Thanks to a recent act by the state Supreme Court there's some good news for sellers of distressed properties in California. The action had nothing to do with foreclosure procedures, bankruptcy cramdowns, predatory lending, or any of the other mortgage crisis topics du jour. Rather, its effect, by implication, is that sellers whose homes are in the process of foreclosure will now have their property exposed to a larger pool of buyers than they were previously able to. This should have the effect of increasing the competition for their homes, thereby increasing the price they are liable to receive.

This effect of the California Supreme Court's act is not apparent on its face; for all the court did was to deny review of a Court of Appeal decision in the case of Schweitzer v. Westminster Investments. A little history is in order.

The Schweitzer case centered on the bonding requirement that Civil Code Section 1695.17 places on representatives of investors who seek to purchase a home that is in the process of foreclosure (i.e. a Notice of Deficiency has been filed, but the foreclosure sale has not yet taken place). Such investors are known as equity purchasers.

California law places a number of requirements upon equity purchasers. These requirements are designed to provide protection for homeowners who are facing foreclosure. For example, the law requires that any contract between an equity purchaser and a homeowner in foreclosure must provide a right of rescission period for the homeowner before the contract can be consummated.

The particular requirement of Civil Code 1695.17 was that any representative of an equity purchaser must possess (1) a valid California Real Estate license, and (2) a bond equal to twice the fair market value of the property. The latter requirement posed a real problem for the simple reason that such bonds have not been available in the state of California.

It's fair to say that for many years little attention was paid to the bonding requirement of 1695.17. It seemed an arcane requirement, a mere technicality that probably had no real practical effect. Then along came the Schweitzer v. Westminster Investments case. In that case a Superior Court granted rescission of a sale to an equity purchaser "solely because Westminster acted through a representative, and its representative did not have a bond specified in Civil Code section 1695.17…"

That ruling got the attention of many within the brokerage community. It probably wouldn't be a good thing to have brokered a sale that was later undone because your agent had not complied with the law. Because the bond required by the law was still unavailable, prudent brokers instructed their agents not to represent equity purchase investors.

Not surprisingly, the Schweitzer case was appealed. Among others, the California Association of Realtors® (CAR) filed an amicus (friend of the court) brief. One of the points made in the brief was that the bonding requirement had unintended negative consequences for those homeowners who were trying to sell their properties before foreclosure took place. The brief noted that there are different kinds of equity purchase investors.

Some are the "pros." These are the ones who make a business of tracking notices of default, seeking to obtain properties at very low prices with very favorable terms. In this regard, the stories of unscrupulous pros are legion. But, even when the pros operate within the rules, they are certainly the drivers of hard bargains.

The other kind of equity purchaser is what we might call the part-time or amateur investor. These are people who don't make a living doing these kinds of transactions, but who are simply trying to pick up a good investment. Generally, such investors need the help of a representative, a licensed agent who can do the research, locate the properties, and structure the transactions.

The CAR brief noted that, by imposing an impossible-to-fulfill bonding requirement, the law worked to keep part-time investors effectively out of the market by denying them the possibility of representation. It also precluded equity investors from being represented by licensed individuals who operated under the regulations of the Department of Real Estate. As the brief quaintly put it, "only the sharks are left in the pool."

As reported here a few months ago, the Fourth Appellate District Court overturned the Superior Court ruling. The appellate court held that the bonding requirement was "void for vagueness under the due process clause and may not be enforced." While this was immediately received as good news by a variety of parties, reactions were tempered when the appellate decision was then appealed to the state Supreme Court.

Now, though, the Supreme Court has denied review. Hence, the appellate ruling stands. CAR has already informed its members that it will be revising its equity-purchase sales agreements accordingly. Real estate agents will be able to represent equity purchase investors without the cloud of the bonding requirement hanging over them.