Panel answers questions about short sales/REO properties (OR: March 2008)

At the Legal Issues Forum during OAR’s Winter Conference (2008), a panel of three prominent real estate attorneys answered questions regarding a variety of issues including short sales and REO properties. The attorneys serving on this panel were Kristin Rosan (Madison & Rosan, LLP), Mike Gruber (Zollinger Gruber & Thomas) and Mark Rodio (Frantz Ward LLP).

Below are some of the answers to the questions they addressed.

Q: REALTORS are taking more and more listings on which the property owner is behind on payments or is “upside” (the mortgage exceeds the value of the property). If the lender contacts the listing agent or begins taking an active role in listing issues and negotiations, what should the listing agent do before providing the lender with information or documents?

A: All of the attorneys agreed that the listing agent cannot share any confidential information with the seller’s lender without the seller’s consent. Such consent should be obtained in writing. In cases where a listing agent knows up front that a short sale will need to be negotiated with a seller’s lender, the listing agent can obtain consent from the seller at the time of listing to share confidential information with the lender.

Q: If the property has sold at sheriff sale and the lender was the successful bidder, can the lender list it with a REALTOR before the sale is confirmed? Should the listing agent document that the lender has title?

A: Under the license law, a realtor cannot offer property for sale without the consent of the “owner”. The Ohio Division of Real Estate and Professional Licensing interprets owner to mean the person or entity who is in the title to the property. Until the Sheriff’s sale is confirmed by the courts and the lender receives a sheriff’s deed, the lender is not considered by the Division of Real Estate to be the “owner” of the property. As such, a licensee cannot market or otherwise offer it for sale until the lender acquires a sheriff’s deed. Licensees should confirm that the lender has received a sheriff’s deed before taking a listing.

Q: If a REALTOR has a listing that has been foreclosed upon and the lender contacts the listing agent and says they’re taking over the listing, what steps should the listing agent take (i.e. new listing, new disclosure documents)?

A: First, the listing agent needs to confirm that the lender has actually obtained title to the property. Assuming that it has, then the listing agent should have a new listing agreement signed by the lender. The listing agent also needs to provide the lender/seller with its company’s Consumer Guide to Agency Relationships and have the lender sign property disclosure documents. These would include the Ohio Residential Property Disclosure form and the lead-based paint disclosure form and EPA pamphlets if the property was built before 1978.

Q: Does a lender selling property have to complete an Ohio Residential Property Disclosure form? If so, what should the Realtor do if the lender refuses or says they are exempt? Can the lender provide their own form instead of using Ohio’s disclosure form?

A: The only exception that exists under Ohio law is if the lender acquired title to the property by accepting a deed in lieu of foreclosure. In that instance the lender would not be required to provide a Residential Property Disclosure form when it later lists and sells the property. However if the property was sold at a sheriff’s auction and the lender was the successful bidder on the property at the sheriff sale, it must provide a form upon later resale of the property.

In most cases where the lender is required to provide the disclosure form, the lender does not want to do so because of its limited knowledge regarding the condition of the property. If the lender refuses to provide a form to the purchaser, the listing broker should explain that under Ohio law this failure will give the purchaser the right to rescind the purchase contract. This rescission right can be exercised for 30 days after the contract was signed or closing, whichever occurs first.

In some instances a lender may have its own disclosure form that is different than the Ohio version. While the lender can provide their own disclosure form to the buyer if they wish, this will not satisfy Ohio law or eliminate the buyer’s rescission rights.

Q: Lenders are notorious for not returning the Agency Disclosure form. Is it sufficient to just indicate in your records that the lender didn’t return the forms? What if you are a dual agent and they don’t sign the Agency Disclosure form?

A: If the lender does not return the listing broker’s “Consumer Guide to Agency Relationships” it is sufficient to note on the Consumer Guide that the lender did not return it. It is also recommended that you document your request that the lender sign it (i.e. e-mail asking for it).

As to the Agency Disclosure Statement, the same process should work as long as you document in your file that you have presented the Agency Disclosure Statement and keep e-mails asking for the lender to sign and return it.

The attorneys serving on the panel at the Legal Issues Forum agreed that if you are acting as a dual agent in the transaction, this process is not sufficient. That is because under Ohio law you must have the consent of both parties to act as a dual agent. If you cannot obtain the lender’s signature on the Agency Disclosure Statement, you cannot act as a dual agent. This will require you to terminate your representation with one of the two parties. Most likely that will be the buyer. Such a termination should be done in writing.

Q: Can a broker provide information regarding seller concessions in a contract to an appraiser who is doing an appraisal on another property and wants to make sure this “comp” is accurate?

A: Because such information is confidential it can’t be disclosed without the consent of your client. Thus if you represent the seller you need the seller’s consent. If you acted as a dual agent representing both parties, the consent of both the seller and buyer is necessary.

Q: The license law requires that records be kept for three years. For litigation purposes, do you recommend they be kept longer?

A: All of the attorneys on the panel recommend that their clients only keep their records for the minimum the license law requires: three years. Brokers should consult with their own attorney and/or CPA regarding their personal recommendations.