This article examines the equity purchase restrictions which must be known and applied by all investors buying owner- occupied, one-to-four unit residential property during foreclosure.


The equity purchase sales scheme


An equity purchase (EP) transaction takes place when an owner-occupied, one-to-four unit residential property in foreclosure is acquired for rental, investment or dealer purposes by a buyer, who is called an EP investor. Conversely, an EP transaction does not occur and the EP rules do not apply if the buyer acquires the property for use as his personal residence.


Equity purchase statutes apply to all buyers who are EP investors regardless of the number of EP transactions the investor completes. The investor does not need to be in the business of buying homes in foreclosure for the statutes to apply to him. [Segura v. McBride (1992) 5 CA4th 1028]


Both the EP investor and his agent must comply with EP law or be subject to drastic penalties.


Also, all agents need to be aware that the EP agreement signed by an EP investor must be printed in bold type, ranging from at least 10-point to 14-point font size, and be in the same language used during negotiations with the seller-in- foreclosure. [Calif. Civil Code §§1695.2, 1695.3, 1695.5]


Thus, the EP investor and all the agents involved in the transaction must use a written agreement containing statutory EP notices. Failure to use the correct forms subjects the EP investor and the agents to liability for all losses incurred by the seller- in-foreclosure, plus harsh penalties. [Segura, supra]


Editor’s note — first tuesday’s Equity Purchase Agreement, Form 156, complies with all statutory requirements and properly sets forth the right of the seller-in-foreclosure to cancel. [See Form 156 accompanying this chapter]


Cancellation within five business days


Prior to closing a sale, a seller-in-foreclosure has a statutory five-day right to cancel the EP agreement he has entered into with an EP investor. Thus, the seller can avoid the sale entirely, with or without cause.


The EP investor’s compliance with the requirement of a written purchase agreement incorporating the EP rules grants the EP seller the automatic five-day right to cancel the agreement before a closing can take place. If the seller cancels within the period, the sale under the purchase agreement cannot be closed.


When the notice of the seller-in-foreclosure’s cancellation rights are properly contained in the EP agreement, the seller’s cancellation period ends at:


·     midnight (12:00 a.m.) of the fifth business day following the day the seller enters into any type of purchase agreement with an EP investor; or


·     8:00 a.m. of the day scheduled for the trustee’s sale, if it is to occur first. [CC §1695.4(a)]


The seller-in-foreclosure’s five-business-day right to cancel does not begin to run until proper notice of the cancellation period is given to the seller. [CC §1695.5]


The first and proper time for giving the seller-in-foreclosure the notice is in the EP agreement. Failure to do so allows the seller to cancel the sales agreement and escrow, even to rescind the sale after closing, until the notice is ultimately given and the five business days have run without cancellation.


A business day is any day except Sunday and the following business holidays: New Year’s Day, Washington’s Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans’ Day, Thanksgiving Day and Christmas Day. Thus, Saturday is considered a business day under EP law, unless it falls on an enumerated holiday. Many state holidays are not included as holidays. [CC §1695.1(d)]


Until expiration of the right of the seller-in-foreclosure to cancel the transaction, the EP investor may not:


·     accept or induce a conveyance of any interest in the property from the seller;


·     record any document regarding the residence signed by the seller with the county recorder;


·     transfer an interest in the property to a third party;


·     encumber any interest in the residence; or


·     hand the seller a “good-faith” deposit or other consideration. [CC §1695.6(b)]


However, escrow can be opened on acceptance, and deeds and funds deposited with escrow, since the seller-in-foreclosure is not delivering a conveyance (to the buyer) and will not receive funds until the close of escrow.


In negotiations with the seller-in-foreclosure, the EP investor, as with any buyer or agent, may not make false representations or misleading statements about:


·     the value of the property in foreclosure;


·     the net proceeds the seller will receive on closing escrow [See first tuesday Form 310];


·     the terms of the purchase agreement or any other document the EP investor uses to induce the seller to sign; or


·     the rights of the seller in the EP transaction. [CC §1695.6(d)]


Cancellation of the purchase agreement by the seller-in- foreclosure is effective on delivery of the signed written notice of cancellation to the EP investor’s address in the purchase agreement. [CC §1695.4(b)]


When the EP investor receives the seller-in-foreclosure’s written notice of cancellation, he must return, without condition, any original contract documents, such as the EP agreement bearing the seller’s signature, to the seller within ten days following receipt of the notice. [CC §1695.6(c)]


Accordingly, the EP investor should not place funds in escrow before expiration of the cancellation period and a request for funds is made by escrow since an EP investor is not permitted to couple the release of funds to the return of documents on cancellation.


When the cancellation period expires for lack of a cancellation, the purchase agreement becomes enforceable and escrow can be closed, unless other contingencies exist.


Requirements for every EP investor


A homeowner defaults on a note secured by a trust deed on his principal residence, a one-to-four unit residential property. A Notice of Default (NOD) is recorded under a power-of-sale provision in the trust deed.


A private lender, who has no knowledge of equity purchase (EP) laws, orally agrees to refinance the property on the condition the owner transfers the property’s title to the private lender. The private lender agrees to take title and refinance the existing loan on the property since he has good credit.


The owner will remain in possession and make monthly payments to the private lender. The owner will recover title when he pays off the private lender and assumes the refinancing.


The private lender is a real estate licensee, but at no time acts as an agent in the transaction. The private lender (erroneously) believes he is purchasing ownership to the real estate since he will receive a grant deed and remain the vested owner of the property until it is “repurchased and reconveyed” to the homeowner.


Without a written purchase agreement or escrow instructions to document the terms of the transaction, the owner conveys title to the private lender by a grant deed which is immediately recorded.


Concurrent with the conveyance, the owner enters into a written sale-leaseback agreement with the private lender, calling for the payment of “monthly rent.” The lease agreement includes an “option” allowing the owner to repurchase title to the property on his payment of a fixed sum of money, being the balance due the private lender. The sale-leaseback and option agreement also states the private lender reserves the right to sell the property on the owner’s default.


The owner receives no funds for his equity at any time. On acquiring title, the private lender pays off the existing trust deed loan with his own funds.


The private lender then transfers the property’s title to himself and his spouse. The couple then refinance the property to recover their funds by obtaining a new first trust deed loan secured by the property. The private lender pays all costs relating to the new loan, including title insurance premiums, escrow fees and loan charges.


Later, the private lender again refinances the property when interest rates drop to increase his cash flow under the sale- leaseback and option agreement. Prepayment penalties are incurred on the payoff, as well as origination costs for the new loan.


The owner then defaults on the monthly payments due on the lease. A 3-day notice to pay rent or quit is served on the owner. Eventually, the owner is evicted from the property.


The private lender then sells the property to a buyer who is unaware of the owner’s option rights to repurchase the property, called a bona fide purchaser (BFP). No sales proceeds remain after the loan is paid off, due to a decline in the property’s value after taking title and the addition of two sets of refinancing charges. The owner receives no money from the sale.


The owner makes a demand on the private lender to recover the value of his equity in the property based on the property’s value at the time of the sale-leaseback transaction.


Is the owner entitled to recover the amount of his equity from the lender?


Yes! The owner is entitled to recover money equal to the fair market value of his equity at the time he conveyed title to the private lender, less any funds he received from the private lender, which were none.


Recovery of the owner’s lost equity is allowed since the private lender violated the EP laws by each of the following events:


·     acquiring recorded title to the owner’s principal residence, consisting of a one-to-four unit residential property in foreclosure, without first entering into a written purchase agreement which conforms to EP statutes [CC §1695.6(a)];


·     failing to document in writing (a note) the terms for repayment of the loan [CC §1695.3(c), 1695.3(d)]; and


·     further transferring title to the property (to the spouse and again to the resale buyer) without the written consent of the owner. [Boquilon v. Beckwith (1996) 49 CA4th 1697; CC §1695.6(e)]


Editor’s note — The private lender in our facts should have structured the transaction as a conventional loan, evidenced by a note and secured by a trust deed on the property. Note and trust deed documentation of the loan would have avoided compliance with EP laws and the penalties for failure to comply due to the transfer of title. Title does not transfer when a trust deed lien is used to secure the repayment of a loan.


Brokers limited to listing property


Equity purchase (EP) legislation regulates brokers when they act as a buyer’s agent for EP investors who attempt to buy an owner-occupant’s home that is in foreclosure.


The broker representing an EP investor must, when negotiating an EP transaction, deliver to the seller-in-foreclosure a written EP disclosure statement that the buyer’s agent representing the EP investor is:


·     a licensed real estate broker; and


·     bonded by a surety insurer for twice the property’s fair market value. [CC §1695.17(a)]


If the buyer’s agent fails to deliver the EP disclosure statement to the seller-in-foreclosure, directly or through the seller’s listing broker, the EP agreement is voidable at the discretion of the seller any time before escrow closes. [See first tuesday Form 156 §16]


Also, the EP investor is liable to the seller-in-foreclosure for any losses arising out of the buyer’s agent’s nondisclosure of licensing and bonding requirements. [CC §1695.17(b)]


However, the EP investor would be entitled to equitable indemnity from his agent, a reimbursement for the seller’s losses caused by the agent’s nondisclosure. Equitable indemnity is available to the EP investor who, without active fault on his part, is forced by legal obligation to pay for losses created by his agent’s nondisclosure. [San Francisco Examiner Division, Hearst Publishing Company v. Sweat (1967) 248 CA2d 493]


For the buyer’s broker, obtaining a surety bond is generally economically prohibitive. Due to bonding requirements, licensed real estate brokers have essentially been removed from representing EP investors who want to locate and purchase owner-occupied, one- to-four unit residential property in foreclosure for EP investors.


Thus, EP investors are learning to “go it alone,” now (and in the future), without brokerage assistance.


Further, sellers-in-foreclosure are denied the full assistance of their listing broker. The EP statutes, while restricting brokers who represent EP investors, have effectively wiped out the listing broker’s ability to bring in one of his investors as a buyer and be a dual agent in an EP transaction. 

Broker as principal


The EP legislation does not restrict the ability of an individual, who may coincidentally be licensed as a broker or sales agent, to act solely as a principal purchasing property as an investor in an EP transaction.


Thus, a licensed real estate broker or agent may himself be the EP investor, eliminating use of the agency law disclosure as well as avoiding licensee disclosure and bonding requirements. The licensed real estate broker or agent, acting solely as an EP investor, is a buyer who merely happens to hold a real estate license — a fact which does not need to be disclosed to the seller-in- foreclosure since the licensee is not also acting as an agent for anyone in the transaction.


Conversely, if a real estate broker employed as the listing broker by a seller-in-foreclosure decides to directly or indirectly buy his client’s property, he must disclose to his seller-client that he is also acting as a principal in the transaction. [Calif. Business and Professions Code §§10176(d), 10176(g), 10176(h)]


Representing the seller


Prudent brokers and agents are inclined not to solicit or accept an exclusive right-to-sell listing from a seller-in-foreclosure. Property in foreclosure must be sold and escrow closed before the date of the trustee’s foreclosure sale to have fully performed the employment and be entitled to a fee.


Unless the delinquent loan is brought current prior to five business days before the trustee’s sale or paid in full before the sales date, the home will be sold at the trustee’s sale. [CC §§2924c(e), 2903]


The listing agent for a seller-in-foreclosure usually needs extra time to find a buyer and close escrow since the frequency of foreclosures is inversely related to the volume of sales. The time constraints imposed on the listing agent by a trustee’s sale date, before which the listing agent must close any sale of the property, place extra pressure on the broker employed under an exclusive listing agreement to locate a buyer.


As always, the listing agent acting under an exclusive listing must perform his agency duties owed the seller by properly marketing the property with care and diligence. As a further complication, the seller-in-foreclosure expects the broker to save his equity by negotiating a sale of the property and closing escrow before the property is lost to the foreclosing lender.


If the insolvent seller loses his equity, he may claim a lack of due diligence or unprofessional conduct on the part of the broker to locate a buyer and close an escrow — a risk the broker and his agents take when listing a home which is in foreclosure.


Other EP agents


The agent placing a listing of an owner-occupied residence in a multiple listing service (MLS) when the residence is in foreclosure should advise participating buyer’s agents that:


·     the property is an owner-occupied residence which is in foreclosure; and


·     the participating agent is to represent a buyer-occupant or be bonded if representing an EP investor.


Although purchase transactions by buyer-occupants are not controlled by EP law, buyer-occupants are frequently unwilling to purchase property in foreclosure since the property is often:


·     physically damaged or unattractive due to deferred maintenance; and


·     improperly encumbered since either the buyer cannot assume or will not assume the loan on the terms demanded, or the property cannot be refinanced for an amount sufficient to pay off the existing loan and the lender will not agree to a short payoff.


Thus, the property is attractive primarily to an investor-type buyer who is willing to take these risks. The property must be rehabilitated and financing and operating costs carried until the property is resold or rented — at a profit or a loss.


Two-year right of rescission


A Notice of Default (NOD) is recorded on a homeowner’s personal residence after several months of unpaid installments.


The homeowner, now in foreclosure, is willing to sell on almost any terms to salvage his remaining credit and equity in the property.


The property is listed with a broker. The broker’s listing agent markets the property primarily to buyers who will occupy the property as their personal residence.


However, an offer is submitted directly to the seller-in- foreclosure by an EP investor, acting on his own account, without broker representation. Under the EP offer, the seller-in- foreclosure will receive cash for his equity. Additionally, the EP investor will cure the seller’s loan delinquencies.


The seller-in-foreclosure contacts his listing broker who, after reviewing the offer, recommends the seller accept the EP investor’s offer and, if an acceptable backup offer is received within the cancellation period, accept the backup offer and cancel the EP agreement.


The agent advises his client he has five business days after his acceptance of the EP offer to cancel the sale since the sale involves the seller’s home, which is in foreclosure.


The seller-in-foreclosure accepts the EP investor’s offer. The five-day cancellation period expires without receiving a backup offer and escrow is opened on the EP agreement. The EP transaction is later closed and the property conveyed.


Does the EP investor receive good title when he accepts the grant deed?


No! The EP investor’s title remains subject to the seller-in- foreclosure’s right of rescission for two years after closing. If at any time during the two years following the close of escrow and the recording of the grant deed conveyance the seller believes the EP investor’s conduct and the price paid gave the EP investor an unconscionable advantage, the seller may attempt to rescind the transaction and recover the home he sold. [CC §1695.14]


The unconscionable advantage


The two-year rescission period only allows a seller-in-foreclosure to recover property if he can demonstrate the EP investor took unconscionable advantage of him when negotiating the purchase of the property.


Showing the existence of an unconscionable advantage in the EP investor’s conduct is problematic for both the seller-in- foreclosure and the EP investor. The legislature has not defined what exactly constitutes an act of unconscionable advantage by the buyer.


What was a reasonable sales price under the circumstances surrounding the seller-in-foreclosure when the transaction was entered into might appear to be unconscionable to the seller in the future due to market factors and inflation, not the conduct of the EP investor. Thus, an EP investor assumes the risk that a rising economy may provoke the seller into attempting to rescind (for the wrong legal reason).


If real estate values rise rapidly and significantly, the “greed factor” may set in, turning a formerly desperate seller-in-foreclosure into an astute rescinding seller.


However, any increase in the value of the property after acceptance of the EP investor’s offer may not be considered. The test of unconscionable advantage is not based on events occurring after the seller-in-foreclosure enters into the purchase agreement.


Market circumstances existing at the time of the negotiations or when the parties entered into the agreement are the economic considerations which form one of the two elements for testing unconscionable advantage. [Colton v. Stanford (1890) 82 C 351]


Unconscionability has two aspects:


·     the lack of a meaningful choice of action for the seller-in-foreclosure when negotiating to sell the home to the EP investor, legally called procedural unconscionability; and


·     a purchase price or method of payment which is unreasonably favorable to the EP investor, legally called substantive unconscionability.


The price paid, like any other provision in a purchase agreement, can be considered unconscionable. When determining the unconscionability of the purchase price, justification for the price at the time of the sale and the terms of payment will be examined.


An unconscionable method of payment could include:


·     carryback paper with an unreasonably low interest rate, long amortization or a due date on the note that bears no relationship to current market rates and payment schedules; or


·     an exchange of worthless land, stock, gems or zero coupon bonds at face value with a 20-year maturity date.


A form of payment which is uncollectible, unredeemable and with no present value would be unconscionable.


However, the existence of unreasonable pricing and payment alone is not enough to show the unconscionable advantage needed to rescind a closed transaction. Both the lack of a meaningful choice and unreasonably favorable (advantageous) terms must exist to show unconscionability existed.


The un-American low price


Any procedures used or conduct employed by an EP investor as a misfeasance or misrepresentation made to deprive the seller-in- foreclosure of a reasonable choice between the EP investor’s offer and offers from other buyers must exist to establish the lack of a meaningful choice or alternative to the EP investor’s offer.


An unconscionable advantage occurs if the EP investor exploits an element of oppression or surprise in exacting an unreasonably low and favorable purchase price or terms of payment.


Oppression by the EP investor exists when the inequality in bargaining power between the investor and the seller-in-foreclosure results in no real negotiations between them — a “take it or leave it” environment deliberately removed from competing buyers. The foreclosure environment itself often presents a one- sided bargaining advantage for the EP investor to exploit should be decide he does not want his offer “shopped around” and used to solicit a better deal from other buyers during the five- business- day cancellation period.


Surprise occurs due to the post-closing discovery of terms which are hidden in the lengthy provisions of the agreement. The price and how it will be paid is not a surprise. The price is well known to the seller-in-foreclosure and, on any rescission action by the seller, will likely be the only term of the agreement contested by the seller.


The greater the marketplace oppression or post-closing surprise discovery in the transaction, the less an unreasonably favorable price paid by an EP investor will be tolerated. [Carboni v. Arrospide (1991) 2 CA4th 76]


Structuring the EP agreement


An investor, not intending to be an owner-occupant buyer, wants to purchase single family residences (SFRs) for investment purposes.


The investor locates an owner-occupied SFR encumbered by a trust deed on which a Notice of Default (NOD) has been recorded, commencing a trustee’s foreclosure.


Because the seller occupies the residential property and an NOD has been recorded, the investor realizes he must comply with California’s EP laws when preparing and submitting an offer to purchase the property.


The EP investor is willing to purchase the SFR for a price of $140,000 on the following terms:


·     pay $10,000 cash to the seller-in-foreclosure for his equity in the property;


·     take over the existing loan with a total of $130,000 due the lender in unpaid principal, delinquent installments and foreclosure costs; and


·     pay the delinquent installments of principal, interest, taxes and insurance (PITI) and the foreclosure costs of approximately $7,400 — all of which are included in the $130,000 owed the lender on the loan.


The EP agreement calls for a $10,000 cash down payment.


Also, the EP investor will take title to the property “subject to” the existing first trust deed with a 28-year amortization remaining.


The conditions of the trust deed note are:


·     $122,600 of remaining principal (after the delinquent payments have been brought current);


·     6.5% interest;


·     $802.30 monthly principal and interest payments;


·     $150 monthly taxes/insurance impounds payments;


·     current five month delinquencies on PITI of $4,761.50; and


·     foreclosure costs of $1,316.80.


The first trust deed is a loan insured by the Federal Housing Administration (FHA) subject to the Department of Housing and Urban Development (HUD) due-on-sale rules controlling investor purchases. However, only HUD, not the lender, has the right to call a HUD- insured loan. The likelihood of HUD calling any loan which is kept current is remote. Thus, the loan may be taken over by the EP investor “subject to” with minimal interference from the lender, i.e., assumption fees and loan modification are avoided.


Editor’s note — As of the date of this text, FHA is suffering a 12% delinquency rate on its insured loans.


The seller-in-foreclosure will not be carrying back a portion of the purchase price since this is a cash-to-loan transaction. As an alternative method for payment of the purchase price, negotiations could have included provisions for the seller to carryback paper in the EP transaction.


The seller-in-foreclosure is five months delinquent in payments. The EP investor will bring the $4,761.50 in delinquent PITI payments current, which includes $326.66 in principal reduction.


Taxwise, the payment of the delinquent principal and interest (PI) payments (not the impounds) is part of the EP investor’s original costs of acquisition. The interest paid by the EP investor which accrued before acquiring the property is an expense of the seller-in-foreclosure, not the EP investor. Thus, the payment of the seller’s debts must be capitalized by the EP investor as part of his cost basis in the property. [Internal Revenue Code §1012]


The EP investor’s cost basis on acquisition of the property will be the purchase price of approximately $140,000, which includes the seller-in-foreclosure’s delinquent (PI) installments, foreclosure costs and the principal balance on the loan, less the impound account balance.


A prudent EP investor will determine the total cash funds needed to close escrow before making an offer. Cash expenditures of the EP investor on closing include:


·     a down payment of $10,000.00;


·     delinquent principal, interest, taxes and impounds of $4,761.50;


·     foreclosure costs of $1,316.80;


·     escrow fees and charges of $300.00; and


·     a total cash investment of $16,378.30.


Analyzing the EP agreement


The equity purchase (EP) agreement, first tuesday Form 156, is used to prepare a written offer to be submitted by an investor or dealer to purchase a one-to-four unit residential property which is occupied by the owner as his principal residence and is in foreclosure. As required by EP law, the form contains bold print, minimum size type and the statutory notice of the five-business-day right of cancellation, as well as the actual Notice of Cancellation for use by the seller who chooses to cancel the agreement.


A purchase of the owner-occupied residence in foreclosure by a buyer who will occupy the property as his residence does not require the use of an EP agreement as the purchase is not subject to EP law. However, an equity purchase requiring the use of an EP agreement does occur when a buyer is acquiring the property for business, rental, investment or dealer purposes.


The terms for payment of the price are structured to include a lump sum amount of cash to be paid to the seller for his equity in the property. Thus, all adjustments, prorations, credits and offsets are formulated to deliver to the seller this lump sum amount unchanged since it is based on the seller’s representations of sums owing on all encumbrances affecting title to the property.


Each section in Form 156 has separate purpose and need for enforcement. The sections include:


1. Identification: The date of preparation, the real estate and any personal property to be purchased, and the number of pages comprising the entire agreement, including addenda, are set forth in sections 1 and 2.


2. Price and terms of payment: All the typical variations for payment of the price are set out in sections 3 through 10 as a “checklist of provisions.” The EP investor selects the terms of purchase by checking boxes and filling blanks in the desired provisions. While the subject matter of the various provisions is typical, the terms each contain are not. All financial aspects are biased in favor of the buyer, such as prorates and adjustments, since EP transactions are structured as the payment of a lump sum for the conveyance.


3. Acceptance and performance: Aspects of the formation of a contract, excuses for nonperformance and termination of the agreement are provided for in section 11, such as the time period for acceptance of the offer, the broker’s authorization to extend performance deadlines, the financing of the price as a closing contingency, procedures for cancellation of the agreement, a sale of other property as a closing contingency, cooperation to effect a §1031 transaction and limitations on monetary liability for breach of contract.


4. Property conditions: The EP investor’s confirmation of the physical condition of the property as disclosed prior to acceptance is provided for in section 12 by the seller’s delivery of reports, warranty policies, certifications, disclosures statements, an environmental, lead- based paint and earthquake safety booklet, any operating cost and income statements, and any homeowners’ association (HOA) documents not handed to the EP investor prior to entry into the purchase agreement, as well as by the EP investor’s initial inspection, personally or by a home inspector, and final inspection at closing to confirm the seller has eliminated defects known, but not disclosed, prior to acceptance.


5. Closing conditions: The escrow holder, escrow instruction arrangements and the date of closing are established in section 13, as are title conditions, title insurance, hazard insurance, prorates and loan adjustments.


6. Brokerage and agency: The release of sales data on the transaction to trade associations is authorized, the brokerage fee is set, and the delivery of the agency law disclosure to both EP investor and seller and the disclosure of compliance with bonding requirements is provided for as set forth in sections 14 and 15, as well as the confirmation of the agency undertaken by the brokers and their agents on behalf of one or both parties to the agreement.


7. Seller’s right to cancel: Mandated by law, the notice to the owner-occupant seller whose home is in foreclosure (NOD has been recorded) is set forth in section 16, disclosing the seller’ right to cancel the entire transaction within five business days after he enters into this agreement. The notice is one of two major additions imposed on standard purchase agreements by EP law. The other is the Notice of Cancellation used by the seller to implement the right to cancel during the five-business- day period following the seller’s acceptance.


8. Signatures: The seller and EP investor bind each other to perform as agreed in the purchase agreement by signing and dating their signatures to establish the date of offer and acceptance.


9. Cancellation notice: Separate from the actual EP purchase agreement is the form completed by the EP investor, in duplicate, that the seller will use if he chooses to cancel the agreement. By signing and delivering one of the easily detachable cancellation forms to the EP investor at any time before midnight of the fifth business day after the date the seller signs the agreement, the seller effectively cancels the entire EP purchase agreement, with or without reason.


Preparing the EP purchase agreement


The following instructions are for the preparation and use of the Equity Purchase Agreement, first tuesday Form 156. Form 156 is designed to comply with EP law when used by an investor to purchase a one-to-four unit, owner-occupied residential property which is in foreclosure.


Each instruction corresponds to the provision in the form bearing the same number.


Editor’s note — Check and enter items throughout the agreement in each provision with boxes and blanks, unless the provision is not intended to be included as part of the final agreement, in which case it is left unchecked or blank.


Document identification:


Enter the date and name of the city where the offer is prepared. This date is used when referring to this purchase agreement.




1. Property identification: Enter the name of the city and county in which the property is located.


Enter the legal description or common address of the property, or the assessor’s parcel number (APN).


Enter the description of any personal property included, or enter words of reference, such as “see attached inventory,” and attach an itemized list of the inventory. The seller’s trade fixtures to be purchased by the buyer must be listed as inventory if they are to be acquired by the buyer. [See first tuesday Form 250]


2. Entire agreement: Enter the number of pages comprising all of the addenda, disclosures, etc., which are attached to the purchase agreement.


Terms for payment of the purchase price:


3. Cash down payment: Enter the dollar amount of the buyer’s cash down payment toward the purchase price. The down payment represents the amount of cash the seller-in-foreclosure will receive on closing, less any adjustments, escrow charges and fees.


4. First trust deed note: Check the appropriate box to indicate whether the transfer of title is to be “subject- to” an existing loan or by an “assumption” of the loan if the buyer is to take over an existing first trust deed loan. Enter the lender’s name. Enter the remaining balance, the monthly principal and interest (PI) payment and the interest rate on the loan. Check the box to indicate whether the interest is adjustable (ARM), and if so, enter the index name. Enter any monthly impound payment made in addition to the PI payment. Enter any due date or other terms unique to the loan.


4.1 Delinquencies: Enter the dollar amount required to cure all defaults on the loan. Enter the date the loan payments became delinquent.


4.2 Impound balances: Authorizes the impound account to be transferred without charge to the EP investor.


5. Second trust deed note: Check the appropriate box to indicate whether the transfer of title is to be “subject- to” an existing loan or by an “assumption” of the loan if the buyer is to take over an existing second trust deed loan. Enter the lender’s name. Enter the remaining balance, the monthly PI payment and the interest rate on the loan. Check the box to indicate whether the interest is adjustable (ARM), and if so, enter the index name. Enter the due date for payment of a final/balloon payment.


5.1 Delinquencies: Enter the dollar amount required to cure all defaults on the loan. Enter the date the loan payments became delinquent.


6. Loan balance adjustments: Authorizes any adjustments due to differences between the loan balances stated in the agreement and actually existing at the time of closing to be made into the purchase price. However, if the balance on the loans exceeds the amount stated in the purchase agreement, the difference is subtracted from the cash down payment.


7. New trust deed loan: Check the appropriate box to indicate whether any new financing will be a first or second trust deed loan. Enter the amount of the loan, the monthly PI payment, the term of the loan and the rate of interest. Check the box to indicate whether the interest will be adjustable (ARM), and if so, enter the index name. Enter any limitations on loan points.


8. Bond or assessment assumed: Enter the amount of the principal balance remaining unpaid on bonds and special assessment liens (such as Mello-Roos or 1915 improvement bonds) which will remain unpaid and become the responsibility of the buyer on closing.


Editor’s note — Improvement bonds are obligations of the seller which may be assumed by the EP investor in lieu of their payoff by the seller. If assumed, the bonded indebtedness becomes part of the consideration paid for the property. Some purchase agreements erroneously place these bonds under “property tax” as though they were ad valorem taxes, and then fail to prorate and charge the unpaid amount to the seller.


9. Seller carryback note: Enter the amount of the carryback note to be executed by the EP investor as partial payment of the price. Enter the amount of the note’s monthly PI payment, the interest rate and the due date for the final/balloon payment.


9.1 Special carryback provisions: No transfer restrictions or charges for early payoff or late payment will be included in the carryback note and trust deed.


9.2 Carryback disclosure: Fill out and attach a Seller Carryback Disclosure Statement as an addendum. [See first tuesday Form 300]


Editor’s note — Further approval of the disclosure statement in escrow creates by statute a buyer’s contingency allowing for cancellation until time of closing on any purchase of one-to-four unit residential property.


10. Purchase price: Enter the total amount of the purchase price as the sum of lines 3, 4, 5, 7, 8 and 9.


11. Acceptance and performance periods:


11.1 Delivery of acceptance: Check the appropriate box to indicate the time period for acceptance of the offer. If applicable, enter the number of days in which the seller may accept this offer and form a binding contract.


Editor’s note — If “on presentation” is used, the seller still has a statutory period of five business days to cancel the agreement after the seller’s acceptance.


11.2 Extension of performance dates: Authorizes the brokers to extend the performance dates up to one month to meet the objectives of the agreement — time being of a reasonable duration and not the essence of this agreement as a matter of policy. This extension authority does not extend to the acceptance period.


11.3 Loan contingency: Authorizes the EP investor to cancel the transaction at the time scheduled for closing if the financing for payment of the price is not obtainable or assumable.


11.4 Sale of other property: If the closing of this transaction is to be contingent on the EP investor’s receipt of net proceeds from a sale of other property, enter the address of the property to be sold by the EP investor.


11.5 Cancellation procedures: Provides the method of cancellation required to terminate the agreement when the right to cancel is triggered by other provisions in the agreement, such as contingency or performance provisions.


11.6 Exchange cooperation: Requires the parties to cooperate in an IRS §1031 transaction on further written notice by either party. Provides for the parties to assign their interests in this agreement.


11.7 Liability limitations Provides for a dollar limit on the EP investor’s liability for the EP investor’s breach of the agreement. Enter the maximum dollar amount of money losses the seller may recover from the EP investor.


Editor’s note — Liability limitation provisions avoid the misleading and unenforceable forfeiture called for under liquidated damage clauses included in most purchase agreement forms provided by other publishers of forms.


12. Property Conditions:


12.1 Seller to furnish: Check the appropriate box(es) within the following subsections to indicate the items the seller is to furnish prior to closing.


a. Pest control: Check the box to indicate the seller is to furnish a structural pest control report and clearance.


b. Home inspection report: Check the box to indicate the seller is to employ a home inspection company and furnish the buyer with the company’s home inspection report.


c. Home warranty: Check the box to indicate the seller is to furnish an insurance policy for home repairs. Enter the name of the insurer and the type of coverage, such as for the air conditioning unit, etc.


d. Local ordinance compliance: Check the box to indicate the seller is to furnish a certificate of occupancy or other clearance required by local ordinance.


e. Sewer or septic certificate: Check the box to indicate the seller is to furnish a certificate of the condition of the sewage disposal system stating it is functioning properly.


f. Potable well water: Check the box to indicate the seller is to furnish a certificate stating the well supply meets water standards.


g. Well water capacities: Check the box to indicate the seller is to furnish a certificate stating the amount of water the well supplies. Enter the number of gallons per minute the well is expected to produce.


h. Other terms: Check the box and enter any other report, certification or clearance the seller is to furnish.


i. Other terms: Check the box and enter any other report, certification or clearance the seller is to furnish.


