Many, but far from all, California real estate agents and brokers know that state law places extensive restrictions on an investor's ability to negotiate a sale with a homeowner whose residence is in foreclosure (specifically, against whom a notice of default has been filed). The contract to be used must meet certain specifications. The seller must be given a five-day right of rescission. No money may be given to the seller until the right-of-rescission period has elapsed, nor may any transfer of the property occur prior to that time.

Of extreme importance is the provision in Civil Code Section 1695.17, which relates to the representatives of investors in these situations. There are two requirements. The representative must possess a valid California Real Estate license. The representative must possess a bond equal to twice the fair market value of the property.

Unfortunately, no such bond is available in the state of California. Hence, no one may legally act as the representative of an investor who is seeking to purchase an owner-occupied residence that is in foreclosure.

More than a few investors and agents have treated the Civil Code requirement as if it were an irrelevant technicality. Well, maybe it is a technicality, but the case of Schweitzer v. Westminster Investments has shown that it is not irrelevant. In that case, a Riverside Superior Court granted rescission to the former homeowner "solely because Westminster acted through a representative, and its representative did not have a bond specified in Civil Code section 1695.17… ." (from a friend of the court brief filed by the California Association of Realtors® CAR).

It is not surprising, then, that many in the real estate community were delighted to learn of the December 2007 ruling by the Fourth Appellate District Court, which heard an appeal of the Schweitzer case. In a published opinion that court ruled that "the bond requirement of 1695.17 is void for vagueness under the due process clause and may not be enforced."

The court noted that "a statute is void for vagueness if persons of common intelligence must guess as to its meaning and differ as to its applications." It then went on to point out a number of reasons for saying that this applied to the bonding requirement in question. The court held that the amount of the bond was ambiguous because it could not be determined whether an individual bond was required for each separate transaction, or whether a blanket bond covering several transactions would suffice.

The appellate ruling also stated that the statute did not give "adequate notice of other essential elements of a bond that would guide a representative to know what bond would comply with the statute." It didn't state who was to be named as the obligee of the bond, what would be the conditions of payment, or who was to be the beneficiary. Nor did the statute specify delivery and posting requirements, all of which are necessary elements of a bonding requirement.

The appellate ruling in the Schweitzer case is good news for all parties concerned. It would even be good news for sellers of distressed properties, because it would increase the exposure of their properties to the marketplace.

However, it is not quite yet time to break out the bubbly. Just before the deadline, a notice of appeal to the state Supreme Court has been filed. We shall have to wait a little longer to see if this awkward piece of legislation is finally going to be overturned.