It is well known that the number of California residential properties that are in the stages of foreclosure is considerably higher than it was just a few years ago. (The number is not nearly as significant as some make it out to be; but that is another story.) When the number of default notices rises, a certain kind of investor interest is stimulated. Many of these investors choose to work with real estate agents who are liable to have greater access to information about properties in, or about to be in, the foreclosure process.

Such investors, as well as those who would represent them, would do well to consider the recent case of Ingo Schweitzer v. Westminster Investments et al. (Riverside Superior Court #RIC 408450).

In the fall of 2002, Schweitzer ceased making payments on his property, and shortly thereafter a Notice of Default was filed. Westminster Investments made an offer to him whereby the default was cured (about $20,000), there was cash to the seller, and an agreement for Schweitzer to continue to live in the property as a renter. Subsequently, in the trial, the court agreed that there was nothing unconscionable about this agreement, and that it was conducted substantially within the law governing these situations.

When the rental period terminated, Schweitzer refused to leave the property. An unlawful detainer action was filed; whereby Schweitzer filed a lawsuit for rescission of the sale. The suit for rescission was granted, and Schweitzer got the property back "solely because [Westminster] acted through a representative, and its representative did not have a bond specified in Civil Code section 1695.17 … " (from the friend of the court brief filed by the California Association of Realtors® [CAR]).

California Civil Code section 1695, and following, spells out a variety of protections for people in the kind of trouble that Schweitzer was in, and who have received an offer to purchase from an investor. (The code does not apply if the buyer intends to occupy the property as a personal residence.) Among the requirements is that any representative of the investor must have a special bond in the amount of twice the value of the property. Unfortunately, such bonds are not available in the state of California.

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 Schweitzer v. Westminster Investments shows that it is not irrelevant. I suspect that most represented investors would be somewhat more than miffed if they had to give back a property because their representative had not had the required bond.

Recently, CAR filed an amicus curiae brief, in support of Westminster Investments, with the California Court of Appeal in the Fourth Appellate District. The brief is a short one. Basically, it argues that, given the unavailability of these bonds, the particular section of the law that requires them should be stricken. The argument is based on a jurisprudence principle embodied in California Civil Code section 3531, "The law never requires impossibilities." If the surety bonds are not available, the law ought not to require them.

The brief goes on to point out that the bonding requirement is actually detrimental to those whom the law is designed to protect. If your "ordinary" investor, who needs the services of an agent, is prevented from being a potential buyer of properties "in distress," then the result is that the only buyers left are the pros. And they are likely to be much less accommodating to sellers who are about to lose their property.

Investors and their agents should hope that the bonding requirement of Civil Code section 1695.17 is stricken by the appellate court. If it is not, both parties need to be very, very careful.

Published: July 13, 2007

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Bob Hunt is a director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .