may 2011 legal update

2REO Transaction

Overview

3Listing Brokers

8Contract Issues: REO

Offer to Purchase

12Disclosures

15Title Problems

17Working with the

Buyer

20REO Auctions

21Rehab Financing

Inside This Issue

Please Route to:__ _____________ _____________ _____________ _____________ _____________ _____________ ___________

Legal UpdateMAY 2011

A WRA Publication Exclusively for the Designated REALTOR®

WRA Legal Update © 2011

When a lender forecloses on a prop-erty and the property goes to sher-iff ’s sale, the lender will often bid its mortgage and purchase the property. In today’s market, lenders may acquire REO, or real estate owned properties through foreclosure and then receive a sheriff ’s deed to what has now officially become an REO property.

Many lenders have a high number of properties that they are holding, at a cost, that they obviously would like to sell at a reasonable price as soon as possible. Rather than manage and sell the REO property in-house as in the past, the lender turns the property over to a national asset management company located hundreds of miles away. The financial incentive to sell these properties without investing or spending any more money than is nec-essary drives some asset managers to be frugal and at times, cut a few corners.

While eager sellers would seem to cre-ate a favorable environment, working in REO transactions proves to often be challenging. REO properties are bought and sold in a world that tends to work under an entirely different set of rules and standards. Asset managers and servicers are many times located in other states, frequently have their own forms, seemingly do not care to understand Wisconsin law and rou-tinely refuse to use Wisconsin forms.

Dealing with distant asset managers with large property inventories and little familiarity with Wisconsin law is clearly frustrating for both Wisconsin brokers involved in REO transac-tions and the buyers they represent.

A successful REO deal requires con-quering significant challenges includ-ing the REO addendum, verbal nego-tiation and faulty title work. The REALTOR® has to find a way to lead the buyer safely through these perils.

REOs – the Good, the Bad and the Ugly

While home sales may have slowed somewhat, it is not uncommon to hear that the foreclosure market is performing better than the market for other properties. Investment buy-ers are often credited for these trends because there is a tendency, at least in some markets, for REO properties to be priced at significant discounts. In addition, some studies show that many renters and homeowners are at least “somewhat likely” to purchase a fore-closed home. The concerns over hid-den costs, a risky buying process and declining home values are often out-weighed by the expectation of a bargain price – saving money on a discount-ed sales price for an REO property.

While this may seem somewhat encour-aging for industrious real estate profes-sionals, others are apparently taking advantage of those in financial dis-tress. Foreclosure fraud is increasing. According to the FBI, yearly losses due to mortgage and foreclosure fraud range from $4 billion to $6 billion.

One of the uglier sides of REO deals is represented by recent reports that the city of Los Angeles has filed suit against a major lender for allowing numerous of its foreclosed properties fall into serious disrepair and for the

Realistic REO Practice

EDITORIAL STAFF

Author Debbi Conrad

Production Emily Zampardi

ASSOCIATIOn MAnAGEMEnT

Chairman John Horning

President William E. Malkasian, CAE

COnTACT InFORMATIOn

Wisconsin REALTORS® Association 4801 Forest Run Road, Suite 201 Madison, WI 53704-7337608-241-2047 800-279-1972

LEGAL HOTLInE

Ph: 608-242-2296 Fax: 608-242-2279 Web: www.wra.org

The information contained herein is believed accurate as of 6/24/11. The information is of a general nature and should not be considered by any member or subscriber as advice on a particular fact situation. Members should contact the WRA Legal Hotline with specific questions or for current developments.

Reproduction, use or inclusion of this material in other publications, products, services or websites is not permitted without prior written permission from the Wisconsin REALTORS ® Association or its Legal Department.

Contacts


2 Legal Update, May 2011

alleged illegal eviction of hundreds of low-income tenants paying rent for the foreclosed homes. The bank alleg-edly failed to properly maintain vacant homes, unlawfully evicted the ten-ants when the properties were occu-pied and failed to provide minimum maintenance in occupied buildings, thereby leaving tenants to live in sub-standard and dangerous conditions.

REO Transaction Overview

REO transactions are an important part of real estate practice but can be quite frustrating for all involved, including REALTORS®. REO prop-erties typically are sold not by the lender who acquired the property in a foreclosure or deed in lieu of foreclo-sure, but rather by an asset manager or servicer located in a distant state or even country. While each pro-gram varies, the asset manager often enters into a listing contract with an in-state broker. In other cases, REO properties acquired by entities such as Freddie Mac and Fannie Mae are listed directly with a listing broker with no intervening asset manager.

Asset managers and servicers are often national companies that operate in sev-eral, if not all, states. Consequently, they are not always familiar with Wisconsin law and may inadvertently suggest that the broker act in a manner con-trary to Wisconsin law. For instance, REO asset managers may insist that a verbal acceptance is sufficient to bind a contract or they may refuse to put any counter-offer in writing. A long time may elapse before the broker receives a signed copy of the offer.

Another frustration comes when REO asset managers insist that their own forms or addenda be used, even though they are not Department of Regulation and Licensing-approved forms. These forms and addenda tend to be inconsistent with the stan-

dard provisions found in the WB-11 Residential Offer to Purchase, and may prompt buyers to forego rights and safeguards they would otherwise enjoy in the DRL-approved forms. The result is that Wisconsin brokers may find themselves trying to cope with a “sell-er” that insists on operating outside of Wisconsin law or standards of practice.

The REO title may be subject to existing junior mortgages, debts and encumbrances not listed in the fore-closure action because a sheriff’s deed is not a warranty deed and resembles a quitclaim deed. The asset manager may or may not have the delegated authority to sign offers and deeds. Either way it may be hard to identify the real seller. In addition, asset man-agers frequently work with out-of-state title companies making title a chal-lenging prospect. This typically means a lack of familiarity with Wisconsin law, the way title is handled, etc.

This Legal Update will alert Wisconsin REALTORS® to the issues and pitfalls involved for brokers and for parties involved in REO transactions. This Update discusses issues that can be a source of concern for REALTORS® in sale transactions involving REO properties. The review of the REO listing process covers the listing con-tract concerns, requested property management services, tenants’ rights and safety issues. The Update also covers contractual issues including verbal negotiation, verbal acceptances, REO addenda and REO purchase contracts. Disclosure issues are dis-cussed with a focus on the real estate condition report (RECR), lead-based paint (LBP) and “as-is” transactions. Title problems are covered next fol-lowed by pointers for working with buyers in REO transactions. The Update concludes with an overview of REO auctions and a summary of § 203(k) rehab financing. Many points are illustrated with REALTOR® practice tips and Hotline questions.

Listing BrokersSome lenders have in-house REO divisions while others use asset man-agement companies as an intermediary between the seller and the listing bro-ker. When considering listing an REO property, the first step is to determine who is the REO asset manager con-tact person for the transaction. More importantly, the broker may wish to identify who will have the authority to bind the seller when a buyer submits an offer. It is important to know who holds title, who has the authority to sell and what signatures will bind the contract. Consider working with the title company to obtain a search and hold to help identify the titleholders.

Lenders do not want to be hom-eowners and REO transactions are investment-driven, unlike emotion-driven residential sales. The bottom line drives REO decisions. The broker who provides valuable market condi-tion information, allowing the REO seller to compare facts such as hold-ing costs, marketing costs, staff time to process, asset management costs and attorney fees will help REO sell-ers make cost-effective transactions.

The Listing ContractSome REO asset management companies will ask the Wisconsin REALTOR® to sign the REO’s listing contract rather than the DRL's state-approved listing contract. Although Wisconsin law requires brokers to use state-approved forms, when act-ing as a broker in a real estate trans-action, the broker, as a party to the listing, may agree to and sign the seller-provided listing contract.

If a seller is requiring a licensee to use a listing contract other than the state-approved form, the licensee may not "use" the form, which includes filling in the blank lines. In Wis. Admin. Code § RL 16.02(5), “‘use a form’ means to complete a contrac-tual or conveyance form by filling in

the blanks or modifying printed pro-visions on a form for the purpose of accomplishing the intent of a party in a specific real estate transaction.” In this situation, the licensee is permit-ted to help negotiate the terms of the unapproved listing contract and only the seller or an attorney may actually fill in the blanks. The listing broker, however, can sign an REO listing contract as a party to the listing.

REALTOR® Practice Tip: An agent wanting to list an REO property should obtain the bro-ker’s consent and compare the REO form to WB listing con-tracts, giving special consideration to commission and listing protec-tion provisions. Brokers may wish to review the REO listing contract – or have their attorneys review the contract – to make sure the contract is enforceable under Wis. Stat. § 240.10 for the payment of commission.

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 buy-ing real estate shall be void unless such contract or note or memo-randum 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 commis-sion, except that a contract to pay a commission to a person for locating a type of property need not describe the property.

Real estate licensees in Wisconsin also must provide clients a written Broker Disclosure to Clients. The licensee is not exempt from providing this writ-ten disclosure statement to the client just because a non-WB listing contract is used. The licensee should carefully document the delivery of this form and the licensee’s request that it be

signed – just in case the REO seller does not sign it. For further discus-sion about the Broker Disclosure to Clients, see the April 2006 Legal Update, "Chapter 452 Modernization Act," at www.wra.org/LU0604.

Seller-Provided Listing Contract The REO seller sent their own list-ing form because they refuse to sign the Wisconsin form. Can the broker use an REO listing?

It is a matter of broker discretion whether or not to enter into an REO-provided listing contract. Wis. Stat. § 240.10 sets forth the minimum requirements for an enforceable listing contract.

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 acknowl-edgment 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 bro-ker should incorporate the Broker Disclosure to Clients into the REO listing or concurrently use a separate Broker Disclosure to Clients 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. 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.

