimidating and lengthy terms of REO addenda. Oftentimes the seller will offer the property “as-is,” modify the warranty language, include per diem penalties if the transaction fails to close in a timely manner, require the wire transfer funds to close, use out-of-state title companies, limit buyer incentives, and neglect local code compliance issues. Each of these items must be considered before the buyer accepts the offer and proceeds to closing.
Verbal Acceptances/Timelines
Broker A has an REO listing. A cooperating broker has written an offer to purchase and the seller verbally stated they will accept the buyer’s offer, but the offer has not been approved in writing by the seller. Is there a contract yet? What about the timelines?
Wisconsin law is clear about binding acceptance; a seller’s acceptance must be in writing and delivered to meet the requirements for conveyances of real property per Wis. Stat. § 706.02. A contract for a real estate transaction shall not be valid unless evidenced by a conveyance that satisfies the following: identifies the parties, identifies the land, identifies the interest conveyed, recites material terms, is in writing, is signed by the parties and is delivered. Except for rare situations where a court may, under equity or fairness grounds, waive the requirement, the offer must be signed and delivered to be binding.
Acceptance is defined in the WB offers as when all the parties have signed an identical copy of the offer. Timelines running from the time of acceptance require evidence that the seller has signed the offer. If the binding acceptance date passes without the signed offer returned to the buyer, the buyer may continue the negotiations by initiating a counter-offer for the seller’s signature and delivery.
Tracy Rucka is Director of Professional Standards and Practices for the WRA.