The Best of the Legal Hotline: Foreclosures


 Debbi Conrad & Tracy Rucka  |    December 02, 2004
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The following are some recent Legal Hotline questions regarding transactions involving properties in foreclosure.

Broker duties

After taking a listing, the broker finds out that the seller is in foreclosure. Can the broker walk away from the transaction? What can be done if the closing is set and there are not enough funds to close the deal and pay commission? 

Once the listing is entered into, the broker has a contractual and a fiduciary duty to the seller to provide brokerage services for the duration of the transaction. The listing broker should do whatever he or she can to help the seller meet the terms and conditions of the offer. If the seller has enough funds to meet the contract obligations and provide a clear title, the closing should proceed. If the funds fall short, the seller may work with legal counsel and try to borrow needed funds, convince lien holders to accept less than the full amount due and find other ways to meet the seller's closing obligations.

A broker cannot put his or her interest in commission ahead of the broker's duty to help the parties complete the transaction. Although the listing contract provides that the broker's commission is due at closing, the broker cannot stop the closing just because there is not enough money to pay the full commission at that time. The listing broker may consider renegotiating the commission, creating a payment plan for the seller, having the seller give a promissory note, taking a lien on other property owned by the seller or going to court to obtain a judgment for the commission. In residential transactions, there are no broker commission liens.

Listing issues

A broker is thinking about taking a listing where the seller may go into foreclosure. How should the broker proceed?

Before entering into the listing, a prudent broker will encourage the seller to determine whether it is in his or her best interest to list the property for sale or negotiate a work-out with the lender. The seller should consult with his or her attorney for advice on whether a sale or a deed in lieu of foreclosure might be best. Depending on the financial position of the seller, bankruptcy might also be considered. The broker may do a search and hold, and evaluate whether there will be enough funds to close the transaction and pay commission.

A seller, whose home is going to be auctioned by a sheriff's sale, contacted a broker about listing the property. The seller wanted to know if he still has time to sell. The house has not been listed yet. If the seller lists today, will an accepted offer cancel the sheriff's sale or would the independent sale have to close by the sale date? 

A seller in foreclosure may list and market his or her property while the foreclosure is pending. The seller can close on an independent sale before the court confirms the sheriff's sale. The broker may suggest that the seller talk to his or her attorney for advice regarding legal rights in the foreclosure and strategy options.

A seller still owns his or her property and can still sell it up until the court has a hearing confirming the sheriff's sale (at which time the seller loses the right of redemption). Only then will the title to the property vest in the purchaser from the sheriff's sale. The time allowed for redemption depends upon the type of property, the date of the mortgage, whether the property is occupied, whether the lender is seeking a deficiency judgment and other factors. The owner and his or her attorney can determine the length of the redemption period. The listing broker may continue to market the property, giving appropriate disclosures, until the judicial conformation hearing. See Wis. Stat. §§ 846.16-.17 and Legal Update 99.05 (www.wra.org/LU9905) for more information about real estate foreclosures.

Disclosures

If a listed property is going into foreclosure (has been advertised as a sheriff's sale in the local papers), must the foreclosure be disclosed to the cooperating agent and the buyer?  

A broker has a duty to disclose the impending foreclosure action to the parties in writing only when it becomes a material adverse fact. When the foreclosure becomes a material adverse fact is a case-by-case determination. The listing agent will need to disclose the foreclosure if it reaches the point where the seller cannot transfer a clear title or the seller will not be able to close before judicial confirmation of the sheriff's sale.

A seller has an accepted offer on a property going into foreclosure. The bank indicated it would do a short sale, but as the closing approaches, additional judgments are appearing on the title. The seller apparently does not have enough cash to close the transaction. Where does the buyer stand?

The listing broker must disclose to the buyer if the seller may not be able to give a clear title. In addition, a seller's statement that he or she is unwilling or unable to close can create a breach even before the closing date - this is called an "anticipatory breach." This is a material adverse fact that must be promptly disclosed in writing. The buyer can then decide whether he or she wants to declare the offer null and void due to unacceptable title (see WB-11 Residential Offer to Purchase, lines 207-212) or proceed with the transaction.

Buying a property at a sheriff's sale

A buyer wants to buy a foreclosure home at a sheriff's auction and would like to look at the inside of the property. Can a broker be involved in this if the property is not listed? 

Pursuant to real estate license law in Wisconsin, the broker must enter into an agency relationship either with the seller (and act as the listing broker) or with the buyer (and act as a buyer's agent) before providing any brokerage services. The buyer needs to do adequate research before bidding at a sheriff's sale. The buyer should conduct a physical property inspection and a comprehensive review of the title because the purchaser at a sheriff's sale takes title to the property subject to all superior liens.

Commission

A seller has just informed the listing agent that he is facing foreclosure. The seller has not paid the mortgage for months and has asked the broker to get the pay-off amount. Anything short of a full-price sale would not be enough to pay the lender and pay commission. What is the listing broker's liability if there are not enough funds at closing to pay the MLS cooperating commission?

The listing broker may discuss commissions with the seller and consider reducing the commission offered in the MLS before a cooperating broker submits an offer. Because the MLS offer of compensation is unconditional, a listing broker is relieved of the obligation to pay the cooperating broker the commission offered in the MLS only in very limited circumstances. Unless it is impossible or financially unfeasible for the broker to collect the commission from the seller, the broker must pay the offered co-broke. See MLS Policy Statement 7.23 at
www.realtor.org/.

Listings with banks taking back properties

A buyer's offer did not close, but the buyer is still interested in the property. The lender took the property back and listed it with another agency. Does the first broker have listing protection for the buyer when the bank takes it over? 

No. Once the property changes ownership, listing protection rights are lost. The broker may work with the buyer and the new listing broker to draft a new offer to purchase and perhaps receive commission as the cooperating broker. The first broker may consider a claim against the original owner for commission based upon the conveyance between the owner and the lender.

Listing with the bank after a foreclosure. Is a lender who has taken a property in foreclosure exempt from the seller's condition report? Also, must the lender give the lead-based paint disclosure? 

All sellers subject to Chapter 709 must complete a Real Estate Condition Report (RECR) or risk rescission of the offer to purchase. There is no exemption based solely on the fact that the owner does not live in the property. An owner like a bank that has acquired a home by foreclosure can either (a) complete the 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. Federal lead-based paint disclosure rules require disclosure for all transaction relating to target housing. If the property was built before 1978, the lender must complete a lead-based paint disclosure.

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