3Wisconsin REALTORS® Association Legal Update, May 2011

Accidental Property Manager

With the increase in lender owned properties (REOs), agents are being asked to list and sometimes pro-vide property management services for REO properties that are usu-ally vacant. Listing agents are often asked to provide property manage-ment services addressing the physical condition of these properties such as changing light bulbs; mowing, rak-ing and shoveling; and undertaking the responsibility for placing utility service in the broker’s name and pay-ing the bills for these services. The licensee must consider if the request-ed services are real estate brokerage or services independent from real estate brokerage and the brokerage company. The agent must also check office policy and determine whether his or her broker is willing to engage in the provision of services beyond traditional real estate brokerage.

REALTOR® Practice Tip: If the broker is going to be asked to provide services beyond mar-keting and selling, it is imperative that the broker negotiate property management terms and conditions with the REO asset manager that very clearly spell out the precise extent of the broker’s responsibili-ties. These provisions may appear in a separate property manage-ment agreement or language may be added to the listing contract, such as in an addendum.

At a minimum, the agent should have a written work order which identi-fies the listing agent as an agent of the owner, indicates that the work is being done on behalf of the owner, and emphasizes that all billings are the responsibility of the owner and should be put in the owner’s name. Information regarding the contrac-tor’s insurance, bonding, etc., should be provided to the owner. Preferably the owner, and not the listing agent, will select the contractor to avoid

later claims that the agent was negli-gent in the hiring of the contractor.

REALTOR® Practice Tip: If the broker agrees to be an inter-mediary between the contractor and the seller, the broker should obtain written authorization from the seller to hire the contractors, including a disclaimer that the licensee is not responsible for any negligence by the contractor, and the contractor should be properly certified or licensed to engage in the service provided. The May 2004 Legal Update, “Avoiding Liability When Signing and Making Referrals,” available at www.wra.org/LU0405, contains both a sample Service Request form and an Authorization and Release from Liability form.

Office Policy The agent is working with an REO sell-er who wants the agent to provide prop-erty maintenance and management services while it is for sale. What can the agent do if the brokerage company does not offer property management?

A licensee provides real estate bro-kerage services, whether for the sale or management of property, on behalf of the brokerage company. The agent may see if the broker is willing to provide such services. If not, the agent may refer the REO seller to other brokers who pro-vide property management services.

As another option, if the agent has a broker’s license, he or she may, with the broker’s consent, establish an independent practice for prop-erty management and other REO services. When an individual has a broker’s license and is working under another broker, Wis. Admin. Code § RL 17.03(1) permits the licensed individual to conduct some indepen-dent practice. The licensed individual must have the written consent of the employing broker and must avoid conflicts of interest. In addition, the

licensed individual may not engage other licensees in this independent practice. Where a licensed individ-ual conducts independent practice, care should be taken that all of the normal aspects of a brokerage are provided for. The brokerage com-pany should have no responsibility for the independent practice if the licensed individual establishes the operation as clearly independent. For further information about indepen-dent practice, see the March 2008 Legal Update, “Running a Real Estate Office,” at www.wra.org/LU0803.

Securing the Property REO owners (lenders, asset manag-ers) often ask the listing agent to arrange and pay for utilities and other services needed to maintain a vacant REO property. The agent then pays the bills and forwards the bills to the REO company. What is the agent’s obligation to secure the property for the REO owner? Can the reimburse-ment check be sent directly to the agent or must it go through the broker-age? What if the seller does not pay?

Brokers are being asked to provide a myriad of services for REO sellers: to clean out personal property from the property, arrange for weatheriza-tion, hire contractors to make repairs, change locks, frequently drive by the property to assure it remains vacant, turn off power, change power into the agent’s name, shovel, plow, mow, pay association fees or dues, etc.

The responsibility for performing and paying for this work depends upon the circumstances and the contract(s) entered into with the lender. Physical property management-type services, which do not require a real estate license, may be performed under the name of the brokerage as one of the company’s services, or this may be an activity performed by the agent as a business that is com-pletely separate from the brokerage.

4 Legal Update, May 2011Wisconsin REALTORS® Association


If the services are part of the list-ing contract, then the payment goes through the listing broker because a Wisconsin licensee may not receive commissions or fees from anyone other than the employing broker. If, on the other hand, the services are contracted with an independent entity and not the brokerage, fees are paid per that separate contract.

Before agreeing to conduct property maintenance services for the REO seller, the agent may wish to review company policy to determine if such services may be offered by the real estate brokerage company or by an independent company. Office policy may address the situations wherein the property does not sell or the agent leaves the listing company before the transaction is complete.

Brokers and agents sometimes report difficulty in obtaining seller reim-bursement and should consider which remedies they would have if the owner does not reimburse them before enter-ing into an REO property mainte-nance agreement. It may be prudent to work with an attorney to create contractual remedies and whatever other protective measures are possible.

Winterizing Properties The asset manager asks the listing agent to hire contractors to win-terize the REO property. What issues should the agent consider?

No news for Wisconsinites: Winter is cold in the north! However, some distant asset managers do not real-ize the effects of freezing tempera-tures and Wisconsin winters on vacant REO properties. Before the power is turned off during freezing months, the property must be winterized to avoid freezing and breaking pipes. Any liquids that could freeze should be removed. The owner should also consider that when the power is off, sump pumps don’t pump and fans for radon mitigation systems don’t run.

For more information about winter-izing properties, see the December 2010 edition of Wisconsin Real Estate Magazine at www.wra.org/WREM/Dec10/AccidentalPropertyManager.

Reimbursement for Agent Advances

When REO properties have to be taken into the agent's name for util-ities, gas, clean-outs, etc., the agent then pays the bills and forwards the bills to the REO companies. Can the check be sent directly to the agent or must it go through the brokerage? The agent was paid for work done in August and the franchise is asking it to be run through the company, apparently based on Minnesota law.

How fees are paid would depend upon the facts and circumstances. Property management may be performed with the consent and under the name of the brokerage as one of the compa-ny's activities, or it may be an activity performed by the agent as a side line of work that is completely separate and not done as a brokerage function.

One indication may be whether the management/maintenance tasks were authorized in the listing con-tract. If the services are part of the listing contract then the payment would be required to go through the listing broker because Wisconsin licensees may not receive commis-sions or fees from anyone other than their employing broker, per Wis. Stat. § 452.14. If, on the other hand, the services are provided for, and the contractual agreement is with, an independent entity and not the brokerage, the payment of fees would be paid per that separate contract. The agent may wish to review company policy to determine if such services may be offered by the real estate brokerage compa-ny or by an independent company.

Unpaid Utility Bills Lead to Withheld Commissions

An agent who specializes in listing REO properties finds that almost all of the banks require that the listing agent put the utilities for the REO properties in the real estate company's name, pay those bills on behalf of the bank and then submit the paid bills for reimbursement. The same is true for most other bills that have to be paid for the property (i.e. condomini-um association fees, repair bills, etc.).

When the agent switched brokers, the agent switched all of the utili-ties for these properties into the new company's name, but there is a lag in getting the final bills ordered and paid. The prior broker is stat-ing that he will not pay the agent any commissions on six transactions that have closed in the past, or on any that are pending and going to close, until the situation with the bills is cleared up. Does the broker have the legal right to withhold commission?

While commission and reimburse-ment for utility bills for REO prop-erties may be separate issues, if the case were to go to court, a court could order an offset of one against the other. The agent may want to contact the local REALTOR® asso-ciation to have the matter arbitrated or mediated, or hire an attorney to write a letter to the prior broker demanding payment of the commis-sion. It would be advisable to first review any independent contractor agreements or other office policies to see if offsets are addressed there.

See the March 2008 Legal Update, "Running a Real Estate Office, at www.wra.org/LU0803, and Legal Update 00.12, "Real Estate Office Management," at www.wra.org/LU0012, for further information.

SafetyREO properties often are found in depressed neighborhoods, so safety is a prime concern and extra precau-tions are a must. Foreclosures may attract unexpected house guests – such as squatters – or former hom-eowners refusing to leave. People may break into the buildings to escape the heat, rain, or cold, or to look for food and water, but some are looking for copper or other “trea-sures” that may be stripped from the property and sold and they may be dangerous. The homes also may be damaged and poorly lit or attract wildlife since it’s abandoned, lead-ing to more potential safety hazards.

Safety Tips for Listing Brokers• Inspect the exterior. Walk around

the perimeter before you enter the

house and make sure the door hasn’t been kicked in and no windows are shattered. Call police if the property is unsecure or you suspect someone is in the property.

• Don’t confront a squatter. If a squatter is in the home, leave imme-diately. Call the police once you've left and let them deal with any tres-passers.

• Use the buddy system. Ask a co-worker, spouse, friend or family member to come with you when you show the home, or bring your dog.

• Let others know where you are. Before you leave, tell your co-work-ers, family or friends where you are, whom you are with and when you expect to return.

• Visit during the day. Visiting homes at night makes it more dangerous, so

try to make appointments during daylight hours only.

• Park your “getaway car” in the street. Make sure your vehicle can be easily spotted and can’t be blocked in.

• Look for clues that uninvited peo-ple are present. Is the gate as you left it, is there new litter on the ground, water running, cut wires or other signs of intruders? Take bin-oculars and look the property over before getting out of your car.

• Don’t carry a weapon. It soon may be legal to carry concealed weapons in Wisconsin, but carrying a gun is probably a bad idea, even if you do have a concealed weapons permit. The presence of such a weapon may serve to only invite more trouble. Carry pepper spray if a defensive tool is desired.


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7Wisconsin REALTORS® Association

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Legal Update, May 2011

Tenants/OccupantsAgents and brokers should not overlook occupant rights. In the rush to get a property vacant, they must ensure they do not violate any tenant’s or occu-pant’s rights to remain in the home.

During a foreclosure action, a tenant would likely be named as a party to the foreclosure lawsuit. The bank would request that the court foreclose or elimi-nate the tenant's lease/rental interest in the premises. If granted, the tenant would have to vacate the premises on a date determined by court order. This would likely be at the judicial confirmation hear-ing approving the highest bid from the sheriff ’s sale. However, this outcome has been altered by federal and state legislation.

