On the selling side, REOs can be big trouble. The commissions can be discounted, the listing agent detached, the seller distant and disengaged and the deal a legal nightmare on unfamiliar forms. If ever there was a “no such thing as a free lunch” transaction, it’s a REO transaction from the selling side. Selling agents and their clients need to understand the REO market and adjust accordingly. Many buyer agents will not show REO property without having a buyer service agreement with the buyer that spells out duties and compensation.
Adjusting to the REO market means understanding that a lender is not an unsophisticated homeowner selling their property with the help of a real estate licensee. Until the rise of the distressed property market, most agents had been involved only in homeowner transactions done on standard agent supplied forms using traditional practices and procedures. The residential homeowner sale market was so much of the total real estate market for so long that the forms, practices and procedures used in that market were often misunderstood as somehow required by law. That is simply not the case.
Buyers and sellers are not regulated by the state as buyers and sellers in any serious way. Sure, there are laws about contracts, deeds, required disclosures and the like, but not about how buyers and sellers must conduct their negotiations. Real estate agents are licensed and subject to real estate licensing laws, but license laws do not apply to buyers or sellers. Much, if not most, of what real estate agents do, and how they go about doing it, is not law but custom custom developed in the homeowner/homebuyer market. These customs have little or no application in the REO market. This causes no end of angst on the selling side of REO sales.
Because REO sales involve an institutional seller who is liquidating assets for loss mitigation purposes, REO sales are done on seller-generated forms with provisions never seen in homeowner/homebuyer sales. The companies involved in selling bank assets have well paid lawyers who have no trouble at all understanding their client’s needs. Those needs are to retain full control of the transaction until closing, minimum transaction costs and no liability after closing. These seller needs are typically met by the seller demanding that all buyers use the seller’s forms typically one or more addendums that are added to the contract form used by the buyer.
The seller’s addendums in a REO transaction are made the controlling instruments in the sale by expressly superseding any conflicting provision of the sale agreement to which they are attached. The addendums are often as long as the sale agreement form used by the buyer’s agent. The terms added are complicated and contrary to most of the terms found in standard homeowner/homebuyer forms. The REO addendum, therefore, ends up controlling all the important terms and conditions of the sale. Although real estate licensees cannot practice law by giving clients advice about the legal meaning of REO clauses, they should be aware of the business consequences of common REO clauses.
Most REOs use “property condition” addendums or clauses that are true legal works of art when compared to the tepid “as is” clauses used in homeowner/homebuyer forms. Rather than simply disclaim warranties and representations, REO clauses often make buyer risk and responsibility for the condition of the property part of the consideration for the contract itself. Sometimes these property condition clauses are set out as a separate addendum. Sometimes they are just a clause in the general REO addendum. However they are presented, REO property condition clauses are specifically designed to make it difficult or impossible for the buyer to sue the seller after closing for after-discovered defects. In short, all risk of loss from the condition of the property is shifted to the buyer.
REO contract and addendum clauses can hold other risk shifting surprises for the buyer. For instance, the title conveyed may be a bargain and sale or special warranty deed that does contain the same title warranties as in a homeowner/homebuyer sale. If the buyer wants financing, the seller may demand prequalification by a specific lender at the buyer’s expense. That is perfectly legal as long as they do not make where the loan itself comes from a term or condition of the sale. Finally, many REO contracts contain “per diem” clauses that can cost the buyer as much as a hundred dollars a day for any delay in closing, regardless of the reason for the delay.
REO addendums are usually presented on a take it or leave it basis by adding provisions that expressly forbid buyer-initiated changes. Listing agents are often instructed not to submit offers that do not conform to the seller’s offer criteria. This practice is very distressing to buyer agents, but the seller is entitled to define what they will and will not consider as an offer to purchase their property. An unaccepted offer in the hands of the seller is the seller’s document to do with as they please. They can instruct their agent to line things out, add provisions, or do what they will and hand it back to the buyer. It has nothing to do with making changes above some line. It is just a way, albeit a poor one, to communicate the seller’s offer criteria to the buyer. In REO’s, the seller will end up making a contingent offer to sell instead of the buyer making an offer to purchase.
The exchange of offers and counter-offers process used in homeowner/homebuyer real estate sales is not required by any rule or law. It is just a convenient process used to form contracts. It creates mutually binding contracts that can protect the rights and expectations of both parties. But that’s not necessarily what an institutional seller wants. The institutional seller wants full control, minimum transaction costs, and no ongoing liability. As a result, they don’t use the standard real estate offer and acceptance process.
In REO transactions, the seller may not be very interested in whether a particular buyer closes on a particular property because they have lots of properties and lots of buyers. They are seeking aggregate benefit, not just a single transaction benefit. To the buyer, and their agent, the REO transaction is a single transaction, but that is not the way the seller sees it. A REO seller’s attitude often is: “Ok, we can work with you on this and, if at the end of the day we still think it’s good for us, we’ll go ahead and close it, otherwise all bets are off.” That is not really acceptance in the legal sense of the word. It is a contingent offer.
A contingent offer is one that says: I will enter into a contract with you on these terms in the future if I still want to. Look for clauses like: “final acceptance of the contract of sale is subject to seller’s approval” or “this contract is contingent upon final approval by seller or seller’s Agent” or “the seller reserves the right to terminate the contract for any reason in its sole discretion” or “not binding until accepted by seller” or variations and combinations of reservation and approvals. In Oregon, a contingent offer is treated much like a letter of intent and is not usually binding on either party. It is not “illegal” to do business in this wa; it’s just that it is not the way agents and buyers usually think about real estate contracts.
