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Bank Owned Properties Not Always EXEMPT from Disclosure | By: Cynthia LaChapelle

Bank Owned Properties Not Always EXEMPT from Disclosure

By Cynthia LaChapelle, TREIA President & Broker/Owner of LaChapelle Properties LLC

Many investors have put in offers on properties that have been foreclosed or taken back from an owner. These are called Bank-owned or REO (Real Estate Owned) properties. When making an offer, you are told to tick the box which says these properties are exempt from North Carolina state law requiring Seller Disclosure of defects. Although banks are often exempt from this NC law, when a bank takes a property as Deed in lieu of foreclosure, they must disclose just like everyone else. Only if they go through a legal foreclosure can they be exempt. (Bill Gifford, NCAR attorney published Oct. 30, 2012)

However, Listing Brokers are not exempt. They are required to disclose Material Facts once known. This is a very important law to understand. Once a property has gone under contract at least once, odds are good that the listing broker has been presented with an inspection report or at least told what is wrong. They MUST tell you by law if it is “material.”

Many investors have seen the properties that go under contract only to pop back up in the computer several times. They know there must be problems, but they have been told that they can’t know what they are and will have to make yet another blind offer. Really? The Real Estate Commission has said    that any listing broker who becomes aware of a material fact is required by law to disclose this to potential buyers.

What is a Material Fact? Refer to Chapter 8 of the NC Real Estate Manual:

  • Facts about the Property itself. Any significant defect or abnormality. Examples: a structural defect, a malfunctioning system, a leaking roof, or a drainage or flooding problem.
  • Facts that directly relate to the property. These are typically external factors that affect the use, desirability or value of a property. Examples: A pending zoning change, the existence of restrictive covenants, plans to widen an adjacent street, or plans to build a shopping center on an adjacent property.
  • Facts that relate directly to the ability of a principal to complete the transaction. Any fact that might adversely affect the ability of a principal party to the transaction (seller or buyer) to consummate the transaction. Examples: A buyer’s inability to qualify for a loan; a buyer’s inability to close on a home purchase without first selling his or her currently-owned home; a seller’s inability to convey clear title due to the commencement of a foreclosure proceeding (posting of a notice of sale) against the seller. [Note, however, that the fact that a seller is behind in making mortgage payments is not a material fact until the foreclosure process has officially been started by posting notice of foreclosure sale.]
  • Facts that are known to be of special importance to a party. These are many facts relating in some way to a property which normally would not inherently be considered as “material,” but because they are known to be of special interest or importance to a party, they become a material fact that the agent must discover and disclose. Example: The fact that a residential property may not be used for a home business due to zoning or restrictive covenants normally would not be a material fact that an agent must specifically discover and disclose. However, if an agent working with a buyer knows that the buyer wants to operate a particular home business for his or her home, then the issue of whether the house being considered can be used for that purpose becomes a material fact which the agent must investigate and, if the proposed home business is found to be prohibited, the agent must disclose this fact to the buyer making an offer on the house.

Bottom line- Disclosing this information could lower the price for which the house is eventually sold. This could even lower the whole REO market. When everyone knows these defects before they make the offer, they will likely make lower offers.

You are supposed to be informed by the listing broker of a defect once they know it, and the banks are not exempt at all on properties that they take back without a legal foreclosure. This is important, because the buyers, whether they be investors or owner occupants would actually absorb less of the real estate foreclosure losses than they have been doing by overpaying for REO properties. What happens if the banks or Brokers violate this law knowingly or unknowingly? That is a question for your attorney. They can best tell you your legal rights and remedies.

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