The federal Protecting Tenants at Foreclosure Act of 2009 (www.fdic.gov/news/news/financial/2009/fil09056a.pdf) provides protections for tenants when landlords fall into foreclosure. Under the Helping Families Save Their Homes Act, tenants have the right to stay in their homes after foreclosure for 90 days or through the end of their lease term, whichever is longer. These pro-tections will expire at the end of 2012.

This law will provide tenants 90-days’ notice of eviction, require banks to honor leases and protect Section 8 tenants after foreclosure. This law applies to foreclo-sures of federally related mortgage loans on any dwelling or residential real prop-erty and requires 90 days notice for evic-tions of bona fide tenants who are month-to-month or without a lease. Tenants with leases are allowed to remain for the balance of the lease term except that they may be evicted with a 90-day notice if the new owner will occupy the unit as his or her primary residence. Any state laws pro-viding longer time periods or additional protections for tenants will continue to apply. All tenancies and leases must be the result of arms’ length transactions and require rent that is not substantially less than fair market rent for the property.

Under Wisconsin law, tenants also have

rights in REOs. Wis. Stat. § 846.35 (http://legis.wisconsin.gov/statutes/Stat0846.pdf) indicates that if the landlord’s property is foreclosed upon and sold at sheriff ’s sale:

• Thetenantmayremainintherentalunitfor up to two months after the end of the month in which the sheriff’s sale is con-firmed. The tenant must pay rent at the same rate that applied immediately before judicial confirmation of the sheriff’s sale.

• The tenant may withhold rent in anamount equal to the security deposit dur-ing the last period the tenant remains in possession. The tenant’s right to posses-sion expires at the end of the month for which the tenant withholds rent.

• No writ of assistance or writ of restitu-tion may be executed against a tenant whose tenancy is terminated by foreclo-sure before the additional two months have passed unless the tenant waives this right in writing.

Leases after Deed in Lieu of Foreclosure

Do leases survive a deed in lieu of fore-closure? The broker just received listings from a bank. These houses each have a family renting them. The leases are hand-written, very sketchy and do not have many details. Are the leases binding on the bank who is now the owner of the properties?

A deed in lieu of foreclosure occurs when a property owner in default on his or her mortgage decides to quitclaim the proper-ty back to the lender rather than attempt a short sale or go through the foreclosure process. When a deed in lieu of foreclosure is considered, the bank should work with the title company to determine the status of title to the property because any mort-gages, judgments or liens filed against the property or created by the borrower will likely remain against the property upon its transfer back to the bank. Thus a deed in lieu of foreclosure is generally used only when title is clear. If other liens have attached to the property, a foreclo-sure action becomes necessary because a foreclosure removes the liens of all lend-ers, creditors and other lienholders named as parties in the foreclosure complaint.

Leases would generally survive a deed in lieu of foreclosure because the borrower quitclaiming his interest in the property to the bank would not extinguish the rights of any tenants. It would be helpful if the former owners assigned the leases to the bank so that the bank could, in turn, assign these leases to new purchasers when the broker sells the properties.

RecordkeepingHonest accounting and reimburse-ment practices are essential for all bro-kers, but this is particularly true if the agent or broker is providing mainte-nance services, hiring contractors and paying bills. Property management bookkeeping may be required if there are rent-paying tenants in the REO properties listed for sale. By keeping accurate and thorough accounting, agents and brokers ensure their books are clean and above board. There is no need to invite any disputes with the REO seller over needless discrepancies when it is, at times, difficult enough to secure reimburse-ments from the asset managers. The broker providing property manage-ment services for tenants will want to avoid any disputes with tenants.

A listing broker perform-ing property management ser-vices may wish to consider hold-ing property management funds in:

(1) A traditional non-interest-bearing trust account, in other words, the regular trust account with which licensees are historically familiar.

(2) An interest-bearing trust account if the broker obtains the written con-sent of the parties for whom the funds are being held. This authoriza-tion must specify how and to whom the interest will be paid. No interest may be paid to or provided in any way for the benefit of the broker.

(3) The rental owner's account. "Owner's account" is defined as an account maintained by the rental

property owner for the deposit and disbursement of the owner's funds. A broker may deposit checks that are payable to the one or more of the owners or to the owner's account.

See Legal Update 00.10, "Trust Account Basics," at www.wra.org/LU0010, for information about trust accounts.

For more information regarding working with REO sellers, see "Best of the Legal Hotline: Working with REO Transactions" in the March 2009 edition of the Wisconsin Real Estate Magazine at www.wra.org/WREM/Mar09/REOTransactions and the February 2008 Broker Supervision Newsletter, “Listing and Selling REO Properties,” at www.wra.org/BSNFeb08.

Fannie Mae and Freddie Mac REO Conflict of Interest Rules

Fannie Mae and Freddie Mac have conflict of interest and other poli-cies for those working with their REO properties acquired pursuant to foreclosure (or a deed in lieu of foreclosure). Violation of these rules can result in the broker losing cur-rent and future REO listings, so it is vital that brokers and agents (and anyone else affected) understand the rules and comply with them. Brokers would be well-advised to be sure that everyone covered by the policies is trained on these limita-tions and to retain documentation related to the training, including attendees and content. If ques-tions arise, checking with Fannie Mae and Freddie Mac in advance will help minimize problems.

For a summary of the REO con-flict of interest policies, visit www.ksefocus.com/billdatabase/c l i e n t f i l e s / 1 7 2 / 4 / 1 2 1 3 . p d f .

Contract Issues: REO Offer to Purchase

Wis. Stat. § 706.02 sets forth the legal requirements for a binding contract. A contract for a real estate transaction shall not be valid unless evidenced by a conveyance that satisfies the follow-ing: 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. Given the nature of REO transactions, brokers may be asked to forgo meeting some of these require-ments. However, doing so will not only risk the transaction, but may place the broker at risk of license law viola-tions and litigation. Remember the fundamentals and protect the parties.

Binding AcceptanceWisconsin law is clear about binding acceptance; an acceptance from the seller must be in writing and deliv-ered to meet the requirements for conveyances of real property per Wis. Stat. § 706.02. Verbal acceptances are not binding, even in REO transac-tions. Both Wis. Admin. Code § RL 24.09 and Article 9 of the Code of Ethics require REALTORS® to put agreements in writing. Nonetheless, REO asset managers often respond verbally to offers and will not pro-vide written counter-offers, a problem because there is no legal binding con-tract until there is a contract signed by both parties. The asset managers often assert that “verbal acceptance” has occurred prior to the time the buyer’s offer has actually been signed and delivered back to the buyer; licensees must never mislead buyers into think-ing this is true. Licensees represent-ing that the offer had been “verbally accepted” could be liable for damages resulting from that misrepresentation.



The Wisconsin offer to purchase clear-ly states that an offer is accepted when all the buyers and sellers have signed an identical copy of the offer. See lines 23-26 of the WB-11 Residential Offer to Purchase (2010). Until such time as the offer is accepted and delivered to create binding acceptance, a real estate licensee should not represent that there is an accepted offer. The WB-11 residential offer provides on lines 27-29 that the offer is bind-ing only if a copy of the accepted offer is delivered to the buyer by the stated acceptance deadline. Only then is the offer binding. These provi-sions of the offer are based upon the Wis. Stat. § 706.02 requirements for creating a valid real estate contract.

Provide Ample TimeOne of the realities of working with REO sellers is the need to provide ample time for the consideration of offers and acceptance. REO asset managers are notorious for providing only verbal assurances, usually after a substantial delay – and after the accep-tance deadline has passed. REO asset managers/sellers may engage in these “verbal acceptances” because there can be a delay between verbal com-munication of the terms of an offer to the distant REO asset manager and the REO seller’s actual receipt, writ-ten acceptance and delivery back of the written offer. It also is the practice of some REO sellers to not sign offers until after the buyer has completed certain actions, such as satisfaction of the inspection contingency. However, Wis. Stat. §§ 706.02(1)(d) & (g) indi-cate that the offer is invalid until it is signed by the grantors and delivered.

Extending the DeadlineIn addition to being non-binding due to the lack of written acceptance, many REO offers may expire if the REO seller does not sign and deliver them, per the terms of the offer to purchase, by the stated deadline for binding acceptance. One solu-tion may be to extend the acceptance

deadline. The acceptance deadline may be extended in several different ways: (a) on the offer to purchase or counter-offer; (b) by using a WB-43 Amendment to Offer to Purchase, or; (c) by using a WB-44 Counter-Offer. However, if the seller does not accept and deliver back an offer within the time allowed, a counter-offer is the most appropriate form for a real estate licensee to use in order to continue negotiations between the buyer and seller. To facilitate the seller’s consideration of the offer, the buyer may initiate a counter-offer to his or her own offer to extend the time allowed for binding acceptance.

A counter-offer may be used at any time after the acceptance deadline. This has the effect of making a new offer on the same terms as were in the original offer, except as specifically stated on lines 6-29 of the WB-44. A party using the WB-44 in this man-ner does not need to put anything on these lines. Some licensees use these lines to state a change in the offer acceptance deadline, but this is not necessary. The previous accep-tance deadline is irrelevant because the WB-44 rejects the original offer and establishes a new acceptance deadline on line 32 for accepting the new offer made on the WB-44. The counter-offer must be accepted in the manner stated on lines 31-34 of the WB-44 before the contract is binding.

Verbal Offers and Acceptances The agent working with the buyers wrote an offer on an REO prop-erty. The agent was told that the bank will get to the offers (there are several) “when their schedule per-mits.” 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 bind-ing acceptance date, are the buy-ers obligated to purchase the home?

REO asset managers may negoti-ate verbally, but there is never a legal binding contract under Wisconsin law until there is an agree-ment signed by both parties. 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 bro-ker 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, mon-itor acceptance deadlines and refer the parties to legal counsel if these dead-lines are not met or if the buyer has any questions regarding the buyer’s legal rights or the status of the offer.

Verbal Acceptances/Timelines Broker A has an REO listing. A coop-erating 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 con-tract 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. 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 bind-ing acceptance date passes without the signed offer returned to the buyer, the buyer may continue the negotia-tions by initiating a counter-offer for the seller’s signature and delivery.

