Source: https://journal.firsttuesday.us/an-owners-residence-in-foreclosure/240/
Timestamp: 2019-09-22 10:15:47
Document Index: 520004154

Matched Legal Cases: ['§1695', '§1695', '§1695', '§1695', '§1695', '§1695', '§1695', '§1695', '§10176', '§1695', '§1031']

An owner’s residence in foreclosure | first tuesday Journal
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.
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]
· 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)]
· 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;
· hand the seller a “good-faith” deposit or other consideration. [CC §1695.6(b)]
· the net proceeds the seller will receive on closing escrow [See first tuesday Form 310];
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)]
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.
· 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)]
· bonded by a surety insurer for twice the property’s fair market value. [CC §1695.17(a)]
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)]
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.
· 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.
· 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.
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.
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]
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.
· 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.
· 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.
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.
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.
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.
· 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.
· $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.
· 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.
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.
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.
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.
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.”
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.
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 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).
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