Although the bubble never popped, it is true that some of the air has gone out of a number of real estate markets around the country. One evidence of this is an increasing number of foreclosures and mortgage delinquencies. And when that happens, real estate agents experience an increase in calls and inquiries from investor clients who want them to be on the lookout for distress situations, where the owner is in default but the property has not yet gone back to the lender.
In California, investors and those who would represent them need to be extremely careful in these kinds of situations. California law (Civil Code Sections 1695 - 1695.17) sets forth a number of very stringent requirements that are designed to protect homeowners who are facing foreclosure. The law deals with what are known as equity sellers, equity purchasers, and representatives of equity purchasers.
An equity seller is a person who owns and occupies a residence -- which may be a single unit or one of up to four units -- that has an outstanding and properly recorded notice of default against it. Thus, an owner of a commercial building in default would not be an equity seller, nor would the owner of a single-family home in default, if the property were not occupied by the owner.
An equity purchaser, under the Civil Code, is a person who is, or attempts to, acquire title to an owner-occupied residence in foreclosure and who does not acquire the property for the purpose of making it his or her residence. Excluded from the definition of equity purchasers are those who purchase property at a foreclosure sale and also those who acquire the property from a spouse, blood relative, or blood relative of a spouse. If your brother-in-law's house is in foreclosure, and you buy it as an investment, you are not subject to the restrictions on equity purchasers.
Finally, a representative of an equity purchaser is any person who solicits, induces, or causes an equity seller to transfer title to an equity purchaser. A representative of an equity purchaser must have a current California real estate license and must also have a bond from an admitted insurer in an amount equal to twice the fair market value of the property. An equity purchaser's representative must supply an equity seller with written proof of having fulfilled these requirements.
A sale contract or an offer to purchase between an equity seller and an equity purchaser must comply with specific provisions of the law. For one thing, if the transaction has been negotiated in a language other than English, the contract must be written in that language. Most notably, the agreement must contain a provision allowing the seller to cancel, without penalty, until midnight on the fifth business day following the day the contract was signed, or until 8:00 A.M. of the day scheduled for the foreclosure sale, whichever occurs first.
During the seller's five-day right of cancellation period, the equity purchaser may not accept from the seller, or induce the seller to execute, any instrument that would convey an interest in the subject property. Nor may the equity purchaser pay any consideration to the seller during the cancellation period. It is not ok, for example, for the buyer to do something like, "I'll give you $5,000 right now to sign the contract, even if you do have the right to cancel in 5 days."
Violations of these provisions can result in criminal penalties including jail time and substantial fines. In situations where a purchaser has taken unconscionable advantage of the seller, the seller may have a right to rescind the sale for up to two years.
Finally, we turn to the Catch 22 aspect of the law governing the representatives of equity purchasers. The law requires that the purchaser's agent must have a bond. Unfortunately, no such bond is available in the state of California. Hence it is impossible to comply with the law's requirements.
The California Association of Realtors® (CAR) has come up with a "work around" solution whereby an equity purchaser's agent essentially becomes a referral agent. But that is not something to try to explain here. Any agent who wants to represent an equity purchaser should go over the matter carefully with his or her broker and their company attorney.