REALTOR® Practice Tip: REALTORS® in these transac-tions may need to have new offers drafted or have the offer’s acceptance period extended by



amendment. If a buyer tells a REALTOR® that an REO seller has “verbally accepted” an offer, that licensee should inform the buyer that Wisconsin law requires that an offer to purchase be signed and delivered before it is valid.

REALTOR® Practice Tip: REALTORS® should monitor acceptance deadlines and refer the parties to legal counsel if these deadlines are not met. A licensee may indicate to the buyer that the REO asset manager or seller is giving favorable consideration to the buyer’s offer, but that the offer cannot be valid until it is signed and delivered. If a buyer has any questions regarding the buyer’s legal rights or the status of the buyer’s offer, the buyer should be referred to legal counsel for appropriate advice.

REO Addendum REO asset managers/sellers often have requirements that a particular adden-dum be used in conjunction with the residential offer to purchase form being used in the transaction. As a general rule, this type of requirement is per-fectly appropriate. The buyer, on the other hand, may not find the content of the addendum to be appropriate.

The REO purchase contract typically starts on a DRL-mandated offer to purchase form, but the REO asset manager often has a lengthy, hard-to-understand REO addendum that negates contract rights and protec-tions for the buyer. One of the big-gest challenges for REALTORS® is providing brokerage services without engaging in the unlicensed practice of law by interpreting the addendum for the buyer. An agent may share gener-al information or explanations about REO transactions – for instance, that REO addenda are notorious for shift-ing the risk of the transaction to the buyer – but may not give legal advice. Instead, they can 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 ques-tions. At the same time, REALTORS® should not lose sight of the fact that it is unlikely that the buyer will success-fully purchase the property if the REO addendum is rejected or countered.

Addenda Use RulesLicensees may use a pre-prepared offer addendum provided by an REO company, but only if the pre-pared or “preprinted form” adden-dum complies with Wis. Admin. Code § RL 16.06(4) or (5).

Optional Information AddendumWis. Admin. Code § RL 16.06(4) provides that a licensee may use a pre-prepared addendum containing provisions that relate to the informa-tion that would be filled in on the blanks on a DRL-approved form, or that modify or supplant the optional provisions or contingencies set forth in the DRL-approved forms. An example might be the financing or inspection contingency in an offer to purchase. In practice, this type of addendum may be drafted by the broker or an attorney. A licensee may complete any fill-in-the-blanks or make selections when using this “optional information” addendum.

Language Modification AddendumUnder § RL 16.06(5), a licensee may use a pre-prepared addendum, which supplants or alters the printed provisions of a DRL-approved form that are not optional. This is allow-able only if the addendum is drafted by an attorney who is identified on the addendum and there are no blanks, fill-in provisions, options to select or multiple-choice provi-sions in the addendum (other than spaces for the signatures of the par-ties and for incorporating the adden-dum by reference into the offer to purchase or other DRL-approved form). The bottom line is that if

an addendum rewrites provisions of an offer that are not optional, it must be drafted by an attorney. This “language modification” type of an addendum may not be filled in by the licensee other than signa-tures and incorporation provisions.

A licensee must properly incorpo-rate the addendum by reference into the approved form and relate the approved form and the attached addenda to one another. REO adden-da tend to be language modification addenda because they change man-datory provisions in the offer. Some such addenda are a combination of an optional information and a language modification addendum, which cre-ates further frustration for the agent. The agent may wish to have the buyer or the buyer’s attorney com-plete the form to help the licensee avoid running afoul of these rules.

Further explanation of the RL 16 rules and general tips for draft-ing offers is available in the March 2005 Legal Update, “Customizing the Offer to Purchase,” online at www.wra.org/LU0503. The Wis. Admin. Code § RL 16.06 forms use and rules for addenda are available online at http://legis.wis-consin.gov/rsb/code/rl/rl016.pdf.

Must Buyers Add REO Addenda to Accepted Offers?

On occasion, REO asset managers or sellers may ask REALTORS® to obtain a buyer’s signature on an addendum to the offer after the buyer’s offer has been accepted. This might occur if the offer was accept-ed without inclusion of the REO addendum, either because acceptance occurred prior to the REO asset manager’s participation in the trans-action or because of an oversight. The terms of these addenda typically are intended to modify the legal and contractual rights of the buyer to the benefit of the REO seller. The addi-tion of the addendum to an accepted



offer is essentially an amendment to the offer. Best practice in this situa-tion would be to prepare a WB-40 Amendment to Offer to Purchase with the REO addendum incorpo-rated by reference into the WB-40.

A related issue arises when REO asset managers/sellers take an offer or a counter-offer from a buyer and “accept” the offer contingent upon the buyer approving modifications the REO asset manager/seller has made to the buyer’s offer or counter-offer. Under contract law, any acceptance that includes a material change to the offer constitutes a counter-offer by the REO asset manager/seller. The buyer is not obligated to accept this counter-offer and may accept it, reject it or counter it as the buyer wishes. REALTORS® who receive an offer that has been countered by an REO asset manager by means of a contingent “accepted” offer must disclose to the buyer that the REO asset manager appears to have coun-tered the offer and encourage the buyer to consult with legal counsel regarding any questions the buyer has regarding the buyer’s legal rights.

REO Addenda to the Offer to Purchase

The REO seller has asked that cooperat-ing brokers complete the REO adden-dum when submitting any offers. Can the broker fill in the REO addendum?

Licensees may use the REO adden-dum only if it complies with Wis. Admin Code § 16.06(5), which 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 provi-sions are for the parties’ signatures and those that connect the adden-dum 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 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 that the list-ing agent says must be signed. Does the buyer need to sign the adden-dum? Is there a binding contract?

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 buy-er’s offer. Instead, the seller may counter the buyer’s offer to add or modify the terms and conditions.

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 reject-ing the REO addendum, and refer the buyer’s questions to legal counsel. The buyer will need to decide wheth-er he or she wants to sue the REO seller to try to enforce the accepted offer without the REO addendum.

A listing broker, knowing the sell-er will require additional terms and conditions or an addendum for the transaction, may be wise to pro-vide these to the buyer in advance. This gives the buyer, the cooperat-ing broker and the buyer’s attorney the time to review the addendum to determine if the buyer is will-ing 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, the warranty 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 addenda 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 lan-guage 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 attor-ney review the sometimes intimidat-ing and lengthy terms of REO adden-da. 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 trans-fer 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.

REALTOR® Practice Tip: REALTORS® must be very care-ful to never suggest that the buyer must sign the REO addendum. To do so likely would be a mis-representation and may consti-tute the unauthorized practice of law. Licensees who have been told to get the buyer to sign an REO addendum when the offer has already been accepted should deliver the addendum per the REO asset manager’s request, inform the buyer of the REO asset manager’s proposed amend-ment to the offer, explain to the buyer that he or she has the option of accepting or rejecting the proposed amendment, and refer the buyer to legal counsel for an analysis of the buyer’s rights under the offer and the addendum.



REO Offer Forms When REO sellers provide worksheets, addenda or offers and ask the broker to complete them, the broker should proceed cautiously. A licensee may be safe to complete an optional informa-tion addendum prepared by a party or an attorney or non-contractual forms such as a worksheet. Working with an REO-drafted purchase contract or other contractual form between the parties, on the other hand, may present a danger zone for licensees.

Some REO asset managers ask licens-ees to “fill in the blanks” on a pre-printed offer provided by the REO seller. However, brokers are prohib-ited from engaging in the unlicensed practice of law and completing con-tractual forms, such as offers, that are not state-approved. Wis. Admin. Code § RL 16.04 requires licensees to use Wisconsin-approved forms if an approved form is available for that purpose. The exception would be in a case where there is no DRL-approved contractual form suitable for the situation and one is draft-ed by a party or attorney whose name is imprinted on the form, per Wis. Admin. Code § RL 16.04. However, the DRL does provide an approved contract form for the pur-chase of a residential property, so this would not appear to be a situation where a party or attorney can pre-pare a different contract form that a Wisconsin licensee could legally use.

If an approved form is available, but the parties do not wish to use it, licensees are permitted to negoti-ate the terms of the offer but must have the parties or an attorney draft the offer, including completion of all blanks. The broker may, however, deliver the documents to the parties. Delivery of REO forms does not vio-late license law, but giving legal advice about them or completing them results in a license law rules violation.

REO Offer Form 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, how-ever, requires Wisconsin licensees to use Wisconsin-approved forms if an approved form is available for that purpose. The best legal 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 Amendment FormThe broker is the selling agent on an REO property. The bank/owner has agreed to put in a new well. The buy-er's lender wants that in writing. The selling agent told the listing agent she would send over an amendment stating that fact. The listing agent said not to bother because the bank/owner would not sign it. The only thing they will sign is their own form. The selling agent said she can't fill out their forms, but the listing agent says she can, and e-mailed an amend-ment that is not a state-approved form. The listing broker has filled out the REO number and the seller and buyer information, and wants the selling agent to fill in the state-ment required by the buyer's lender. The selling agent believes she cannot “fill in” other forms. Who is correct?

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. All government forms, including HUD and VA (when used for the sale of properties owned by the government agency), are approved forms for licensee use.

Some REO companies ask licensees to “fill-in the blanks” on a pre-printed offer or amendment provided by the REO seller. Wis. Adm. Code § RL 16.04,

however, requires Wisconsin licens-ees 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 or amendment and then have the parties or an attorney com-plete the forms and fill in the blanks.

REALTOR® Practice Tip: REALTORS® asked to complete an REO asset manager’s/seller’s offer or amendment form may negotiate the terms of the transac-tion and present the terms to the parties (or the attorneys repre-senting the parties) for insertion into the form. Licensees may use the pre-prepared offer addendum provided by REO asset managers/sellers, but only if the addendum complies with Wis. Admin. Code § RL 16.06(4) or (5).

