As
a lender, can’t we just use the standard TREC or TAR Contract presented
by the broker?
You
can, but we advise against it. Both the Texas Real Estate Commission and the
Texas Association of Realtors form residential and commercial contracts are
meant to be fair to both the buyer and seller in a standard transaction. But
sale of OREO is not a standard transaction-the lender is acting as a liquidator
and as such, should not be subject to the same after sale risks as a long
term owner/seller of the realty.
What
are the risks in using the standard forms?
The
lender should always sell the OREO in its "as-is, where-is" condition.
To be effective, the as-is language should track the language acceptable under
Texas case law. Also, the lender should always contract for a special warranty
deed.
Why
conveyance by Special Warranty?
Under
a general warranty, the lender becomes liable for defects in the chain of
title from the beginning of the chain. Under a special warranty, the lender
is only responsible for defects occurring from the date of the foreclosure
sale when the lender took title. Also, if the lender gave a general warranty
and the title company paid a claim on a title defect, the title company can
sue the lender for its loss under a theory of subrogation.
What
else should be changed?
We
recommend a reasonable inspection period for the buyer (at least 14 days)
in every case to ensure adequate inspection and to make sure the "as-is"
language will be honored by the courts. If a free look period is given, then
there should not be a separate financing contingency in the contract.
What
other changes are important?
The
lender should limit the closing period to a date certain and take out the
language allowing extensions if the third party lender financing the purchase
is not ready to close.
What
about limiting remedies?
This
is a very good idea. If you limit remedies, the limitations should be mutual
(a default by Seller-Buyer gets the earnest money; a default by Buyer-Seller
keeps the earnest money). The language must make it clear that the stated
remedies are the "sole and exclusive" remedies of the parties.
Should
we include Arbitration language?
No.
If you limit the remedies to the earnest money, arbitration will just tie
up the resale of the property for an extended time.
The
title company wants us to sign an all bills paid affidavit. Should we?
No,
not without modification. The lender has no way of knowing what debts and
liens encumber the property, especially on a failed construction project.
Part of the consideration in the negotiated sales price should be the buyer
taking the risk of debts and liens on the property. This is particularly true
on new construction where lien affidavits may be filed after the closing.
Should
we be selling OREO property without consulting an attorney?
Probably
not. When the property is "liquidated" at a bargain price, the lender
clearly does not want post closing liabilities to appear. This requires an
appropriately prepared contract, deed and closing instructions.