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Notice of Default  – Home Equity Sales Contracts

by | Dec 9, 2022 | Contracts and Forms

BROKER RISK MANAGEMENT

WEEKLY PRACTICE TIP 

QUESTION:  I recently took a listing of a single-family home.  The Seller has just informed me that he stopped making his mortgage payments several months ago; he wanted a better cash flow to fix-up his residence in anticipation of a sale in this limited inventory market.  His lender has now filed a Notice of Default.  There is more than sufficient equity in the Property to pay off the loan and the arrearages.  We are about to hear offers but I want to make certain that my Seller’s rights are protected.  I recall that special steps must be taken when selling property that has a recorded Notice of Default; can you provide any guidance?

ANSWER: Yes, when selling residential property where a Notice of Default (“NOD”) has been filed, there needs to be an immediate assessment as to whether the Home Equity Sales Contracts Law (“HESC”) applies. The HESC law only applies if ALL FOUR of the following facts are true:

  1. The property is residential, one-to-four units;
  2. The Seller currently occupies one of the units on the property;
  3. A NOD has been filed; AND
  4. The Buyer does not intend to occupy the property (the Buyer is an investor).
  5. HOME EQUITY SALES CONTRACTS (HESC) LAW (Civil Code Sections 1695-1695.17)

The HESC law was first enacted in 1979 because homeowners whose residences were in foreclosure had been subjected to fraud, deception and unfair business practices by some investor buyers.  The majority of defrauded sellers were homeowners in financial distress, especially the poor, elderly and financially unsophisticated urban dwellers.

It appears from the facts outlined above that the first three factors exist in this situation.  If the “winning” offer is from a Buyer who intends to occupy the property then the HESC law does not apply. However, if the Seller intends to sell the property to an investor Buyer then the HESC law applies and the Seller has two very specific statutory rights:

  1. A Cancellation Period that lasts until midnight of the fifth business day after the Seller signs the purchase agreement; AND
  2.  A two-year Contract Rescission Period

The law prohibits the Buyer from even attempting to get the Seller to waive the provisions of the HESC law and/or to attempt to limit the liability of the Buyer from damages resulting from the statements or conduct of the Buyer or the Buyer’s Agent.  Any violation of the HESC requirements by the Buyer could lead to any or all of the following: (a) a fine of not more than $25,000.00: (b) imprisonment of up to 1 year; (c) payment of Seller’s actual damages including attorneys’ fees and costs; and (e) exemplary damages.

  1. HESC REQUIRED DOCUMENTS

To ensure compliance with the HESC law, use the following 2 C.A.R. forms:

  1. The Notice of Default Purchase Agreement (CAR Form NODPA); AND
  2. A fully completed Notice of Cancellation of the NODPA (CAR Form HENC) which must be included with the NODPA. (Which is bundled with the NODPA on zipForms)

III.  SELLER MOVES OUT:  Many agents ask “But what if the seller has moved out?”

That depends on the facts of the case.  If the seller just moved out to a local hotel, then maybe not; because it is likely that the seller has not yet established a new principal residence.  Also, if the seller moved out after being approached by the buyer or buyer’s agent, that might look as though the buyer or agent convinced the unsuspecting seller to move out just so the buyer and his/her client could make the transaction work.

However, one case in California found that where the seller had moved out and established a principal residence elsewhere prior to the time that seller was approached by the buyer, then there was no violation of the HESA.

PRACTICE TIPS

  1. Listing Agents should always ask whether the Seller’s loan payments are current and whether the Lender has filed a Notice of Default.
  2. If the Seller resides in residential 1 to 4-unit property and has missed several loan payments and/or a Notice of Default has been filed, the best practice for Listing Agents is to include in the MLS Agent Remarks section that any “investor Buyer” must use the CAR NODPA form.
  3. NOTE: If a NOD has been filed, the Seller needs to make sure that the lender does not proceed with a foreclosure action.  The Seller should immediately advise his/her lender that the property is listed for sale.  Seller’s Agents should urge the Seller to enter into a written agreement with the lender to stay the foreclosure.  If the lender will not agree, in writing, to stay the foreclosure then the Seller should be strongly encouraged in writing (such as an email) to immediately contact a qualified California real estate attorney.
  4. Buyer’s Agents who are working with investors seeking to purchase residential property should find out (prior to writing an offer) if there is a Notice of Default and whether the Seller resides in the property. If all four factors exist, then the Buyer’s Agent needs to use 2 CAR forms:  NODPA and HENC.
  5. Agents working with Investor Buyers should alert their clients to the unique requirements of the HESC law. The best way to do that is to  provide investor Buyers with the CAR Legal Q&A entitled NOD & Investor Transactions: Home Equity Sales Contracts which can be accessed at https://www.car.org/riskmanagement/qa/foreclosure-short-sale-folder/home-equity-sales-contracts
  6. Buyer’s Agents should make certain that neither they nor the Buyer make any attempt to get the Seller to waive the provisions of the HESC law and/or to attempt to limit the liability of the Buyer from damages resulting from statements or conduct of the Buyer and/or the Buyer’s Agent.

 

This Weekly Practice Tip is an attorney-client privileged document for the exclusive use of clients of Broker Risk Management and their agents.  It may not be reproduced or distributed without the express written consent of Broker Risk Management.  The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.