UNDERSTANDING THE HOME EQUITY SALES ACT
Today, the real estate market is in recovery and property prices continue to rise. But for many owners, increasing prices do not mean an increase in their ability to pay their loans. They’re “asset rich and cash poor”. While many will decide to sell their homes, take whatever equity is left, and move on, others may do nothing until they’re facing foreclosure…and for them time may run out before they can sell.
In 1979, the California legislature was concerned that such homeowners whose residences are in foreclosure are at risk of fraud, deception, and unfair dealing by purchasers seeking to get control of their equity for little or no compensation. To hopefully prevent this, the Legislature passed the Home Equity Sales Contract Act (Civil Code 1695 et seq.) which has been a source of substantial confusion and litigation ever since. This Article will attempt to clarify what the Act requires.
First: the Act only applies if all of the following conditions are met:
(1) the property is one-to-four family dwelling units;
(2) the owner occupies one of the units as his or her principal place of residence;
(3) there is an outstanding notice of default recorded; and
(4) the buyer will NOT use the property as a personal residence.
The Act does not apply if any one of these four conditions is unmet. If, for example, a seller occupies a property in foreclosure, but the buyer will be occupying the property as his or her personal residence, the home equity sales law does not apply. If all four conditions are met, however, the buyer must use a home equity sales contract, such as the C.A.R. standard form “Notice of Default Purchase Agreement” and attachments which incorporate the many requirements of the Act including:
– Full Disclosure of all terms of the Agreement;
– A complete description of the terms of payment from the Buyer;
– Any terms for a rent-back; and most importantly,
– Notice of the Five Day Right of Recision, and Cancellation forms.
Significantly, the Act provides that until the time for the Seller to cancel the Agreement has ended, neither the Buyer nor anyone working for him can ask the Seller to sign any deed or any other document. Also, since this right of rescision doesn’t start to run until the Buyer has provided the Notice, the Seller can cancel at any time before the expiration. So if the Buyer never provides the Notice, the Seller can rescind even after the Buyer has recorded their Deed. Furthermore, the legal penalty for violating this Right of Recision is three times the equity plus attorney fees and court costs. Even worse, equity purchaser who violate the home equity sales law may be convicted of a crime punishable by one year imprisonment, plus a $25,000 fine, for each violation.
As for real estate agents, the law requires a buyer’s agent to be bonded by an admitted surety insurer, but there were not insurers willing to offer the bond. This bonding requirement applies to a buyer’s agent or dual agents, but not a listing agent representing the seller exclusively. In 2007, the bonding requirement was stripped from the Act on Constitutional grounds although few people are aware of this.
Significant in the conditions of the Act is that a Notice of Default (“NOD”) has been recorded. The Notice of Default is the first recorded document in a Non-Judicial Foreclosure proceeding, commonly called a “Trustee Sale”. In some cases, an NOD may not have been recorded at the time the Seller enters a purchase contract with the Buyer so that Act would not apply. If however, prior to close of escrow the NOD is recorded, then it appears that the Right of Recision provisions would apply and the Notice of Right of Recision and Cancellation forms would have to be provided to the Seller and the Recision time must expire before the close of escrow can occur. This provision is not waivable by the Seller.
For over 20 years, the attorneys of BPE Law Group, P.C. have been advising and representing property owners and real estate licensees in dealing with their legal concerns and maximizing their opportunities. If you would like a consultation with us, please call our office at (916) 966-2260 or e-mail me at sjbeede@bpelaw.com. Our flat fee consult for new clients may get you the answers you need for the questions you have. Consultation appointments may be held at our Main office in Fair Oaks or at our Satellite office in Sun City Lincoln.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.
Today, the real estate market is in recovery and property prices continue to rise. But for many owners, increasing prices do not mean an increase in their ability to pay their loans. They’re “asset rich and cash poor”. While many will decide to sell their homes, take whatever equity is left, and move on, others may do nothing until they’re facing foreclosure…and for them time may run out before they can sell.
In 1979, the California legislature was concerned that such homeowners whose residences are in foreclosure are at risk of fraud, deception, and unfair dealing by purchasers seeking to get control of their equity for little or no compensation. To hopefully prevent this, the Legislature passed the Home Equity Sales Contract Act (Civil Code 1695 et seq.) which has been a source of substantial confusion and litigation ever since. This Article will attempt to clarify what the Act requires.
First: the Act only applies if all of the following conditions are met:
(1) the property is one-to-four family dwelling units;
(2) the owner occupies one of the units as his or her principal place of residence;
(3) there is an outstanding notice of default recorded; and
(4) the buyer will NOT use the property as a personal residence.
The Act does not apply if any one of these four conditions is unmet. If, for example, a seller occupies a property in foreclosure, but the buyer will be occupying the property as his or her personal residence, the home equity sales law does not apply. If all four conditions are met, however, the buyer must use a home equity sales contract, such as the C.A.R. standard form “Notice of Default Purchase Agreement” and attachments which incorporate the many requirements of the Act including:
– Full Disclosure of all terms of the Agreement;
– A complete description of the terms of payment from the Buyer;
– Any terms for a rent-back; and most importantly,
– Notice of the Five Day Right of Recision, and Cancellation forms.
Significantly, the Act provides that until the time for the Seller to cancel the Agreement has ended, neither the Buyer nor anyone working for him can ask the Seller to sign any deed or any other document. Also, since this right of rescision doesn’t start to run until the Buyer has provided the Notice, the Seller can cancel at any time before the expiration. So if the Buyer never provides the Notice, the Seller can rescind even after the Buyer has recorded their Deed. Furthermore, the legal penalty for violating this Right of Recision is three times the equity plus attorney fees and court costs. Even worse, equity purchaser who violate the home equity sales law may be convicted of a crime punishable by one year imprisonment, plus a $25,000 fine, for each violation.
As for real estate agents, the law requires a buyer’s agent to be bonded by an admitted surety insurer, but there were not insurers willing to offer the bond. This bonding requirement applies to a buyer’s agent or dual agents, but not a listing agent representing the seller exclusively. In 2007, the bonding requirement was stripped from the Act on Constitutional grounds although few people are aware of this.
Significant in the conditions of the Act is that a Notice of Default (“NOD”) has been recorded. The Notice of Default is the first recorded document in a Non-Judicial Foreclosure proceeding, commonly called a “Trustee Sale”. In some cases, an NOD may not have been recorded at the time the Seller enters a purchase contract with the Buyer so that Act would not apply. If however, prior to close of escrow the NOD is recorded, then it appears that the Right of Recision provisions would apply and the Notice of Right of Recision and Cancellation forms would have to be provided to the Seller and the Recision time must expire before the close of escrow can occur. This provision is not waivable by the Seller.
For over 20 years, the attorneys of BPE Law Group, P.C. have been advising and representing property owners and real estate licensees in dealing with their legal concerns and maximizing their opportunities. If you would like a consultation with us, please call our office at (916) 966-2260 or e-mail me at sjbeede@bpelaw.com. Our flat fee consult for new clients may get you the answers you need for the questions you have. Consultation appointments may be held at our Main office in Fair Oaks or at our Satellite office in Sun City Lincoln.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.