This article examines the effect of equity purchase (EP) legislation on real estate brokers, investors and sellers of property in foreclosure.
Broker restricted to listing foreclosures
Equity purchase (EP) legislation regulates brokers when they act as agents for investors who attempt to buy an owner- occupant’s home that is in foreclosure — called an equity purchase transaction.
The broker representing an EP investor must, when negotiating an EP transaction, deliver to the seller-in-foreclosure a written EP disclosure statement confirming the EP investor’s selling agent is:
· a licensed real estate broker; and
· bonded by a surety insurer for twice the property’s fair market value. [Calif. Civil Code §1695.17(a)]
If the broker for the EP investor 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.
Also, the EP investor is liable to the seller-in-foreclosure for any losses arising out of the broker’s nondisclosure of licensing and bonding requirements. [CC §1695.17(b)]
However, the EP investor would be entitled to equitable indemnity from his broker for the losses due to the broker’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 the broker’s nondisclosure. [San Francisco Examiner Div., Hearst Pub. Co. v. Sweat (1967) 248 CA2d 493]
For the potential EP selling broker, obtaining a surety bond is 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. [CC §2079.13(d)]
Broker as principal
The EP legislation does not restrict the ability of an individual, who is coincidentally licensed as a broker or sales agent, to act only as a principal purchasing property in an EP transaction.
Thus, a licensed real estate broker or sales agent may himself be the EP investor, eliminating agency law addenda as well as licensee disclosure and bonding requirements. The licensed real estate broker or sales agent, acting solely as an EP investor, is a buyer who merely happens to hold a real estate license — a fact which need not be disclosed to the seller-in-foreclosure.
Conversely, if a real estate licensee, while 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 a principal in the transaction, in addition to being the seller’s agent. [Calif. Business and Professions Code §§10176(d),(g),(h)]
Representing the seller
Prudent brokers are inclined not to solicit and accept a listing from a seller-in-foreclosure, since the property must be sold and escrow closed before the date of the trustee’s foreclosure sale to have fully performed the employment.
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 broker for a seller-in-foreclosure needs time to find a buyer and close escrow. The time constraints of a property in foreclosure place the broker under extra pressure to locate a buyer.
As always, the listing broker must perform his agency duty owed the seller to properly market the property with care and due diligence. The seller-in-foreclosure expects the broker to save his equity by negotiating a sale on the property which will close 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 — a risk the broker takes when listing a home in foreclosure.
Other EP agents
A broker placing the listing of an owner-occupied residence in foreclosure in the Multiple Listing Service (MLS) should advise cooperating (buyer’s selling) brokers to:
· represent a buyer-occupant; or
· if representing an EP investor, show proof of bonding since the property is in foreclosure.
Only a buyer-occupant excludes the transaction from complying with EP law. Although buyer-occupants are excluded from EP law, most buyer-occupants are typically unwilling to purchase property in foreclosure since the property is often:
· improperly encumbered — a buyer-occupant may not be able or want to assume the existing loan, or the property cannot be refinanced for an amount sufficient to pay off the existing loan; and
· physically damaged or unattractive — due to deferred maintenance.
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.
Further, the legislature placed marketplace restrictions on the property — and reduced the ability of the listing broker to sell it — through advanced fee brokerage restrictions and the establishment of the foreclosure consultant.
Often, an owner-in-foreclosure will do anything in his power to prevent his residence from being sold at a foreclosure sale.
Owners-in-foreclosure often seek the services of a financial advisor or investment counselor, called a foreclosure consultant.
A foreclosure consultant is any person who, for a fee from the owner-in-foreclosure, agrees to:
· stop or postpone the foreclosure sale;
· prevent lienholders from enforcing or accelerating the note;
· help the owner reinstate the loan or receive an extension of the reinstatement period;
· advance funds to the owner; or
· arrange a loan for the owner. [CC §2945.1(a)]
However, a licensed real estate broker is not considered a foreclosure consultant when the broker:
· receives only a contingency fee from the owner for selling the residence in foreclosure;
· receives no advance fees or costs from the owner;
· makes a loan for an amount sufficient to cure defaults, or arranges a loan to the owner secured by the property in foreclosure as a mortgage loan broker; and
· receives no ownership interest in the property directly from the owner, except as a principal acting as a lender under a trust deed. [CC §2945.1(b)(3)]
Consider a real estate broker who arranges a loan for an owner-in- foreclosure. The loan is funded by a trust deed investor and secured by a trust deed on the owner’s residence. The loan’s closing statement notes the broker is acting as a real estate licensee in the loan transaction.
Later, the trust deed investor forecloses on the trust deed by a trustee’s sale. The trustee’s deed conveys title to both the broker and the trust deed investor as the highest bidder.
The owner claims the broker breached his duties as a foreclosure consultant since the broker obtained an interest in the owner’s residence by purchasing the residence at the trustee’s foreclosure sale under the trust deed loan arranged by the broker.
The broker claims he is exempt from being classified as a foreclosure consultant since he was acting in the capacity of a licensed real estate broker when the loan was arranged for the owner.
