Disclosure Is Not an Option Even if it's an REO

Speaking strictly to listing agents/brokers of REOs, are you sure you want the liability? 

In Arizona, the latest craze is going after the REO listings.  Obviously, there is money to be made in any market as long as you are able to adapt to the changes in the market and right now with REOs dominating the share of properties for sale, a lot of agents are jumping in with both feet to get these listings.

This post is geared to Arizona agents, as I am not familiar with other state's revised statutes.  If you have a specific statute in your state that relieves you of disclosure liability please dis-regard.  However, if there is no statute limiting a seller's obligation to disclose, then case law prevails and your risk is determined by your knowledge and willingness to comply.

I have seen many times in the MLS statements that this is an REO or Repossessed property and there will be no Seller's Property Disclosure Statement.  Really!  Why?  When the "why" is asked, most agents reply, "Because the seller has never occupied the property."  OK.  SO WHAT!?!?!  Did you as the listing agent/broker do a BPO?  In the BPO did you note material items such as damages to drywall, shingles missing from the roof, water damage along baseboards, etc.?  If so, the seller is aware, but more importantly, so are you.  In this case, whether your client wants to disclose or not, you as the broker/agent have an obligation to disclose these material matters to the buyer.

We are unique in Arizona as our state constitution gives real estate licensees the right to practice law when writing  contracts.  Along with all rights comes the obligation to be responsible when exercising that right.  In the context of contracts, this means that when your client asks you about a clause in the contract, you have the obligation to explain what that clause means to them.  I question the ability of some agents to meet this requirement when I look at the REO listing agreement they, the listing agent/broker, have signed.  The agreement says, paraphrased, the listing broker/agent will indemnify and hold harmless the seller/lender for any requirements regarding disclosure.  Then the agent is instructed to place in the MLS, "No Seller's Property Disclosure Statement will be provided." 

So the seller has the obligation to disclose and likely knows this.  The seller passes the liability for the disclosure to the listing agent/broker and then refuses to comply and implies by the instruction to the listing agent/broker regarding the MLS comments not to comply either.

Some may take exception to the statement above about seller's likely being aware of the obligation to disclose.  Some might say they may not know.  This would be a stretch given the brilliant writing of the listing agreement but OK,  lets say they are ignorant.  Isn't it the duty of the listing agent/broker to provide good advice and information to their client and let them know what the requirements requiring disclosure are?  Let there be no misunderstanding here.  The answer is YES!  When you don't, that nifty clause about indemnify and hold harmless just gained some major fangs.

Who, with the ability to read and understand contracts, and also has the obligation to explain contract clauses to their clients, would sign such an agreement that exposes them to immense liability? 

For the past three years I have been teaching these requirement obligations to agents that list REO's.  Some of those agents have taken this knowledge and have insisted that their seller's comply.  Guess what.  The seller's are complying.  These agents have told me they were nervous at first because they expected to lose the business to other agents that would not insist on getting the disclosure but this has simply not been the case.  Oh sure they have lost some unscrupulous sellers to other unscrupulous or ignorant agents/brokers but they also tell me they are sleeping better at night.  Imagine a clear conscience doing that.

Are buyer's agents/brokers doing any better?  In some cases the answer is no.  A buyer's agent/broker that writes into the initial offer that, the buyer understands and accepts that they will not be receiving any material disclosure has opened themselves up to legal problems as well. Especially if they have not explained the rights their client has given up by including this clause in the offer.

I had this discussion with a big time Lister of REO properties a few months back and was dismayed at his reasons for not disclosing.  He stated,  "This is the way we have done it for the past eight years without a problem."  So you have gotten away with it for eight years.  Does that mean we only do the right thing when there is a chance we will get caught?  Heaven help us.

Know the law.  Comply with the law.  Represent your clients.  The ramifications are intense if you don't and the rewards are great when you do.