At this point, buyer agents have to be wondering what, if anything, they can do for their clients in a REO transaction done on REO addendums using REO procedures. The answer is, negotiate in good faith and keep the buyer informed. The fact that REOs often have their own forms and procedures and are usually unwilling to even talk about changing those forms or procedures does not mean there is nothing the buyer’s agent can do.
It is not the agent’s duty to interpret the legal consequences of using REO forms. It is not their duty to demand changes in REO procedures or rail against the inequity in bargaining positions. Rather, it is agent’s duty to help the buyer client understand the business and real estate consequences of what is going on. That means finding out what is going on and reporting it to the client. The agent needs to have some way to document both the finding out and the reporting.
Finding out what is going on is a matter of asking questions. It is true that listing agents in REO deals sometimes do not do a good job of making the seller’s requirements known. That does not, however, excuse a buyer agent from treating a REO listing as if it were a homeowner listing. When a buyer wants to look at a REO listing, it is time for the buyer’s agent to shift gears. That shift should begin with telling the buyer that the property is a REO and what they can expect as a result. This is best accomplished at this early stage with a standard Client Information Letter.
A client information letter is just a way to provide important information to a client (and to prove you did so). Client information letters are not transaction documents. They are not disclosures or disclaimers. They are records of communication between principal and agent. They go in the client’s file. What is recorded is evidence of the agent’s diligence in promoting and protecting the interests of their client while staying within the scope of their expertise. Such letters can be standardized for convenience and efficiency. For example, here is a sample of an information letter to a buyer client who is considering a REO property:
“Information Regarding Real Estate Owned (REO) Property”
You have expressed interest in looking at, and perhaps purchasing, property owned by a bank. Such property, called “real estate owned” or “REO” property, can represent a price bargain. There are, however, some things you should be aware of before getting involved in a REO transaction.
Although banks are often willing to take less money for a property than might a homeowner with similar property, they will typically do so only on terms that are beneficial to the bank. REO property, therefore, is often sold using addendums to standard real estate contracts that substantially change the terms to favor the seller. Most often, these REO contracts and addendums are presented on a “take it or leave it basis” much like a car dealer presents a dealer’s contract that cannot be changed by a car purchaser.
Among the terms found in REO contracts or addendums are those that substantially limit the buyer’s ability to sue the seller if a problem with the property is discovered after the purchase is completed. Such terms make the inspection and investigation of REO properties by the buyer absolutely critical. Inspections and investigations can increase the buyer’s transaction costs. Limiting the buyer’s legal remedies can create substantial risk for the buyer. These increased costs and risks must be weighed against any potential reduction in price of REO property.
REO contracts and addendums often contain provisions that postpone the seller’s acceptance or otherwise reserve to the seller the right to cancel the contract if they obtain a better offer or decide for other reasons not to proceed. Such terms create uncertainty for the buyer because there may be no binding contract until right before the closing. The buyer, therefore, may be expending money to determine the condition of the property, the state of its title, compliance with government regulations and so on without a binding contract. These matters must be carefully considered before becoming involved in a REO transaction.
A real estate licensee cannot give legal advice or offer opinions on the legal consequences of specific contract terms. For that reason, I must strongly recommend that you seek the counsel of a qualified real estate attorney before entering into a REO transaction using forms provided by the seller. Although I will work closely with the listing agent to obtain information about the seller’s forms and procedures, and pass that information on to you, I cannot be responsible for the legal consequences of entering into a transaction on forms developed by the seller and offered on a take-it-or-leave-it basis. You must judge for yourself whether the potential savings are worth the risk and uncertainty typically found in REO transactions.
The point when dealing with REOs on the selling side is that a buyer should understand the situation. That begins with defining the situation. Defining the situation is a matter of communication with the listing office. Discussing documents and procedures with the listing agent is the first step. The second step is a follow-up email to the listing agent clarifying what was discussed. The third step is communicating the resulting information to the buyer client.
This pattern of communicating with the listing office, following up the communication with a confirming email, and then communicating the result to the buyer is good service and good risk management. Take, for instance, the no acceptance problem. The fact that the seller is reserving acceptance is as big a problem for the listing side as for the selling side. That being the case, they will have some mechanism for communicating some kind of preliminary OK. When that preliminary OK comes in, whether by phone, email, fax or whatever, follow it up with a confirming email. For example “this is to follow up on our telephone conversation this morning in which you confirmed that the seller is moving forward on our offer and ï¿½ï¿½” Copy the buyer and follow up any conversations with the buyer with emails as well. What you are looking for is a chronological email record that shows a diligent agent and a well-informed buyer.
It is hard for some agents to settle for being a diligent agent and keeping the client well informed because they believe they have to protect the client’s interests. Although true, the agent does have to protect their client’s interests, that doesn’t mean the agent has to decide what is best for the client. It doesn’t mean the agent has to be a lawyer. A real estate agent protects the interests of their client by finding and communicating information about the property and the transaction and using their real estate training and experience to advise the client on the potential business or real estate consequences of the transaction. Look again at the sample client information letter with this in mind.
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