DisclosuresAsset managers located in other states, as well as the REO seller who is likely headquartered some-where other than Wisconsin, may be unaware of the disclosure require-ments in the transaction. This is true for disclosures required by state law, and also for disclosures mandated by federal law. It seems at times that the asset manager is simply unaware or that they believe they are somehow exempt. Occasionally the impression may be that they would be happy to skate right by in dis-regard of such legal requirements.

Lead-Based PaintOne primary example of a disclosure mandated by federal law is the lead-based paint disclosure law. The fed-eral LBP disclosure rules specifically require that sellers of most residential housing built before 1978 must: 1) disclose the presence of known LBP, 2) provide buyers with any available records or reports about any LBP present in the housing, and 3) pro-vide buyers with a federally approved lead hazard information pamphlet.



Sellers must also provide buyers with an opportunity to inspect for LBP. Offers to purchase must contain mandatory disclosures and acknowl-edgments. Wisconsin REALTORS® typically use the WRA’s Addendum S, which fulfills all federal LBP law compliance requirements and con-tains additional explanatory mate-rial and excerpts from the rules.

REALTOR® Practice Tip: REO sellers are not exempt from federal LBP laws when the home is sold after the foreclosure, a deed in lieu or other bank repos-session. While a foreclosure sale itself is exempt from the LBP dis-closure laws, the subsequent sale of the REO property from the lender’s inventory is not exempt.

If the REO representative refuses to sign an Addendum S – Lead Base Paint Disclosure and Acknowledgement, the broker may request that the seller provide an alternative LBP adden-da that meets the federal LPB law because Addendum S is not a DRL state-approved form. The broker must ensure the lender makes all required disclosures or be subject to the harsh penalties provided for noncompliance. The licensee is required to make sure that the bank complies with disclosure duties. Even if the property is being sold “as-is,” REO sellers still need to comply with federal LBP disclosures.

Lead-Based Paint Disclosures The REO seller made no LBP dis-closures prior to the buyer writing the offer, so no LBP forms were sub-mitted with the offer. The REO sell-er 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 indicated in the federal LBP law may be met by

using a WRA Addendum S or by a party-provided addendum. The con-tent of a particular addendum pro-vided by a seller may need to be reviewed to see if the following LBP law seller requirements are satisfied:

• Give the EPA-approved informa-tion pamphlet regarding the identi-fication and control of LBP hazards, Protect Your Family from Lead in Your Home.

• Disclose any known informationconcerning LBP or LBP hazards. The seller must also disclose addi-tional available information such as the location of the LBP and/or LBP hazards, and the condition of the painted surfaces.

• Provide any records and reportsonLBP and/or LBP hazards that are available to the seller (for multi-unit buildings, this requirement includes records and reports concerning com-mon areas and other units when such information was obtained as a result of a building-wide evaluation).

• Include an attachment to the con-tract (or use language inserted in the contract itself) that includes the man-datory 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 home buyers, must sign and date the attachment.

• Sellers must provide home buyerswith 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. Home buyers 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 July 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.

The listing company says the REO sell-ers have not provided an Addendum S even though the home was built in 1965. The lender acquired the home through foreclosure, has no knowledge regard-ing the condition of the property and is selling the property "as-is.". The seller says this transaction is exempt from federal LBP law. Is that true?

While a foreclosure is exempt from the federal LBP law, there is no exclusion when a home acquired through fore-closure 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 else-where in the contract. The buyer may initiate an LBP addendum, if needed, to comply with the law. The cooperating broker may include a cover letter recommending the par-ties and the listing broker obtain legal advice regarding compliance with the federal LBP law and caution them that the civil penalty for failure to comply can be up to $11,000 per violation with much higher fines for criminal violations. More information about federal LBP law is available on Pages 3-9 of the May 2010 Legal Update, “Lead-Based Paint in Target Housing,” at www.wra.org/LU1005.

The Real Estate Condition Report

All sellers – including REO sellers – subject to Wis. Stat. Chapter 709, whether broker assisted or FSBO, must complete a Chapter 709 RECR or risk rescission of the offer to pur-chase. Chapter 709 generally applies to all persons who transfer real estate containing one to four dwelling units,



including condominium units, time share property, living quarters in a commercial property, etc. Chapter 709 does not apply to (1) personal representatives, trustees, conservators and other fiduciaries appointed by or subject to supervision by the court, but only if those persons have never occupied the property (Note this does not include powers of attorneys); (2) real estate which has not been inhab-ited, e.g. new construction; and (3) transfers exempt from the real estate transfer fee, e.g. between spouses, foreclosures, probate transfers, etc.

REALTOR® Practice Tip: There is no exemption from the Chapter 709 seller disclosure law based solely on the fact that the owner does not live in the property or that the property is bank-owned (REO). REO prop-erty owners are not exempt even if they have not viewed or lived in the property.

An REO seller can handle the require-ment for the RECR in one of these ways:

(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.

Real Estate Condition Reports The broker is working with a bank to sell a bank-owned property (REO). The property is being sold in “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 list-ing. 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 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.

Disclosure of Material Adverse Facts

The cooperating broker scheduled a showing of 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 an RECR, the listing broker and the cooperating bro-ker are still required to make timely written disclosures of any material adverse facts. The fact that the sell-er will sell “as-is” does not release the brokers from compliance with Wisconsin license law and the obli-gation 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.

As-Is SalesREO properties typically are sold on an “as-is” basis with regard to all structural and environmental factors. When a property is sold “as-is,” it generally means that the seller will not make property condition disclosures and will not cure defects. Generally, an “as-is” clause alerts the buyer to the fact that he or she is responsible for determining the condition of the property being purchased, that is, have the property thoroughly inspect-ed and tested. The “as-is” clause may indicate the seller does not intend to make repairs and that the buyer must take the property the way it is. However, it is not unusual to see the offer say “as-is” in transactions where the seller has already made disclosures, and some “as-is” sell-ers end up making some repairs. “As-is” means that if the buyer goes through to closing and defects are later found, the buyer cannot go back to the seller for any compensation.

The use of an "as-is" clause, however, does not necessarily mean that the seller may still not need to make some disclosures about the property. First, the seller has the duty to exercise ordinary care in refraining from any act that would cause foreseeable harm to another or create an unreasonable risk to others. Second, the seller may be liable for misrepresentation if he or she actively conceals a defect or pre-vents a buyer from investigating the property and discovering the defect. Third, the seller may be liable if he or she makes false affirmative statements about the property. Fourth, the seller may be liable in an "as-is" situation if he or she fails to disclose material conditions that the buyer is in a poor position to discover. Finally, the par-ties should be aware that RECR law, under Wis. Stat. Chapter 709 does not excuse REO sellers from provid-ing an RECR. Many, however, do



not provide an RECR, taking the risk that the buyer will not rescind the offer based upon the seller’s failure to provide the RECR, or conditioning the offer upon the buyer’s waiver of the buyer’s rights to receive an RECR and to rescind based on the content of the RECR. Thus, the use of an "as-is" clause is not always going to be an escape for the seller from all disclosures.

From the licensee's standpoint, Wis. Admin. Code § RL 24.07(1)-(3) requires that licensees perform rea-sonably competent and diligent prop-erty inspections and disclose material facts and potential adverse facts to the parties in writing. This is not waived in "as-is" sales. In fact, when the buyer is purchasing "as-is," it is very important for the buyer to know the condition of the property. Generally the buyer has expert inspectors inspect the property as a condition of the offer to purchase, but this does not excuse the licensee from his or her duty to assure that all known material defects are disclosed in writing to the buyer.

REALTOR® Practice Tip: Brokers should make sure that their agents are inspecting the REO properties they are listing and selling and that they are dis-closing material adverse facts, and information suggesting the pos-sibility of material adverse facts, in writing to the parties.

See Pages 16-19 of the October 2009 Legal Update, “Diligent Disclosure,” at www.wra.org/LU0910, for fur-ther discussion of “as-is” sales.

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 there was severe hail damage from a past storm that was not repaired. The seller (REO) does not believe there is an obli-gation to disclose because the prop-erty 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 poten-tial buyers regardless of the source?

REO transactions are often “as-is, where-is” transactions. That means that the seller will not provide an RECR or make any other prop-erty 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 prop-erty and ask the seller to complete a written report regarding the prop-erty 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 bro-ker 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 trans-action, recommends the parties obtain expert assistance to inspect or investi-gate for the possible material adverse fact and, if directed by the parties, drafts appropriate inspection or inves-tigation contingencies. The buyer may then include property inspec-tion contingencies and otherwise address the damage issues in the offer.

The broker has focused on foreclo-sure/distressed properties and lately has seen an increase in new and inexperienced licensees who are list-ing REOs and not disclosing bla-tant adverse facts. When asked why they did not disclose the adverse facts, their standard response is “it’s a foreclosure, so it is sold ‘as-is.’” Doesn’t “as-is” still require broker disclosure of material adverse facts?

All listing brokers are required, prior to listing the property (includ-ing REO properties), to conduct a reasonably competent and diligent inspection of accessible areas of the structure and the immediately sur-rounding areas to detect observable, material adverse facts. In addition, the broker is required to ask the seller for a written statement regard-ing the property condition. Granted, REO sellers may refuse to complete a Wisconsin RECR; however the bro-ker is required to ask. The listing broker is then to disclose material adverse facts and potential material adverse facts to the parties in writing. This is not waived in “as-is” sales.

Generally, the buyer has expert con-tractors inspect the property as a condition of the offer to purchase, but this does not excuse the listing or cooperating licensee from his or her duty to assure that all known mate-rial defects are disclosed in writing to the parties, and that any affirmative statements made are, in fact, true. If the seller provides a condition report, the licensee compares the report to the licensee’s observations from the inspection. If there are inconsis-tencies between the report and the licensee’s observations, the licensee must disclose the inconsistencies to the parties in writing, as well as any material adverse facts the licensee observed. The fact that the seller will sell the property “as-is” does not relieve licensees from conducting inspections and making disclosures.

A sample material adverse fact dis-closure is available on Page 26 of the October 2009 Legal Update, “Diligent Disclosure,” at www.wra.org/LU0910, or on ZipForm.