Here, the broker breached his duties both as a foreclosure consultant and as a real estate licensee on acquiring an ownership interest at the trustee’s sale since the broker did not lend his own funds when he arranged the loan to avoid foreclosure. The broker arranged a loan for which a real estate license is required. [Onofrio v. Rice (1997) 55 CA4th 413]
Editor’s note — The Onofrio court misread and then misapplied the controlling statute. The broker was either acting as a foreclosure consultant or a real estate licensee, but not both at the same time.
The foreclosure consultant scheme states that a broker assisting an owner-in-foreclosure is exempt from equity purchase law unless he acquires an interest in the residence in foreclosure directly from the homeowner other than as trustee or beneficiary of a trust deed given to secure payment of a loan or the broker’s fee. [CC §2945.1(b)(3)]
The statute does not explicitly prohibit a broker who has previously assisted the homeowner from acquiring an interest in the residence as a cash bidder at a foreclosure sale held under either the defaulted trust deed which placed the property under equity purchase law or the later trust deed arranged by the broker to refinance or cure the defaulted trust deed.
No rational basis exists to prohibit anyone, brokers included, from bidding at the foreclosure sale on the trust deed loan previously arranged by the broker. No agency duty remains after the loan is originated that would be in conflict with a purchase of the property at a publicly advertised, open-bid foreclosure sale. The trustee’s sale was brought about by a default after the broker’s agency had long since ended. And again, owners who are in foreclosure are the losers since such cases make doing EP business more risky.
A broker who collects a fee or costs in advance from a seller-in-foreclosure is considered a foreclosure consultant subject to the statutory restrictions.
However, a foreclosure consultant may not collect an advance fee, a “catch-22” for the loan broker attempting to be paid a fee or costs up front. Also, a foreclosure consultant cannot secure his contingent fee by a lien on the property. [CC §2945.4(a),(c)]
Hence, a broker taking an advance fee triggers application of the foreclosure consultant law and is no longer acting as a broke. At the same time, taking the advance fee in an EP transaction violates the EP law.
A broker taking a listing from a seller-in-foreclosure without an advance fee arrangement assumes the risk that the uncreditworthy seller will be unable to pay the fee should he refuse a full listing offer or be unable or unwilling to close an agreed-to sale. Living “rent-free” can quickly become habit-forming for a seller-in- foreclosure. The seller-in-foreclosure is no longer making monthly payments and retains possession until after the trustee’s sale.
The foreclosure consultant law is another example of how EP legislation works to the detriment of the seller-in-foreclosure — and the brokerage community.
However, EP legislation overlooks the fact the broker who takes an advance fee is already heavily regulated by the Department of Real Estate (DRE). The broker must place an advance fee in a trust account, provide accounting to the client before withdrawing funds, and clear all fee agreements and advertising with the DRE. [See first tuesday Form 106]
Broker for a foreclosure consultant
When a broker arranges for a seller-in-foreclosure to employ a foreclosure consultant, or pay a fee or transfer title to a foreclosure consultant, the broker is considered the agent of the foreclosure consultant. [CC §2945.9(b)]
However, a foreclosure consultant retained by a seller-in- foreclosure is barred from acquiring any interest in a residence in foreclosure — even if he hires a broker to represent him. [CC §2945.4(e)]
Unbelievably, a foreclosure consultant’s agent or employee can only be a licensed real estate broker who provides the seller-in- foreclosure with a written statement under penalty of perjury that he is a licensed real estate broker and is bonded by a surety insurer for an amount equal to twice the value of the residence in foreclosure. [CC §2945.11(a)(1)]
Failure of the foreclosure consultant’s broker to provide the broker’s statement to the seller-in-foreclosure will, at the seller’s option before escrow closes, void the advisory agreement with the foreclosure consultant. [CC §2945.11(b)]
Further, an agreement between the foreclosure consultant and the seller-in-foreclosure cannot contain provisions attempting to limit the liability of the foreclosure consultant for money damages caused by the foreclosure consultant’s broker. [CC §2945.10]
Editor’s note — Assembly Bill (AB) 2154 in 1991 attempted, but failed, to repeal the statutory bond requirements created by 1990 legislation to exclude licensed real estate brokers if the broker:
· is performing an activity for which he is licensed;
· is acting as an agent in regard to “listed” property (whether the listing is taken by the broker or another broker);
· has complied with the agency disclosure statutes;
· discloses to the seller-in-foreclosure the recovery available through the Real Estate Recovery Fund, or private bonding or insurance (which the seller may verify through inquiry) for the negligent acts of the broker; and
· discloses to the seller-in-foreclosure the recovery may be insufficient to cover the seller’s potential losses in the transaction.
The sponsors reported the bill was pulled after hostile amendments were added by legal aid groups who felt AB 2154 inadequately protected sellers-in-foreclosure. The 1990 legislation is not likely to be repealed until the legislature realizes the deleterious consequences to sellers-in-foreclosure created by the bonding requirements, let alone the entire scheme of equity purchase law.