Home Equity Sales Contracts

The real estate market is currently in recovery, and property prices are continuing to rise. But for many borrowers, rising prices do not mean an increase in their ability to make loans payable. Though many may decide to sell their houses and move on, others may not do anything until they face foreclosure. The California legislature has been worried that those homeowners whose residences are in hang-out are at risk of fraud, deception and unfair dealing by buyers seeking to get control of the equity for little or no compensation. To hopefully avoid this, the Legislature passed the Home Equity Sales Contract Act (California Civil Code Section 1695), which has since been a source of considerable confusion and litigation.

What is expected from the Home Equity Sales Contract Act?

So, California law also generally requires special sales transaction management in order to protect homeowners in foreclosure. In addition, the Home Equity Sales Contract Act refers to transactions that satisfy all four conditions:

• The land consists of one to four family dwelling units
• The owner shall occupy one of the units as its principal place of residence
• An unpaid default notice is registered
• The owner shall not use that land as a personal residence.

The Act does not apply if any of those four provisions are not met. For instance, if a seller owns a property in foreclosure but the buyer occupies the property as his or her personal residence, the rule on home equity transactions does not apply. Nevertheless, if all four conditions are met, the purchaser must use a sales contract for home equity. One example is the C.A.R. standard form “Notice of Default Purchase Agreement” and annexes which include the many provisions of the Act including:

• Full description of the terms of payment from the purchaser
• Notice of Recission’s Five Day Right, and Forms of Cancelation, and most importantly,
• Any terms for rent-back
• Full Disclosure of all terms of the Agreement.

Additional information on the Home Equity Sales Contract Act

Considerably, the Act provides that until the time has elapsed for the Seller to cancel the Contract, neither the Buyer nor anyone who works for him may ask the seller to sign any deed or other document. Since this right of rescission doesn’t begin to run until the buyer issues the notice, the seller cancel any time. And if the Buyer never delivers the Notice, even after the Buyer has registered their Deed, the Seller can rescind.

Additionally, the legal penalty for infringing this right is three times the equity plus lawyer’s fees and court costs. Even worse, for each violation, equity buyers who violate the home equity sales law may be convicted of a crime punishable by a one-year jail term plus a $25,000 fine. What about real estate agents, the law requires that an authorized security insurer contract a buyer’s agent, but there were no insurers willing to bid the bond. The bonding provision extends to the agent or dual agents of a seller but not exclusively to a listing agent.