February 20, 2007


In the January 30th post, I discussed the California statutes that regulate "foreclosure consultants" who seek to "assist" buyers who are in danger of losing their homes to foreclosure. There is an another group of California statutes that may be a trap for the unwary buyer of a house in foreclosure.

When mortgage defaults and foreclosures increase, investors may actively seek out homes owned by a buyer is in default before foreclosure sale takes place. California Civil Code sections 1695-1695.17 were enacted to protect homeowners in that vulnerable situation. In brief, if an owner resides in the home (or up to 4 residential units) and has equity in the property, the owner is in a protected class as an "equity seller." Subject to specific exclusions, if an investor tries to acquire title from an equity seller and does not intend to reside in the property, the investor is an "equity buyer."

When an equity buyer tries to enter into a deal directly or through an agent with an equity seller, there are a number of special requirements. For example, the equity seller has five (5) days to cancel and the equity buyer cannot pay any money to the seller during that time period. Violations of Civil Code sections 1695, et seq. can result in criminal penalties and fines.

There is another interesting protection for equity sellers. If an equity buyer is represented by an agent, the agent must have a bond from an admitted insurer in an amount equal to twice the fair market value of the property. But no insurer admitted in California offers such a bond, so agents should avoid representing equity buyers.