It is yet another sign of the times that the California Association of Realtors (CAR) has released a form entitled "REO Advisory". REO stands for "real estate owned" and is the common term for property that a lender has acquired through foreclosure. Actually, CAR has released two forms – the second specifies "REO Advisory (Listing)" -- but the two are identical as to their contents.

The primary purpose of the form is to advise both buyers and agents regarding both the exemptions and the obligations that California law provides for sellers who have acquired property either through foreclosure or by accepting a deed in lieu of foreclosure. The form also addresses the requirements imposed upon agents involved in the sale of such properties.

When an entity -- a corporation or an individual -- acquires a residential property of less than four units through foreclosure, California law exempts that entity, as a seller, from providing a number of disclosures that are normally required in residential sales. Most notably, the seller is not required to provide a Transfer Disclosure Statement (TDS), the form that is mandated by the state in almost all residential sales. Also, an REO seller is not required to provide a Mello-Roos district lien disclosure, or the commonly required Natural Hazard Disclosure Statement.

On the other hand, and contrary to the belief of many REO sellers, there are a number of standard requirements from which the REO seller is not exempt. In particular, as the REO Advisory states, "Seller is not exempt from common law and statutory duties concerning fraud and deceit, even though the specific TDS Form is not required to be completed. Seller remains obligated to disclose known material facts affecting the value and desirability of the Property."

For example, suppose an REO seller has a property that he has never seen and that the property has serious settling problems and significant cracks in the slab. If the seller doesn’t know about these problems, he has no obligation either to find out about them or to disclose them. Now also suppose that someone attempts to purchase the property and that, during an initial inspection period, they discover the problems through the services of a home inspector.

The buyer submits the inspection report to the seller and asks for a price discount. Of course the seller doesn’t have to give the discount and the deal may just come undone. But now the REO seller has actual knowledge of the problem. He would be obligated to disclose that to any subsequent buyer.

In the sale of REO properties, agents have the same inspection and disclosure duties that they have in any other sale. Both listing agent and selling agent must do a "reasonably competent and diligent visual inspection of the accessible areas of the Property and disclose to Buyer material facts revealed by such an inspection … ."

Finally, the REO Advisory contains a section labeled "Other Considerations". There, it is noted that there may be lender-prepared "addenda, amendments, or counter-offers to a Buyer and Seller Agreement, or a Lender-Prepared contract [that] may conflict with, contradict, or be inconsistent with terms in Buyer’s offer." Indeed, it is quite likely that a prospective buyer of REO property will receive such lender-prepared documents. Moreover, the advisory raises the possibility that some of the terms in such documents may not be permissible under California law.

What is a buyer to do if, as is likely, he receives such documents from the lender, documents that look nothing like a standard California real estate contract? Don’t look to the brokers, the advisory advises; rather, "seek legal counsel to discuss the applicability and interpretation of any lender-prepared documents prior to signing such documents."

Published: June 16, 2008

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Bob Hunt is a director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .