Wisconsin REALTORS® Association - Legal Hotline Hottips
Legal Hottips - April 6, 2009 1.) Disclosure - Terms of Offers As economic instability continues to impact many segments of the economy and as home prices continue to decline in many housing markets throughout the country due to job losses and increased foreclosures, Fannie Mae, Freddie Mac and FHA find it necessary and prudent to require additional information in appraisals relative to properties located in declining markets. A declining market is considered to be any neighborhood, market area or region that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times. Effective April 1, 2009, the federal guidelines for Fannie Mae, Freddie Mac and FHA appraisals require the use of the Market Conditions Addendum (Fannie Mae Form 1004MC/ Freddie Mac Form 71). Information and instructions on completing the Addendum is available online at https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0830.pdf. Appraisals of properties located in declining markets will be required to include at least two comparable sales that closed within 90 days prior to the effective date of the appraisal. The appraiser must also include a minimum of two active listings or pending sales in addition to three closed comparable sales. The appraiser must insure that active listings and pending sales are market tested and have reasonable market exposure to avoid the use of over priced properties as comparables. The comparable listings should be truly comparable and the appraiser should bracket the listings using both dwelling size and sales price whenever possible. Appraisers must adjust active listings to reflect list to sale price ratios for the market, adjust pending sales to reflect the contract purchase price whenever possible or adjust pending sales to reflect list to sale price ratios. Appraisals must include the original list price, any revised list prices and total days on the market (DOM). They must reconcile the adjusted values of active listings or pending sales with the adjusted values of the settled sales provided such that the final value conclusion is not based solely on the comparable listing or pending sales data. Appraisals must include an absorption rate analysis and report any known sales concessions on active or pending sales. The appraiser must verify data via local parties to the transaction: agents, buyers, sellers, lenders, etc. (if the sale cannot be verified by a party then public records or other impartial data source that can be replicated may be used). The MLS by itself is not considered a verification source. Accordingly, appraisers will be contacting listing agents and other licensees looking for information about active listings and pending sales. However, licensees are not permitted to disclose confidential information and the terms of a pending offer are confidential. Therefore an agent should get permission, preferably in writing, from the parties before providing listing contract and pending sale information to appraisers. The agent may want to explain to the parties that the information is being requested due to federal appraisal requirements and that valid appraisals will be difficult for all buyers to obtain if licensees and the parties are unwilling to comply with these requests. Agents may want to add language to their listing contracts, buyer agency agreements and offers to the effect that: [Seller authorizes Broker] [Buyer authorizes Broker] [Buyer and/or Seller authorize the agents of Buyer and/or Seller] to provide active listing, pending sale, closed sale and financing concession information and data, and related information regarding seller contributions, incentives or assistance, and third party gifts, to appraisers researching comparable sales, market conditions and listings, upon inquiry. READ MORE ABOUT IT: 2.) Agency - Buyer Agency Agreement QUESTION: An agent is looking to transfer to the broker's company. The agent has buyer agency agreements with five buyer-clients with her current company. That company is being acquired by another company. The agent wants to transfer but does not want to lose her buyer-clients. Does the transfer from one company to another by the agent make the buyer agency agreements null and void? ANSWER: The transfer of an agent from one broker to another broker does not automatically terminate the buyer agency agreements with the first broker. Those agreements, while entered into by the agent and the buyer-client, are taken in the name of, and on behalf of, the broker. As such, the contracts remain in effect with the first broker (unless the broker and buyer-client mutually agree otherwise). With respect to the ownership change of the agent's former company, this may have an impact on the status of the buyer agency agreements. As a general rule, if the brokerage entity remains the same (i.e., sole proprietor, partnership or corporation), agency agreements are not affected. When corporations are merged under statute, the survivor corporation takes the rights of the prior entities and again, no changes are needed. However, if the entity changes - one office sells out to another (assuming no statutory merger) - then new agency agreements need to be executed or the existing agreements must be amended to evidence the agreement of the buyer-client to be represented by the new entity. The buyers are also free to enter into new agreements with other brokers instead. In that instance, the agent could enter into new agreements on behalf of the new broker with the buyers. 