California Law for Real Estate Investors – Including Forclosure Issues

One mistake that California real-estate investors make is signing a purchase contract too soon when a probate is required.

Some real-estate investors try to buy properties when the deceased left real estate to family members or friends who cannot make the monthly loan payments. If the deceased had a trust, generally there is no problem: The current trustee has the power to sell the property.

It is different, though, if the deceased either had only a will, or had neither a trust or a will. In that case there has to be a probate unless there is a will leaving everything to a surviving spouse. (There is also an exception if the assets of the estate, without subtracting any loans, is less than $100,000, but that is very unlikely if real estate is involved.) With a will leaving everything to a surviving spouse, it is often possible to bring a “spousal petition” in the probate court to transfer full title to the surviving spouse without having to go through an entire probate.

Otherwise, usually a probate must be filed or there will not be clear title to the real estate. Basically a probate is a court procedure where the will (if any) and a listing of the assets are filed with the Probate Court, a person representative (executor) is approved by the Court, creditors and heirs are given a chance to submit claims, a representative of the Court frequently determines the value of the estate, and ultimately the Court issues an order directing how the money and property in the estate are to be distributed. The whole process can take eight months or so, although the time depends on the complexity of the matter.

Real-estate investors should understand that an executor has no authority to sign contracts for the sale of real estate until that executor is approved by the Probate Court as the personal representative for the estate. Also, unless the petition for the probate asks that the personal representative be given “full authority” (and the Court grants it), any sale of real estate from the estate must be specifically approved by the Court. If the Court has to approve the sale, it may be sold for no less than 10% below the fair market value determined by the Court representative who values estate property. Sometimes executors try to handle the probate themselves without the help of an attorney; few know to ask for “full authority” when the initial papers are filed – and if it is not requested initially, the Court frequently will be reluctant to grant it later. On the other hand, once a personal representative has been approved with “full authority”, any agreement signed with that personal representative regarding the purchase of real property should be binding.

Because probate is complex and non-attorneys who try to handle a probate themselves frequently run into problems, if you are dealing with a probate situation as a potential purchaser, try to get the executor to retain an attorney who can handle the probate. This does cost some money (although the attorney is only paid at the end of the probate), but otherwise the property may be lost to foreclosure. This is particularly true since, while many lenders will stop the foreclosure process if they are given proof that an attorney is handling the probate, frequently they will not stop the process if no attorney is involved.

Preforeclosure Sale Requirements

Another mistake that real-estate investors make is not following the requirements when purchasing residential property in California if a notice of default has been recorded by the lender.

California has a detailed set of statutes setting out requirements for contracts for residential preforeclosure sales. (Civil Code §§1695-1695.17.) These statutes apply to any residential real property consisting of one-to-four family dwelling units, one of which the owner occupies as his or her principal place of residence, and against which there is an outstanding notice of default. These statutes require, among other things, that the contract:

Spell out all terms of the agreement (including, for example, buyback rights).

Contain certain notices that meet certain size and bolding requirements.

Allow the seller to cancel, usually up until midnight of the 5th business day after signing.

Be accompanied by a Notice of Cancellation form in duplicate.

Also, until the cancellation period ends, the buyer cannot:

Have the seller sign a deed or deed of trust.

Record any deed or deed of trust regarding the property.

Transfer any interest in the property to a third party.

Pay the seller any money or other consideration.

In addition, the purchaser cannot make any untrue or misleading statements regarding the value of the residence in foreclosure, the amount of proceeds the seller will receive after a foreclosure sale, or any other untrue or misleading statement concerning the sale of the residence.

Moreover, purchasers are forbidden from taking “unconscionable advantage” of the seller. This applies if the seller is incompetent or does not understand the transaction (for example, if the seller is not fluent enough in English), and may apply in other situations as well. If “unconscionable advantage” is taken, the transaction may be rescinded at any time within two years of the date of the recordation of the conveyance of the residential property.

If any of these provisions are violated, the seller may not only be able to rescind the agreement but also recover actual damages, attorneys’ fees and costs, and exemplary damages in an amount equal to the greater of three times actual damages or $2,500. Fraud or deceit may additionally be punished by a fine of $25,000, by imprisonment in the county jail or in state prison for not more than one year, or by both for each violation. Other remedies may apply as well.

Any provision of a contract which attempts or purports to limit the liability of the purchaser is void and, at the option of the seller, renders the purchase contract void.

Moral of the story: If you are going to be purchasing preforeclosure residential property, you should have an attorney review your forms.

Restrictions on Giving Foreclosure Advice

California also has specific statutes regarding residential foreclosure consultants. (Civil Code §§2945-2945.11.) Part of these statutes are directed at those who charge an owner for helping the owner obtain any money remaining after a foreclosure sale, although the statutes cover more than just that. “Foreclosure consultant” basically is defined as any person who makes offers to perform for compensation or who performs for compensation any service to:

1. Stop or postpone the foreclosure sale.

2. Obtain any forbearance from any lender.

3. Assist the owner to exercise a right of reinstatement.

4. Obtain any extension of time for the owner to reinstate his or her obligation.

5. Obtain any waiver of an acceleration clause.

6. Assist the owner to obtain a loan or advance of funds.

7. Avoid or ameliorate the impairment of the owner’s credit.

8. Save the owner’s residence from foreclosure.

9. Assist the owner in obtaining any remaining proceeds from the foreclosure sale.

With the exception of the last item, there are exceptions for licensed real-estate brokers and agents, accountants, licensed residential mortgage lenders and servicers, etc.

The owner has the right to cancel such a contract until midnight of the third “business day” after the day on which the owner signs the contract.

The contract must be in writing and, among other things, must:

Fully disclose the exact nature of the foreclosure consultant’s services.

Fully disclose the total amount and terms of compensation.

Contain a specific notice in a minimum size and with bolding.

Have a Notice of Cancellation form attached in duplicate.

Only after the 65-day period following any foreclosure sale, may the foreclosure consultant enter into a contract to assist the owner in arranging the release of funds remaining after the foreclosure sale. This agreement also must contain a specific notice in a minimum print size in bold.

Among other things, it is a violation for the foreclosure consultant to:

1. Receive any compensation until after the foreclosure consultant has fully performed.

2. Receive any fee or other compensation which exceeds 10 percent per annum of the amount of any loan which the foreclosure consultant may make to the owner.

3. Take any wage assignment, any lien of any type on real or personal property, or other security to secure the payment of compensation.

4. Receive any consideration from any third party in connection with services rendered to an owner unless that consideration is fully disclosed to the owner.

5. Acquire any interest in a residence in foreclosure from an owner with whom the foreclosure consultant has contracted.

6. Take any power of attorney from an owner for any purpose.

7. Induce or attempt to induce any owner to enter into a contract that does not comply with the foreclosure consultant statutes.

8. Enter into an agreement to assist the owner in arranging the release of surplus funds prior to 65 days after the trustee’s sale is conducted.

Note that (e) means that someone cannot both be paid as a foreclosure consultant AND also purchase some or all of the property.

A foreclosure consultant is also liable for the acts of any representative that he/she uses.

Any waiver by an owner of the statute is void, and any attempt by a foreclosure consultant to induce an owner to waive his/her rights is a violation of the statute.

If a foreclosure consultant violates any of the statutes, the owner may receive a judgment for actual damages, reasonable attorneys’ fees and costs, and appropriate equitable relief. The court also may, in its discretion, award exemplary damages and must award exemplary damages equivalent to at least three times the compensation received by the foreclosure consultant in violation of certain provisions, and three times the owner’s actual damages for any violation of other provisions, in addition to any other award of actual or exemplary damages. The owner may bring the action up to four years after the date of the alleged violation. In addition, there may also be criminal penalties of not more than ten thousand dollars ($10,000) and/or imprisonment in the county jail for not more than one year, or in the state prison. klimt cairnhill