Because of the economic consequence of the COVID-19 shut down, jobs have lost and as a result, mortgages will go unpaid and an increase in home foreclosures will occur. Now home prices currently remain high because of the fact inventory is low. So many in default will decide to sell their homes, take whatever equity is left, and move on. However, others may do nothing until they are facing foreclosure. Owners allow this to happen because they just cannot voluntarily let their home go even if the foreclosure strips away whatever equity their home may hold. Accordingly, some who obtain knowledge a property is in foreclosure, contact the defaulting owner and offer deals such a purchase with a rent back option, among other things.
Following the deep recession of the mid 1970s, in 1979, the California legislature was concerned that 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 prevent this, the Legislature passed the Home Equity Sales Contract Act (Civil Code 1695 et seq.) 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 Recission, and Cancellation forms.
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 rescission does not start to run until the Buyer has provided the Notice, the Seller can cancel at any time before the expiration. 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 Recission is three times the equity plus attorney fees and court costs. Even worse, an equity purchaser who violates the Home Equity Sales Act may be convicted of a crime punishable by one year imprisonment, plus a $25,000 fine, for each violation.
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 Rescission provisions would apply and the Notice of Right of Rescission and Cancellation forms would have to be provided to the Seller and the Rescission time must expire before the close of escrow can occur. This provision is not waivable by the Seller. Any provision of a contract which attempts or purports to limit the liability of the equity purchaser shall be void and shall at the option of the equity seller render the equity purchase contract void. The equity purchaser shall be liable to the equity seller for all damages proximately caused by that provision. Any provision in a contract which attempts or purports to require arbitration of any dispute arising under this chapter shall be void at the option of the equity seller only upon grounds as exist for the revocation of any contract.
Bottom line, whether you represent a seller of buyer and the property at issue has a Notice of Default recorded against it be aware that a Home Equity Sale Contract Act situation might exist. This is particularly important if you are an investor or represent. Executed correctly, Home Equity Sales can yield huge profits, but done incorrectly can result in large judgements and big attorney fee bills.
The information contained in this article is for informational purposes only and not to be construed as legal advice. If you have questions, you should seek competent legal representation to assist you.