3.) Contract Issues & Forms - Approved Forms QUESTION: An agent has two listings that are commercial condominiums. They have store fronts and rental apartments upstairs. An offer has been written on a WB-14 Residential Condominium Offer to Purchase form. There is no Executive Summary for the condominiums. Should the offer be written on a WB-15 Commercial Offer to Purchase form and is an Executive Summary needed? ANSWER: Because a "commercial condominium offer to purchase" does not exist, licensees may use either the WB-14 or the WB-15, modified as appropriate to accomplish the intent of the buyer. The DRL recommends that licensees use the form that requires the least amount of modification. As to the issue of the executive summary, under Wis. Stat. § 703.33(7), an executive summary is not required in a sale of a condominium unit that is primarily intended to be occupied and used for non-residential purposes. If that exception does not apply, an executive summary may not be required as part of the disclosure materials for a "small condominium" - up to 12 units - depending upon the elections made in the declaration (Wis. Stat. § 703.365(1) and (8)). 4.) Disclosure - Material Adverse Facts QUESTION: The seller purchased a foreclosure property to turn around and resell, so he never lived in the property. The seller received an offer from a buyer who did a radon test that failed. The seller's attorney has advised the seller that if the radon is not remediated, he would not have to disclose it to future buyers because he has each buyer sign an amendment to the RECR that states: "Seller has never lived in property and property is being sold 'as is' where is, without representation or warranties. Buyer agrees to accept the same as is, where is, with all faults. Buyer agrees that Seller has made no warranties or representations concerning the condition of the property or any part of it. Buyer holds the Seller harmless from any claim for damages relating to the condition of the property. Seller has completed and delivered to Buyer a Real Estate Condition Report in compliance with Section 709.02, Wisconsin Statutes. Buyer agrees that said report is neither a warranty nor representation by Seller. Lines 82-91 of a WB-11 Residential Offer to Purchase or lines 104-115 of a WB-14 Residential Condominium Offer to Purchase are hereby deleted." Is this correct? Even if a seller has never lived in a property and/or has a buyer sign such a disclaimer, doesn't the seller still have a legal responsibility to disclose known defects to a buyer? ANSWER: 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. Unless the buyer agrees to waive rights under Chapter 709, all sellers subject to Chapter 709, whether broker-assisted or FSBO, must complete a Chapter 709 Real Estate Condition Report (RECR) or risk rescission of the offer to purchase. Chapter 709 allows for the buyer to waive the right to rescind as well as the right to receive a RECR. The seller's attorney apparently was setting up an "as is" sale, but in a pure "as is" sale the seller does not make property condition representations and thus does not complete a RECR. Generally, an "as is" clause alerts the buyer that he or she is responsible to determine the condition of the property being purchased. 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 which 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 prevents 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, as was shown in the Grube v. Daun case summarized on page 8 of Legal Update 93.04. Finally, the seller may be liable in an "as is" situation if he or she fails to disclose material conditions which the buyer is in a poor position to discover, as discussed in the Green Springs Farms case (see page 9 of Legal Update 93.04). 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 requires that licensees perform reasonably competent and diligent property inspections and disclose material adverse facts and potential material adverse facts to the parties in writing. This is not waived in "as is" sales. In fact, where 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 adverse facts are disclosed in writing to the buyer, and that all affirmative statements are in fact true. Thus, the licensee would disclose the radon test results if the seller does not do so. 5.) Offer to Purchase - Earnest Money QUESTION: The licensee is working with sellers (foreclosure investors) who have asked the buyer for non-refundable money in the counter-offer. Is this money non-refundable only if the buyer's fails to perform? The concern is that the seller would be able to keep the buyer's earnest money for any default, including those that the seller caused (e.g. not curing a defect as it is in the current offer). ANSWER: Unless the language includes a statement that the money will only be non-refundable if the buyer breaches or defaults, then such language would mean that under all circumstances the money will not be refunded to the buyer. Therefore, no matter what the reason that the transaction fails to close, at the fault of buyer or seller, the earnest money will not be refunded to the buyer. Non-refundable earnest money language is often found in pre-construction or new construction transactions and is steadily gaining popularity within the investor community. Debbi Conrad |