This article examines the equity purchase (EP) restrictions which must be known and applied by all investors who purchase owner-occupied, one-to-four unit residential property during a foreclosure.
The home equity sales scheme
An equity purchase (EP) occurs when an owner-occupied, one-to-four unit residential property in foreclosure is acquired for rental, investment or dealer purposes by a buyer, called an EP investor. Conversely, an EP transaction does not occur and the EP rules do not apply if the buyer acquires the property as his personal residence.
Equity purchase statutes apply to all EP investors regardless of the number of EP transactions the investor completes. The investor need not be in the business of purchasing homes in foreclosure for the statutes to apply to him. [Segura v. McBride (1992) 5 CA4th 1028]
Both the EP investor and a selling broker representing an EP investor must comply with EP law, or be subject to drastic penalties.
For example, the EP agreement signed by an EP investor must be printed in bold type, ranging from 10-point to 14-point size, and be in the same language used in negotiations with the seller-in-foreclosure. [Calif. Civil Code §§1695.2; 1695.3; 1695.5]
The EP investor and all brokers 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 brokers to liability for all losses incurred by the seller-in-foreclosure, plus penalties. [Segura, supra]
Note — first tuesday’s Equity Purchase Form 156 complies with all statutory requirements, and properly sets forth the seller-in-foreclosure’s right to cancel. [See Chapter 2]
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 and avoid the sale entirely.
When the notice of the seller-in-foreclosure’s cancellation rights are properly contained in the EP agreement, the seller’s cancellation period ends:
· midnight 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 occurs first. [CC §1695.4(a)]
The seller-in-foreclosure’s five-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)]
However, until expiration of the seller-in- foreclosure’s right to cancel the transaction, the EP investor may not:
· accept a conveyance of any interest in the property from the seller;
· record a conveyance of 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)]
Therefore, 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 may not misrepresent:
· 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 10 days following receipt of the notice. [CC §1695.6(c)]
Two-year, post-closing rescission rights
After escrow closes, the EP investor’s title is subject to the seller-in-foreclosure’s right of rescission for two years. The rescission might be based on some unconscionable conduct of the EP investor. The seller’s two-year right to rescind and recover the property from the EP investor cannot be waived. [CC §§1695.10; 1695.14]
Also, any provision in an EP agreement which purports to limit the liability of the EP investor for damages caused by the EP investor’s or his broker’s misrepresentations is void. Further, the inclusion of a liability limitation provision gives the seller-in-foreclosure the right to cancel the transaction at any time prior to closing. This rule is contrary to the general rule of contracting for the purchase of real estate. [CC §1695.16; See first tuesday Form 150 §11.11]
In addition, the EP investor is liable for all losses incurred by the seller-in-foreclosure due to misrepresentations made by himself or his broker. [CC §1695.15]
The EP investor is liable to the seller-in-foreclosure for any money losses caused by his failure to comply with the EP statutes. Further, the EP investor may be subject to treble damages should he transfer or encumber the property before the cancellation period expires. Again, the period does not begin to run until proper notice is given in purchase documents. [CC §1695.7; See Chapter 2]
An EP investor who violates the five-day cancellation period or takes unconscionable advantage of the seller-in-foreclosure will be subject to imprisonment or a fine no greater than $10,000, or both imprisonment and a fine for each violation. [CC §1695.8]
Also, any selling broker representing an EP investor as the buyer’s agent must provide the seller-in-foreclosure, under penalty of perjury, a writing stating he is:
· a licensed real estate broker; and
· bonded by a surety insurer for at least twice the amount of the property’s fair market value. [CC §1695.17(a); See Chapter 3]