When a property owner is behind in his or her payments, and in danger of losing the property, an obvious solution is to sell. This can be a good idea. Buyers, however, should be careful about buying a residence in foreclosure. The Home Equity Sales Contract Act, Civil Code Section 1695 et. seq., may apply to such a purchase, and, if it does, the buyer has to comply with the law.
The Home Equity Sales Contract Act was passed when home prices were rising rapidly, and most homeowners – even those not able to pay their mortgage – had a great deal of equity. The Legislature was concerned that predatory buyers might take advantage of unsophisticated homeowners. Specifically, the Legislature wanted to be sure that homeowners were fully informed, had clear written agreements and would not be victimized by fraud.
The law applies to any person who acquires title to any residence in foreclosure, with one to four units, except for: (1) a person who buys the home as his or her own residence; (2) a person who acquires via a deed in lieu of foreclosure; (3) a person who acquires via a power of sale in a non-judicial foreclosure; and (4) a person who acquires from a spouse or family member. Civil Code Section 1695.1.
If the law applies, then the agreement between the parties must be written, in at least 10 point type and in the language used by both buyer and seller. If the deal is negotiated in Spanish, the written agreement must be in Spanish. Civil Code Section 1695.3. The contract must set forth the entire agreement, and it must state:
(a) The name, business address, and the telephone number of the purchaser.
(b) The address of the residence in foreclosure.
(c) The total consideration to be given by the purchaser.
(d) A complete description of the terms of payment including, but not limited to, any services which the purchaser says he will perform for the seller before or after the sale.
(e) The time at which possession is to be transferred to the purchaser.
(f) The terms of any rental agreement.
Finally, and perhaps most critically, the buyer is given a right of recission, and the law requires that he or she be given multiple notices of this right of rescission. Pursuant to Civil Code Section 1695.4, the seller can rescind the sale for up to five business days after the contract is signed. (“Business days” means weekdays, which are not legal holidays.)
The buyer must give the seller notice of this right to rescind in at least two ways. First, Civil Code 1695.5 provides that, near the signature block on the agreement, in at least 12 point type, there must be a statement that the seller can rescind the agreement for five business days. Second, Civil Code Section 1695.3(h) and 1695.5(b) provide that the buyer must give the seller a separate document, captioned Notice of Cancellation. The precise format which this notice must follow is described in the statute.
What happens if the buyer does not deliver the Notice of Cancellation as required by law? In that case, the seller’s right to cancel the contract lasts forever. Civil Code Section 1695.5. The five day deadline to rescind does not start to run until the notice is delivered; if it is never delivered, then the time clock never starts to run