Title ProblemsTitle problems are the most seri-ous when REO asset managers or servicers use a title company that is not in Wisconsin and not familiar with Wisconsin law, not to mention



local municipal requirements. These title companies may be unorganized and unfamiliar with and confused by several items, such as acreage (when partial releases are required), obtain-ing rental weatherization stipula-tions, unsatisfied secondary liens still on title, or whether a foreclosure is still required when a seller gave the lender a deed in lieu of foreclosure.

Some also appear to try to short-cut the process (and save themselves money) by excluding normal cov-erage (e.g., covenants and restric-tions of record) typically found in a traditional owner’s title insurance policy. See “Title Exceptions and Gap Coverage” in the June 2010 Wisconsin Real Estate Magazine at www.wra.org/WREM/Jun10/TitleExceptions for further information.

Just because many REO properties have been through a sheriff ’s sale – a part of the foreclosure process that involves a court and the sheriff – that does not mean that the title is necessarily clear.

When the lender that started the fore-closure filed its pleadings in court, the lender may have done a good job of checking title and making sure that everyone who had any liens against was named in the foreclosure com-plaint. All parties named will gener-ally have their liens removed from title when the court confirms the sheriff ’s sale and the sheriff ’s deed is given. However, at least some asset managers at times try to cut corners and not order a full judicial fore-closure commitment from the title company. Consequently, they miss some of the liens against the property.

The sheriff ’s deed itself is not a warranty deed. Instead, it is similar to a quitclaim deed. The sheriff ’s deed passes the former owner’s title after barring all parties named in the foreclosure action holding liens and encumbrances on the property and barring any parties filing any liens after the lis pendens is filed with

the register of deeds. This leaves a channel for liens and encumbrances to remain on the title through the foreclosure and sheriff ’s sale, land-ing squarely in the new buyer’s lap.

REALTOR® Practice Tip: The agent needs to be particularly cautious about giving advice on the legalities of foreclosure sales. The client, accordingly, should be directed to meet with an attorney to review title and the litigation documents to determine if there are any liens that were not extin-guished by the foreclosure.

REALTOR® Practice Tip: The listing broker may wish to order a search and hold from the title company to obtain informa-tion to confirm ownership, see what liens may remain on the property and determine the sell-er’s ability to complete the trans-action. In addition, a search and hold is helpful in case the seller has forgotten or is concealing rel-evant information.

Having the search and hold infor-mation from the beginning gives more time to repair any title glitches, address any liens and mortgages, and have a successful closing. While this certainly is not within a real estate broker’s job description, it is better to try to get a full picture of what the broker is dealing with up front and try to head off disaster down the line.

Ordinarily the listing broker might also ask the seller to complete the WRA Listing Questionnaire Regarding Title Issues to avoid being surprised by liens and additional mortgages, but many REO asset man-agers and sellers may likely decline such a request. The questionnaire is designed to identify early in the transaction many different title issues that could have an impact on closing.

See Pages 1-4 of Legal Update 04.02, “Listing Procedures for the Prudent Broker,” at www.wra.org/LU0402.

REALTOR® Practice Tip: Persons preparing closing docu-ments must carefully review the offer to purchase between the REO seller and the buyer to ensure that a warranty deed and all title warranties promised in that offer are being provided by the “seller” who agreed to provide them in the offer to pur-chase. The REO seller must itself be the grantor in the warranty deed to the buyer.

Closing the GapAlthough title insurance can offer many protections to the parties in the transaction, a basic policy may include a gap in coverage. The gap exception puts the buyer at risk for any title defects that appear of record after the effective date of the title insurance commitment and before the buyer’s deed is recorded, i.e., the “gap peri-od.” Some of the title defects that may appear of record during the gap peri-od include mortgages, deeds to third parties, lis pendens filings for foreclo-sures or other litigation, construction liens, federal tax liens and judgments. The actual risk to the buyer of an intervening lien may be greater in short sales or with REO properties.

Lines 346-350 of the WB-11 Residential Offer to Purchase require the seller to provide a gap endorse-ment “provided the title company will issue the endorsement,” or equivalent gap coverage. If a gap endorsement or equivalent gap coverage is not available, the buyer may give writ-ten notice to trigger the Title Not Acceptable for Closing subsection on lines 356-362. While the intent of this provision is more to cause the parties to reach a mutually agreeable solution and bind comprehensive coverage for the buyer rather than to cause the offer to become null and void, that can be the result. This is a serious issue for the buyer and intervening liens can be very expensive for all involved.

Whether a particular title company



will provide a gap endorsement in a particular transaction or for particular types of closings, e.g., short sales and REO sales, is basically a business deci-sion. The title company evaluates the potential risk, the circumstances of the parties, the purchase price involved and other factors and decides whether to provide gap endorsements. The title company cannot know any better than anyone else what might pop up on title before the new deed and mort-gage are recorded. They decide which risk they are comfortable insuring.

REALTOR® Practice Tip: Prudent agents may wish to become familiar with which title companies in their market areas do not provide gap endorsements in REO transactions. It may be wise to learn which gap coverage alternatives are offered by other title companies or attorneys to ensure the highest level of protec-tion possible for buyers.

REO DebacleThe buyers wrote an offer on a bank-owned property (REO) listed in the MLS. The bank accepted the offer and then amended it, mov-ing up the closing and establishing a $100-per-day charge to buyers if the closing was extended past the set date, along with their standard REO amendment releasing them from most all liability for anything. The buyers accepted the amendments.

The buyers paid for a home inspec-tion, de-winterizing and minor repairs to satisfy the buyer’s bank’s demands. The buyers were ready, willing and able to close by the clos-ing date, and had already rent-ed out their home and were liv-ing in temporary housing expecting to move into their new home soon.

At closing it was discovered the bank did not own the property; another bank did. The seller claimed they had Power of Attorney, but could not produce it. The REO representa-tive told the buyers that management

could not provide clear title and the contract was to be cancelled, the list-ing was to be immediately removed from the MLS and earnest money funds to be returned to the buyers.

The buyers are now without a per-manent home and are at risk of having the county remove their fos-ter children, and they have to start the process of looking for a home all over again. Do the buyers have any legal rights against the REO seller?

Does the broker have any legal rights against the REO seller for the com-mission owed for finding a quali-fied buyer and then the seller not performing? The agent feels the banks should be held accountable for their actions, just as any other seller would, and that brokers should have the right to sell a property that is listed in MLS without wasting valuable time and putting families at risk.

The buyer's rights will be determined by the terms and conditions of the offer to purchase. Unlike the WB forms, which are drafted to balance the interests of the parties, REO addenda and other forms are general-ly drafted by attorneys who represent the REO seller and may not afford much protection to buyers. The buyers would need an attorney to review their specific contract to see what remedies might be available.

A cooperating broker’s right to MLS commission is based on procuring cause. Procuring cause can be read-ily understood as the uninterrupted series of causal events that results in the successful transaction. Or, in other words, what "caused" the suc-cessful transaction to come about. A “successful transaction” is defined in the Arbitration Guidelines as a “sale that closes or a lease that is executed.” The MLS offer of compensation is predicated on a successful transaction.

When dealing with REO transactions or short sales, it may be valuable, not only for listing brokers but also

agents working with buyers, to con-sider requesting a search and hold by the title company. Such a search gives the brokers and parties valuable information about who holds title and what liens and encumbrances are on the property. It would appear that the title problem in this transaction could have been spotted earlier, which might have prevented this situation.

For more information about REO transactions, see the March 2009 Legal Update, "Working with Distressed Sales," at www.wra.org/LU0903, and the February 2008 Broker Supervision Newsletter, "Listing and Selling REO Properties," at www.wra.org/BSNFeb08. Also see “A Cautionary Tale for REO Buyers” in the March 2011 edi-tion of the Wisconsin Real Estate Magazine at www.wra.org/WREM/Mar11/CautionaryTaleREOBuyers.

Working with the Buyer

Many REALTORS® experience great frustration as they attempt to assist a buyer purchasing an REO property. While some REOs are handled rela-tively well, many asset managers and lenders are causing REALTORS® and buyers to want to pull their hair out, and stress and frustration are wide-spread. Although there are no magic answers, understanding what may be in store for the buyer might help make the process a little less stressful.

1. Expect Delays. While there are some REO asset managers who are fairly prompt with their responses, many REALTORS® report that waiting for an answer is challenging. The wait time for a response to an offer varies, but overall is reported to be slow – from five to 10 days to as long as six weeks – for those who are lucky enough to get a response. In some cases lenders are apparently getting multiple offers and taking weeks to respond and choose the best one.



2. Asset Managers. REO properties are handled by regional or national asset managers who enter into listing contracts for the sale of a typically large inventory of properties. Some asset managers are pretty good – they view the negotiation as a business without an emotional component. Others are reportedly bad – they can be extremely rude and abrasive and may not really understand the docu-ments they are working with.

3. REO Addenda. A buyer’s initial offer to purchase may be submitted on a familiar Wisconsin form, but the written response from the asset manager may be a lengthy REO addendum that overrides most of the offer to purchase provisions. This addendum is written by the lender’s legal counsel and may be very dif-ficult for buyers to understand. The buyer may need legal counsel to interpret the addendum, and the attorney’s advice for the buyer may be to never sign such a heavy-handed document. Some REO addenda pro-visions require that the buyer pay for the title insurance policy and the real estate transfer fee, allow only five days for inspections and 14 days for financing, require non-refundable earnest money or charge the buyer a daily fee for a delayed closing (when there is no penalty if the seller causes the closing to be delayed). The REO addendum generally is non-nego-tiable and cannot be altered. Some buyers have backed out of deals after seeing the REO addendum, angered that it essentially strips the buyer of any recourse or rights.

