The Standard Forms Committee of the California Association of Realtors® (CAR) recently released a draft version of a "Foreclosure Property Purchase Agreement." The draft was circulated for comment and questions at the January meeting of CAR directors in Monterey. A final version of the contract will be available in April.

The timing of this release should not be taken as a market prediction on the part of CAR. The document has been in the works for some time. Nonetheless, you don't have to be a doomsayer to expect that the number of foreclosures is going to rise over the next few years. Even without a market crash, or a bursting of the alleged bubble, it is reasonable to surmise that the enormous number of refinances in the past few years, which resulted in a general reduction of equity, will have at least some negative fallout. There will be overextended people who lose their homes.

Real estate agents are frequently approached by investors who ask the agents to be on the lookout for homes that are in foreclosure. In California law, such investors are termed "equity purchasers." An equity purchaser is one who acquires a home in foreclosure for investment purposes, not for use as his or her own personal residence. This is not a person who buys the property at the foreclosure auction, but rather one who deals with the homeowner during the foreclosure period prior to the public sale.

If it's true that home mortgage defaults will be on the rise, then agents can expect to receive more contacts and inquiries from equity purchasers. California agents need to proceed very carefully in such circumstances.

California Civil Code sections 1695 -- 1695.17 spell out requirements that have been put in place to afford a certain amount of protection to often unwitting homeowners who are facing foreclosure. Failure to comply with these requirements may not only result in substantial fines and possible imprisonment, but also a right of rescission of the transaction for up to two years after the close of escrow.

There is not room here to enumerate all the particulars of the law in this regard. The main one is that a homeowner in foreclosure, has up to five business days to cancel the sale contract, dating from the time the agreement is made. Moreover, during that five business day period, the equity purchaser may neither ask for, nor receive, a deed or any form of encumbrance from the homeowner. Nor may the purchaser pay any consideration to the homeowner during that period.

As far as agents are concerned, the law contains a bizarre and important catch-22 provision. It provides that any agent representing an equity purchaser must not only have a California real estate license, but also that agent must possess a bond in the amount of at least twice the value of the subject property. What's so odd about this requirement? No such bond is available in the state of California.

Given the unavailability of such bonds, no one can legally act as an agent of an equity purchaser in California. Doing so would subject the agent to the fines and penalties mentioned above, and would also make the contract voidable. This would also apply to a seller's agent attempting to be a dual agent.

So why would CAR produce a contract form to cover equity purchases? To protect agents who become involved in these situations from running afoul of the law and/or jeopardizing the transaction.

In essence, the CAR contract provides for a termination of the agency relation between the real estate licensee and the equity purchaser. The licensee becomes a referral agent, very much like what happens when an agent brings a buyer to new home sales. Additionally, the contract contains the notice of cancellation provisions that are required by law.

Whether this contract will work, or be used, remains to be seen. The best hope is that market conditions will never create a need for it.