12.2 Property condition(s): Check the appropriate box within the following subsections to indicate the status of the Transfer Disclosure Statement (TDS).


a. Attached TDS: Check the box to indicate the seller’s TDS has been prepared and handed to the buyer, and if so, attach it to this agreement. Thus, the property’s condition is accepted by the EP investor upon entering into the purchase agreement offer.


Editor’s note — Use of the TDS form is mandated on one-to-four unit residential property. [See first tuesday Form 304]


b. Later delivered TDS: Check the box to indicate the TDS is to be delivered later to the EP investor to confirm the condition of the property is as disclosed prior to entry into the purchase agreement. On receipt of the TDS, the EP investor may either cancel the transaction for failure of the seller or the listing agent to disclose known property defects prior to acceptance of the purchase agreement (or counteroffer), or give notice to the seller of the defects known and not disclosed prior to acceptance and make a demand on the seller to correct them prior to closing.


c. Repair of defects: Authorizes the EP investor to either cancel the transaction or adjust the price should the seller fail to correct the defects noticed under sections 12.2b or 12.3a.


12.3 EP investor’s inspection: Authorizes the EP investor to inspect the property twice during the escrow period to verify its condition is as disclosed by the seller prior to the time of acceptance.


a. Initial property inspection: Requires the EP investor to inspect the property immediately after acceptance to put the seller on notice of material defects to be corrected by the seller prior to closing. [See first tuesday Form 269]


b. Final walk-through inspection: Requires the EP investor to inspect the property again within five days before closing to confirm repairs and maintenance of the property have occurred. [See first tuesday Form 270]


12.4 Seller’s Natural Hazard Disclosure (NHD) Statement: Check the appropriate box to indicate whether the NHD statement disclosing the seller’s knowledge about the hazards listed on the form has been prepared and handed to the EP investor. If it has been received by the EP investor, attach a copy to the purchase agreement. If the NHD will be handed to the EP investor after acceptance, the EP investor has ten days after the EP investor’s receipt of the NHD statement in which to approve it or cancel.


Editor’s note — Disclosure by the seller is mandated on one-to-four unit residential property. [Calif. Civil Code §1103]


12.5 Hazard disclosure booklets Check the appropriate box(es) to indicate which hazard booklets have been received by the EP investor, together with the seller’s prepared and signed disclosures accompanying each booklet.


12.6 Other property disclosures: Check the appropriate box(es) to indicate other disclosures made by the seller regarding the location of the property. Enter a reference to any local (option) ordinance disclosure statement attached as an addendum to the purchase agreement and attach it. [See first tuesday Form 307]


12.7 Operating costs and rents: Check the appropriate box(es) to indicate the information the seller is to disclose regarding the operating expenses of ownership and any rents.


a. Disclosure approval: Authorizes the EP investor to cancel the purchase agreement and escrow if the operating expenses and income disclosures are unacceptable.


12.8 Homeowners’ association (HOA): Check the appropriate box to indicate whether any HOA documents have been or are to be delivered to the EP investor.


a. Monthly payments: Enter the dollar amount of the monthly payments assessed by the HOA.


b. CC&Rs: Enter the nature of any violation of the CC&Rs by the seller.


c. HOA charges: Provides for the seller to pay all HOA charges on the transaction.


d. Condition of assessments: Provides for the EP investor to approve the HOA’s condition of assessments statement prior to closing.


e. Disapproval of HOA documents: Authorizes the EP investor to terminate this purchase agreement within ten days after his receipt of HOA documents when the disclosures are made after entering into the purchase agreement. Disclosure of HOA conditions in escrow trigger a statutory contingency allowing the EP investor to cancel the purchase agreement.


12.9 Safety compliance: Requires smoke detectors and water heater bracing to exist or be installed by the seller.


12.10 Buyer’s possession: Check the appropriate box to indicate when possession of the property will be delivered to the EP investor, whether at closing or under an attached buyer’s interim occupancy or seller’s holdover agreement. [See first tuesday Forms 271 and 272]


12.11 Property maintenance: Requires the seller to maintain the present condition of the property until the close of escrow.


Editor’s note — See section 12.3b for the buyer’s final inspection to confirm maintenance at closing.


12.12 Fixtures and fittings: Confirms this agreement includes real estate fixtures and fittings as part of the property purchased.


Editor’s note — Trade fixtures are personal property to be listed as items on an attached inventory.


12.13 Sex offender disclosure: Complies with requirements that the seller disclose the existence of a sex offender database on the sale (or lease) of one-to-four residential units.


Editor’s note — By the existence of the disclosure in the form, the seller and brokers are relieved of any duty to make further disclosures regarding registered sex offenders.


13. Closing conditions:


13.1 Escrow closing agent: Enter the name of the escrow company handling the closing.


a. Escrow instructions: Check the box to indicate the purchase agreement is to also serve as the mutual instructions to escrow from the parties. The escrow company will typically prepare supplemental instructions they will need to handle and close the transaction. [See first tuesday Form 401]


b. Escrow instructions: Check the box to indicate escrow instructions have been prepared and are attached to this purchase agreement. Attach the prepared escrow instructions to the purchase agreement and obtain the signatures of the parties. [See first tuesday Form 401]


13.2 Closing date: Check the appropriate box to indicate the method to be used to set the date on which escrow is scheduled to close. Following the checked box, enter the specific date for closing or the number of days anticipated as necessary for the parties to perform and close escrow. Also, prior to seven days before closing, the parties are to deliver all documents needed by third parties to perform their services by the date scheduled for closing.


a. Escrow charges: Requires each party to pay their customary escrow closing charges, amounts any competent escrow officer can provide on inquiry.