4. Verbal Negotiations. REALTORS® and buyers are frustrated when asset managers provide verbal responses and will not counter offers in writ-ing. Once a sale is verbally finalized, it is discouraging when the lender reveals that there is another offer and asks for the buyer’s highest and best price, changes the terms and conditions of the buyer’s offer, or indicates that they have accepted another offer. Many asset managers and lenders, however, operate under

a system in which the asset manager may have the ability to give a con-ditional approval or acceptance, but final acceptance requires the lender’s corporate approval. In other words, it may be a very long time before there is actually a contract signed by the buyer and the seller – in some REO transactions the signed offer is not received until shortly before or even after closing. Understand that although REO asset managers nego-tiate verbally, there is never a legal binding contract under Wisconsin law until there is an agreement signed by both parties; don’t mislead buyers into thinking otherwise.

5. Closing Delays. Closing on an REO property can be exasperating. Closings are often delayed for days or even weeks due to lender/asset manager difficulties getting the deed, the final signed HUD-1, title work and other closing documentation to closing on time. In some cases there are problems when charges, such as delinquent utility bills or subdivi-sion association dues, do not appear on the closing statements; the REO seller will not reimburse any charges after closing.

6. Title Problems. Ask where the title company and attorney working on the transaction are located – if they are in Wisconsin, there should be fewer problems getting to closing. REO properties often have title issues, so a buyer may wish to have a title search report prepared if there is no current title commitment pre-pared by a Wisconsin title insurance company. A bargain price evapo-rates quickly if the buyer must pour money into outstanding taxes, liens and encumbrances.

7. Don’t Focus on Price. Too many people, when shopping for an REO, abandon their real estate sense and focus on price alone. Less than desir-able location, poor light, terrible view, below-average school district, high local crime rate, etc., might be part of the reason why a home went into foreclosure in the first place. Don’t ignore those problems,

especially if the buyer will sell in the next five to 10 years. Other foreclo-sures nearby are also a red flag.

8. As-Is, Where-Is. REO transactions are “as-is, where-is” transactions. That means the seller will not provide an RECR or any other disclosures about the condition of the property. It also means that asset managers will rarely make repairs from the lender/seller’s funds.

9. Inspect the Disrepair. REO sellers will fail to disclose major ongoing problems like a property with frozen or leaking pipes or a failed septic system, even if they have been spe-cifically informed. So it is critical that the buyer inspect the property. One common obstacle is that the power or other utilities have been turned off. In some cases, unsecured prop-erties have been vandalized; when the property is not secured properly there may be safety concerns associ-ated with any showing or inspection. Make sure a registered home inspec-tor is engaged to check out a prop-erty and determine what repairs need to be done before writing an offer so the buyer can truly assess whether it’s worth it. Don’t rely on previous inspections, even if relatively recent; a vacant home can deteriorate quite a bit in a short time, especially in an area with climate extremes.

10. Skip the Flip. “House-flipping,” i.e., buying at bargain-basement pricing, updating, and then selling for much higher, hasn’t been too profitable recently. Even if a house looks like an incredible flipping opportunity, tell the buyer to automatically triple the estimated cost to fix up the home. Clients should avoid the temptation to make fast money unless they think it through and talk to a home inspec-tor and contractors.

11. Minimize the Pain. The best approach to all this madness is to prepare the buyer to expect the worst and to be happy if things work out more smoothly than predicted. Make sure the buyer knows to expect delays and the imposition of harsh



REO addendum terms.

These problems are difficult enough for REALTORS® to work through. Trying to explain all of the REO transaction pitfalls to hopeful buyers and equip them to protect themselves presents an additional challenge. The WRA disclosure form “Information for Buyer of Bank (Foreclosure) Property” is a useful disclosure tool to warn the consumer of the risks involved with REO transactions and help protect the broker from liabil-ity. This form educates the buyer by providing some basic background information about REO transactions, warning of some of the risks, explain-ing that agents cannot always address all of the buyer’s questions, and sug-gesting some protective measures that the buyer may want to take. Look for this form on the WRA website (www.wra.org/Fraud) and on ZipForm.

REO Home Inspections The data sheet for the listed property states the property has been winter-ized. The broker has heard of buyers who bought a property and discovered broken pipes when they turned on the power and water after closing. How can buyers protect themselves when an REO property is being sold "as-is?" Is the seller required to turn on the power and water for the inspection? Who pays for this?

Unfortunately, the standard home inspection contingency in the WB-11 Residential Offer to Purchase does not address this situation or refer to winterized properties. When the water and power are off, buyers may discuss this with their home inspector before writing an offer to find out exactly what the home inspector will need. The buyer can then draft the offer to specifically address: (a) who will turn on the power and the water and who will pay for this; (b) when this will be done; (c) who will re-winterize the property and pay the costs; and (d) who will be responsible for any

damage that occurs during the period when the power and water are on.

An REO seller has an “as-is” clause in its addendum to the offer. Does this mean the buyer cannot have a home inspection?

REO transactions are often “as-is, where-is” transactions. The seller often will not provide an RECR and will rarely make any repairs. REO sellers may not disclose major ongo-ing problems like frozen or leaking pipes or a failed septic system, even if they have specific notice. The use of an “as-is” clause, however, does not necessarily mean that the seller may still not need to make some dis-closures about the property or that the seller cannot be liable for mis-representations about the property.

Generally, an “as-is” clause alerts the buyer that he or she is responsi-ble for determining the condition of the property being purchased. The buyer retains the right to con-duct a home inspection unless the offer specifically provides otherwise.

The broker sold a bank owned property (REO) on December 27, 2007. It was also the broker’s listing. The buyer did not have a survey and purchased the property “as-is” per the seller’s REO addendum. He recently had a survey that shows he does not own two-thirds of the garage and 1 foot off the back of the house. The buyer wants to know what recourse he has as he has spent $10,000 on attorney fees and surveys. What can the broker tell him? The buyer had asked for a survey, but chose to waive it, with a price reduction. Can the broker give the buyer copies of the offer or transaction documents?

Once a transaction has closed, the agent has no responsibility to assist the buyer with this situation or to give the buyer advice. Doing so will only expose the agent to potential liability. The buyer should be advised that the issue would need to be resolved by the parties themselves

or with the assistance of legal coun-sel. The buyer may also wish to contact the title company to see if there is any title insurance coverage (unlikely if no survey was done). The buyer may have his attorney review the offer and the title policy.

The broker may, as a courtesy, pro-vide an additional copy of the offer to any of the parties in the transac-tion. However, the broker is not required to supply a copy of every-thing contained in the transaction file. Wis. Admin. Code chapter RL 15 provides that the parties must be provided copies of the offer and other documents they sign in the transaction, as well as the closing statement. Before supplying any other documents the broker may wish to check with the company attorney (to avoid any potential liability exposure).

The Wis. Admin. Code chapter RL 15 rules regarding the requirements for the provision of documents to a party are found at http://legis.wis-consin.gov/rsb/code/rl/rl015.pdf.

After a foreclosure, the lender allowed the previous owner to stay at the REO property as a tenant for a short time. A new buyer has made an offer that has been accepted. During a final walk-through of the property, the buyer and the agents discovered that some personal property is miss-ing. The offer to purchase contract included a furnace, a three-phase electrical box and a large exhaust fan, all of which are missing. The missing exhaust fan leaves a three-foot hole in the side of the garage.

If the seller is unwilling or unable to return or replace these items, what course of action should the buyer take? The closing occurs in 10 days.

The offer dictates what is being sold. According to the standard WB-11 Residential Offer to Purchase, all fix-tures are included as part of the sale. Fixtures are defined at lines 185-193 and include both the enumerated



items and items that are by their characteristics categorized as fix-tures. For example, items that are not easily removable without dam-age may be classified as fixtures.

It appears that there may be incon-sistent understandings between the tenant and the seller, and between the seller and the buyer. Hopefully the buyer and the seller can inventory the missing items and determine if they are included in the offer as fixtures. Once this is done, the buyer and seller may negotiate to modify the offer to proceed with the transaction.

The value placed on the items and any damage done may need to be determined by an appraiser or con-tractors who can give bids. Once there is a complete inventory and valuation, negotiation may occur. In the alternative, the parties may be referred to the default provi-sions of the offer and legal counsel.

Safety Concerns for Cooperating Brokers

Much of protecting yourself boils down to common sense. This can include:

• Hold the first meeting with newbuyer-clients at your office.

• Always let someone know whereyou're going, whom you intend to meet, and how long you expect it to take.

• Arrangeforafamilymember,friendor colleague to check in with you by phone at a predetermined time, and use code words to convey your com-fort level.

• Don't park where you could beboxed in.

• Use text messaging or your cameraphone to document people or license plate numbers.

• Arrive for appointments early, andscout the area around the home. If anything seems suspicious, call for help before entering.

• Beforeshowingavacanthome,iden-tify all possible exits in case you need to be able to get out of the home quickly.

• Inform unfamiliar buyers that youare expecting other buyers or a sales associate shortly.

• Whenpractical,encouragebuyerstotour the home while you wait near the front door and prepare for any questions. If you must act as the guide, let them lead as you follow.

• Avoid closets, attics andbasements,and never allow a stranger between you and the door.

• Be assertive and confident. Whenyou feel uncomfortable or sense any threat, excuse yourself from the situ-ation for a call or to retrieve some-thing from your car.

In every situation, trust your hunches. It's better to be too cautious than not at all (from www.realtor.org/rmotechnology/buyersguide/guides/0909_buyers-guide_personalsafety_bestpractices).

For a wealth of additional safety resources, visit www.realtor.org/about_nar/safety?wt.mc_id=rd0046.

REO AuctionsSome REO sellers are attracted to auctions because they are quick, effi-cient, public and generally set a valid market price. Auction properties are almost always sold in "as-is, where-is" condition. This means that buyers looking at REO properties have to be extra cautious because the prior owners likely were in financial trouble and did little to keep up the property. Some angry homeowners may have damaged the home or ripped out appliances and property components.

Fortunately, most auction companies hold open houses before the auc-tion. A buyer should inspect a home before bidding on it, ideally bringing a home inspector or rehab contrac-tor along to help estimate repair

costs. A property at a lower price is no longer a bargain if the repair and renovation costs will be high.

