Sale of property by bank not subject to disclosure requirement

March 13, 2007 | Roger McEowen

The Iowa Real Estate Disclosure Act (IRDA) requires sellers of real estate to deliver a written disclosure statement to prospective buyers. The disclosure must include certain information about the condition and important characteristics and structures on the property. But, there are exceptions to the disclosure requirement. The question in this case is whether a bank that acquires property via a deed in lieu of foreclosure, and then re-sells the property is subject to the disclosure requirement. Under the facts of the case, the bank held a mortgage on an acreage that contained a manufactured home that was in poor condition. When the owners ran into financial trouble, the bank accepted a deed in lieu of foreclosure. The plaintiffs expressed an interest in buying the property, and the bank showed the plaintiffs an appraisal that valued the property at $130,000. The appraisal referred to the home as a “manufactured home” or as a “modular home.”  The plaintiffs eventually bought the property for $121,500 and, when seeking insurance for the property, claimed that they learned for the first time that the home was a manufactured home. The plaintiffs sued for fraudulent misrepresentation and failure to disclose under the IRDA. The trial court ruled for the bank on the basis that the IRDA did not apply to the sale because the bank had obtained the property by deed in lieu of foreclosure, and the jury ruled for the bank on the fraudulent misrepresentation issue. The plaintiffs appealed the trial court’s grant of directed verdict for the bank on the disclosure issue.

The appellate court noted that the statutory list of exceptions to the disclosure requirement (Iowa Code §558A.1(4)(b)) was confusing, but reasoned that the purpose of the exception was to relieve from the disclosure requirement commercial lenders that do not occupy residential property, but merely hold title for security purposes. The court also noted that had the bank acquired the property after a “sale” the statute would clearly have exempted the sale from the disclosure requirement. The deed in lieu of foreclosure technique was provided by the legislature as an alternative to judicial foreclosure and sale proceedings, but put the bank in exactly the same position. Thus, the court reasoned that whether the bank acquired the property by a sale following foreclosure or by deed in lieu of foreclosure should produce the same result as far as the IRDA is concerned. So, the sale of the property to the plaintiffs was not a “transfer” subject to the IRDA’s disclosure requirement.Wanfalt v. Burlington Bank and Trust, 729 N.W.2d 828 (Iowa Ct. App. 2007).