13.3 Undisclosed lien adjustments: At the EP investor’s option, adjustments for liens not disclosed in the agreement will be made first into the down payment and then into any carryback note for any amounts remaining.


13.4 Title conditions: Enter wording for any further- approval contingency provision the EP investor may need to confirm that title conditions set forth in the preliminary title report will not interfere with the EP investor’s intended use of the property, such as “closing contingent on EP investor’s approval of preliminary title report.”


13.5 Title insurance: Provides for title to be vested in the name of the EP investor or his assignee. Enter the name of the title insurance company which is to provide a preliminary title report in anticipation of issuing title insurance. Check the appropriate box to indicate the type of title insurance policy to be issued on closing.


a. Policy endorsements: Enter any endorsements to be issued with the policy.


b. Payment of premium: Check the appropriate box to indicate whether the EP investor or seller is to pay the title insurance premium.


13.6 Fire insurance: Requires the EP investor to provide a new policy of hazard insurance.


13.7 Prorates and adjustments: Authorizes prorations and adjustments on the close of escrow for taxes, insurance premiums, rents, interest, loan balances, service contracts and other property operating expenses, prepaid or accrued.


13.8 Personal property: Requires the seller to execute a bill of sale for any personal property being transferred in this transaction at section 1.


13.9 Property destruction: Provides for the seller to bear the risk of loss for any casualty losses suffered by the property prior to the close of escrow. Thus, the EP investor may terminate the agreement if the seller is unable to provide a marketable title or should the property improvements suffer major damage.


14. Brokerage fee:


14.1 Fee amount: Enter the total amount of the fee due all brokers to be paid by the seller. The amount may be stated as a fixed dollar amount or a percentage of the price.


Editor’s note — The defaulting party pays all brokerage fees and the brokerage fee can only be altered or cancelled by mutual instructions from the EP investor and seller.


14.2 Fee sharing: Enter the percentage share of the fee each broker is to receive.


Editor’s note — The percentage share may be set based on an oral agreement between the brokers, by acceptance of the listing broker’s MLS offer to a selling office to share a fee, or unilaterally by an agent when preparing the buyer’s offer.


14.3 Agency law disclosures: Attach a copy of the Agency Law Disclosure addendum for all parties to sign. The disclosure is mandated to be acknowledged by the EP investor with the offer and acknowledged by the seller on acceptance as a prerequisite to the brokers enforcing collection of the fee when the property involved contains one-to-four residential units. [See first tuesday Form 305]


14.4 Disclosure of sales data: Authorizes the brokers to report the transaction to trade associations or listing services.


15. Bonding disclosure: Check the box to indicate whether the EP investor is represented by a licensed real estate broker, exclusively or as a dual agent, and the broker possesses the bond required to represent the EP investor.


16. Cancellation period:


16.1 Statutory cancellation period: The seller has the right to cancel the EP agreement until midnight (12 a.m.) of the fifth business day (Monday through Saturday, excluding specified holidays) following the day the EP agreement is accepted or until 8 a.m. on the day scheduled for a trustee’s foreclosure sale of the property, whichever occurs first. [CC §1695.4(a)]


Notice of right to cancel


Enter the EP investor’s name and the appropriate time and date for the expiration of the seller’s cancellation period of five business days after acceptance.


Editor’s note — See explanations for time and date given in section 16.1 above and in the Notice of Cancellation section below.


Agency confirmation:


Buyer’s broker identification: Enter the name of the buyer’s broker. Obtain the signature of the buyer’s broker or the selling agent acting on behalf of the buyer’s broker. Check the appropriate box to indicate the agency which was created by the broker’s (and his agents’) conduct with the parties.


Seller’s broker identification: Enter the name of the seller’s broker. Obtain the signature of the seller’s broker or the listing agent acting on behalf of the seller’s broker. Check the appropriate box to indicate the agency which was created by the broker’s (and his agents’) conduct with the parties.




Buyer’s signature: Enter the date the buyer signs the purchase agreement and each buyer’s name. Obtain each buyer’s signature on the purchase agreement and on each attachment which requires his signature. Enter the buyer’s address, telephone and fax numbers, and email address.


Seller’s signature: Enter the date the seller signs the purchase agreement and each seller’s name. Obtain each seller’s signature on the purchase agreement and on each attachment which requires his signature. Enter the seller’s address, telephone and fax numbers, and email address.


Notice of Cancellation:


Editor’s note — The Notice of Cancellation is not part of the actual EP agreement. It is the notice the seller-in- foreclosure signs and delivers to cancel the transaction. It must be filled out, in duplicate, by the buyer and handed to the seller with the EP agreement.


Enter the date the seller signs his acceptance of the EP agreement. Enter the time (12 a.m. or 8 a.m.) and the date on or before which the seller may cancel the agreement (five business days after acceptance or the date set for the trustee’s sale, if earlier).


Enter the EP investor’s name and the address where the Notice of Cancellation is to be delivered if the seller-in- foreclosure chooses to cancel the EP agreement by signing it. Enter the time (12 a.m. or 8 a.m.) and the date by which the seller may cancel the agreement (five business days after acceptance or the date set for the trustee’s sale, if earlier).


The EP investor is to also complete the second, duplicate Notice of Cancellation which follows.


Editor’s note — The Notices of Cancellation at the end of the EP agreement are not dated or signed by the seller on acceptance. The seller will later sign and deliver a Notice of Cancellation to the EP investor only if the seller actually decides to cancel the transaction.