Often the buyer will receive a bid-der’s package at an open house. The bidder’s package normally includes the contract that will be used by the winning bidder to purchase the prop-erty. The buyer will have approxi-mately 30-45 days after acceptance to secure funding (if not already done) and close. Buyers should take the contract to their attorney for review before the auction. REO properties also often have title issues, so a buyer should have a title search report pre-pared if there is no report in the bid-der’s package or if it is not current.

Auction Sale of REOA buyer is interested in an REO property that the lender is now going to have sold at auction. Can the agent help the buyer buy the property at the auction and still receive a commis-sion? What should the agent and the buyer do to prepare for the auction?

In an auction sale transaction, a coop-erating agent often has the opportunity to register a buyer before or at the auc-tion. If the buyer ultimately purchases the property offered at the auction, the cooperating agent may earn what-ever fee or commission was offered by the auctioneer, the auction company or the listing broker on the MLS.

Often the buyer and the agent must be pre-registered prior to the auction using specific forms and procedures. These steps help eliminate any doubt as to representation and ensure that the agent/broker will be duly com-pensated for work completed. Agents should verify the specific auction com-pany’s procedures early in the process.

Buyers generally can familiarize them-selves with an auction property by carefully reviewing the bidder’s infor-mation package available from the auctioneer. The bidder’s package from a Wisconsin-registered auctioneer



should contain a current title report with copies of all title exceptions, sur-veys, service contracts, leases, purchase and sale agreements, floor plans and financial statements, if appropriate.

Most auction properties are sold “as-is, where-is,” with no proper-ty condition reports and without warranty or guarantee of any kind (other than clear title), so the buyer should be strongly urged to inspect the property before the auction sale. The buyer may also need to obtain a mortgage pre-approval or line of credit – the purchase agree-ment from an auction usually does not include a financing contingency.

Cooperating agents should attend pre-auction open houses with buy-ers, help buyer-clients determine the market value of the property prior to the auction, assist the buyer with auction registration and strat-egy, and attend the auction with the bidder. Commission is gener-ally payable when the property closes.

The July 2007 Legal Update, “Real Estate Auctions,” online at www.wra.org/LU0707, is a valuable resource in understanding auctions and the role of auctioneers and real estate licensees. For additional information, see “Let’s Make a Deal: Purchasing Properties at Auctions and Sheriff ’s Sales” in the August 2010 Wisconsin Real Estate Magazine at www.wra.org/WREM/Aug10/Auct ionsSher i f f sSa le s .

Rehab Financing§ 203(k) Rehab Loans: When the Bargain Home needs Some Repairs

An abundance of REO homes on the market present some good buy-ing opportunities. Purchase of these homes by owner occupants helps spur community and neighborhood revi-talization. Homes needing renova-tion are often the best buys available, but most buyers have no idea how

to finance both the purchase of the home and the needed renovations. The FHA § 203(k) Renovation Loan Program offers a means for turning that “fixer-upper” into a dream home.

What is the FHA § 203(k) Renovation Loan Program?

The § 203k is a unique mortgage loan that offers the benefits of FHA financing along with the ability to provide funds for both the purchase and renovation of a home – or to refinance the current home plus a needed rehab project. The loans are beneficial for persons or families with low and moderate incomes, offering a single, long-term, fixed or adjust-able rate loan that covers both the acquisition and rehabilitation of a property in a single mortgage loan.

To provide funds for the rehabilita-tion, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the prop-erty after rehabilitation, whichever is less. The cost of the rehabilitation must be at least $5,000, and the total improved value of the property must fall within the FHA mortgage limits for the area (see the mort-gage limits tool at https://entp.hud.gov/idapp/html/hicostlook.cfm).

What are the typical loan terms and conditions?

A § 203(k) loan will be either a 15- or 30-year fixed rate or adjust-able rate mortgage with a dual pur-pose, single closing. At least $5,000 in improvements and repairs must be made. At least the first $5,000 should be devoted to eliminating building code violations, moderniz-ing the home or the garage, or per-forming upgrades for the health or safety of the occupants. Once the

minimum level is reached, minor or cosmetic repairs may be added. The funds may not be used, however, for commercial features or luxury items like gazebos or swimming pools.

How can the program be used?The extent of the rehabilitation cov-ered by a § 203(k) loan may range from relatively minor repairs ($5000 minimum) to virtual reconstruction. A home that has been demolished or will be razed is eligible if the existing foundation remains in place. § 203(k) loans can finance the rehab of the residential portion of a mixed-use property that includes retail or com-mercial space or a one- to four-family dwelling, provided it is owner-occu-pied, or can cover the conversion of a property of any size to a one- to four- unit structure. An existing house (or modular unit) on another site can be moved onto the mortgaged property and then rehabilitated. A § 203(k) loan may be used for interior repairs to an individual condominium unit provided the unit is in a one- to four-unit building. These rehab loans are offered to owner-occupants only and are not available for investors.

What kinds of repairs and improvements are eligible?

The types of improvements that buyers may make using § 203(k) financing include:

• Makestructuralalterationsorrecon-struction of a deteriorating property.

• Modernize and improve function-ality: remodel bathrooms or the kitchen, including new built-in appli-ances.

• Eliminate health and safety hazardssuch as lead-based paint or mold remediation.

• Improve appearance and eliminateobsolescence with, for example, new siding or a covered porch.

• Upgradeplumbing,heating,aircon-ditioning or electrical wiring



• Connect to public water or sewersystems.

• Install a well and/or septic system(property must be one acre mini-mum).

• Addor replace roofing,guttersanddownspouts.

• Addorreplaceflooring.

• Add a family room, bedrooms orbathrooms.

• Perform major landscape work andsite improvements such as grading, patios, decks and porches.

• Make the property accessible for aperson with disabilities, for example, provide wheelchair access with wider doorways and an exterior ramp.

• Makeenergyconservation improve-ments such as new windows, insula-tion, doors or solar panels.

HUD requires that properties financed under this program meet certain basic energy efficiency and structural stan-dards and have smoke detectors. All improvements must comply with HUD's Minimum Property Standards (HUD Handbook 4905.1) and all local codes and ordinances. A property owner may also qualify for income tax credits for some § 203(k) projects, depending upon the nature of the repairs and improvements performed.

Is a contractor required to do the work?

No. However, if the buyer wants to do any work or be the general contractor, the buyer must be quali-fied to do the work, and do it in a timely and workmanlike manner.

If a buyer or homeowner is interested in obtaining § 203(k) financing, what steps should he or she take?1. The buyer finds a property.

2. The buyer works with his or her real estate agent to conduct a preliminary feasibility analysis that assesses the

extent of the work needed, gives a rough cost estimate and projects the market value of the property after completion of the work.

3. If the repairs would be worthwhile, the buyer enters into an offer to purchase, contingent upon the buyer receiving a § 203(k) loan.

4. The buyer finds an HUD-approved lender (use the search tool at www.hud.gov/ll/code/llslcrit.cfm or call the HUD field office at 414-297-3214). It may be wise for the buyer to talk with the lender first about § 203(k) loans before writing the offer.

5. The lender may assign a § 203(k) consultant to assist with the buyer’s planning and cost estimates (often if the work will exceed $35,000). These consultants typically will be general contractors or home inspectors. See the information about § 203(k) con-sultants at www.hud.gov/offices/hsg/sfh/203k/203khow.cfm.

6. The buyer prepares the work descrip-tion and cost estimate, including architectural exhibits (plot plan if structural additions, proposed inte-rior plan showing contemplated changes, etc.) (see the worksheets and forms in the HUD Handbook for § 203(k) at www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4240.4/index.cfm).

7. The property is appraised. The appraiser must provide an opinion of the “after-improved” value and in some cases the lender may direct the appraiser to also provide the “as-is” value. If the lender decides an “as-is” appraisal is not feasible or necessary, the lender may use the sales price on a purchase transaction, or the exist-ing debt on a refinance transaction, if this does not exceed a reasonable estimate of value.

8. The lender issues a conditional com-mitment and statement of appraised value.

9. The lender pulls a credit report on the buyer, verifies employment,

confirms deposits, etc., to establish the buyer’s ability to pay.

10. The lender issues a firm loan com-mitment, stating the maximum mortgage amount that HUD will insure.

11. The lender prepares the Rehabilitation Loan Agreement for the lender’s and buyer’s signatures. This agreement establishes the conditions under which the lender will release funds from the Rehabilitation Escrow Account.

12. At closing a portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the exist-ing mortgage, and the remaining funds are placed in the Rehabilitation Escrow Account. Construction may then begin. The new owner has up to six months (depends on the lender) to complete the work.

13. After closing, the lender submits the mortgage documents to the HUD office for mortgage insur-ance endorsement. If acceptable, HUD issues a Mortgage Insurance Certificate to the lender.

14. As construction progresses, funds are released after the work is inspected by an HUD-approved inspector. Up to four draw inspections plus a final inspection are allowed.

15. When the work is done in accor-dance with the work plans and any change orders, the new owner pro-vides a letter saying the work has been done satisfactorily. If the HUD inspector agrees, the final draw is released minus a required 10-percent holdback.

Other FHA Repair and Rehab Loan Programs

For less extensive repairs/improve-ments, FHA's Streamlined § 203(k) program permits home buyers to finance up to an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this loan, home buyers can quickly and easily tap into cash to



pay for property repairs or improve-ments, such as those identified by a home inspector or FHA appraiser.

For housing rehabilitation activities that do not also require buying or refi-nancing the property, consider HUD's Title I home improvement loan pro-grams described at www.hud.gov/offices/hsg/sfh/title/ti_home.cfm.

REALTOR® Practice Tip: Brokers working with buyers interested in properties needing basic rehab work and brokers list-ing properties in disrepair may be wise to have § 203(k) infor-mational materials on hand. You never know when that may be just what is needed for a successful transaction.

Section 203(k) ResourcesFor additional information about the HUD repair and rehabilitation loan programs, see the resourc-es at www.hud.gov/offices/hsg/sfh/203k/203kmenu.cfm.


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