Deeded Interest: Seller beware … disclosures
Until last week, I had an attractive midvalley home listed in a unique, convenient, family-friendly neighborhood. After a six-month listing period, it expired and may come back to me when the current owner decides to re-list.
While the home was active on the MLS and being marketed by me and my firm, we received seven offers and went under contract twice. In the end, both potential buyers asked for a significant reduction after their respective inspection periods, and the seller ended up rejecting both. About the same time the last offer fell out, the Lake Christine Fire struck which stopped showing activity in the Basalt/Willits area cold — at least for a week or so. Missouri Heights activity was affected longer.
As a result, I warned the seller they were in danger of missing the market. Time was of the essence, summer was ticking away. I decided, as their broker of record, it was my job to give them a kick in the pants and encouraged them to make needed repairs, lower the price and keep the momentum going before we got stale and lost among other newer listings.
But there’s more to the story. This home was one of the few offerings in our area owned by a bank. For clarity, this bank is located in another state and is not local. It’s what brokers call an REO, which is what occurs after the former owner loses the home to foreclosure. While we saw an avalanche of these kind of offerings here and around the nation during the recession, the market has rebounded significantly and so this one stuck out like a sore thumb.
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Because of this home’s unique status, it got a lot of attention early because those that have experience with banks know most are motivated to get assets like this off their books. That can mean a real savings for buyers if they are willing to accept the home in “as-is” condition. Interested parties then bring offers with those additional costs in mind monetizing what might be required to bring things back to original condition. In this case, the home needed a fresh coat of paint inside and out, the carpet was thrashed and the roof was nearing the end of its useful life.
While many of these to-dos were obvious to the naked eye, it’s what you couldn’t see that ended up scuttling both deals. The two separate inspections, performed by two different inspectors, revealed additional problems. Plumbing leaks, mold and rodent infestation were among them. All these problems can be mitigated, but as these types of properties are always offered “as-is” the bank considers those costs when they price the property. In this case, the new issues were previously unknown to the seller and, in turn, the bank indicated they were willing to consider a reduction of the original negotiated sales price if presented with estimates supporting the proposed cost of repair.
In one case, the potential buyer even submitted a spread sheet with three estimates for each issue. She then calculated the average and asked for that amount as a reduction. Sorry to say, not only did the bank not accept that proposal but, when this particular buyer said she was willing to split those additional costs, her final offer to resolve the issues and make the repairs on her own was summarily rejected. The bank wanted to make their own repairs, using their own contractors and then sell the home for more money than these two buyers thought made sense.
After dismissing an all-out effort by me, my managing broker, even the brokers representing the buyers to convince the bank to reconsider, things really got interesting. I pointed out that we now had a problem; an issue we all needed to acknowledge and address.
Although the bank had been offering the home “as-is,” we were all now in possession of new information. The more obvious issues we were previously privy to were now compounded and multiplied by two new, highly detailed written reports showing other problems as provided by the two potential buyers via their professional inspectors. This information could not be simply swept under the rug. The bank could still offer the home “as-is” but were now required by law to disclose all we had recently learned to any new potential buyer.
I figured they all had a good handle on that critical concept until I was challenged and ultimately asked a “hypothetical” question by one of the bank managers.
“What if we fired you, made the repairs ourselves and then hired another broker?” he asked.
As surprised and shocked as I was, it made me think. If a bank manager in the REO department didn’t get it, how many sellers out there might also be confused about this?
Disclosure is a fairly simple concept but if ignored, can have significant and serious consequences. In this case, if this bank and its employees are reckless enough to attempt to hide these less obvious defects, even if they are repaired or corrected, they could be subject to legal action that could include the right of rescission requiring the bank to buy the property back. It could even result in charges of fraud or punitive damages for complicit individuals including real estate brokers and even their firms.
Mold, previous leaks, known foundation instability are all examples of latent defects that must be disclosed to buyers, ideally in writing through an instrument known as a Sellers Property Disclosure form. Such defects are not always visible and are often behind walls or underground but if not discovered or disclosed can adversely affect value. Another way to drive the point home, if your bathtub leaks thru the ceiling and you repair the leak, replace the drywall and paint the ceiling, leaving no visible trace the damage ever happened — you still need to let the next buyer know. It can be counterintuitive, an out-of-sight, out-of-mind mentality, but a step that cannot be ignored, disguised or even forgotten on the part of a seller. In the end, it’s just not worth the risk and it’s better to be up front even if it means less at the closing table.
Today, my former listing sits unlisted and unsold. I have no idea if they plan to hire another broker or will ask me to continue where we left off. But one thing’s for sure, if it does come back my way, I’ll be sure we make the proper disclosures, not only for the sake of my client, but for me, my firm and the buyer.
By the way, if another broker takes over, they too must disclose what they know and discover. It’s not only the law, but the right thing to do. It really comes down to an honor system of sorts, one that breaks down amid omission and deception.
Scott Bayens (GRI, ABR, CNE) is a realtor with Aspen Snowmass Sotheby’s International Real Estate with more than a decade of experience with buyers and sellers. Scott can be reached at firstname.lastname@example.org.
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