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Reminder Regarding the “Home Equity Sales Contract” Act

by | May 30, 2025 | Uncategorized

BROKER RISK MANAGEMENT

WEEKLY PRACTICE TIP

Recently, Broker Risk Management (“BRM”) received questions from clients pertaining to the sale of properties which are in foreclosure.  If a property is owned and occupied by the seller, in foreclosure and being sold to an investor, the Home Equity Sales Contract Act (“Act”) may apply.  Extreme caution should be used when handling these transactions.

The Act was initially enacted by the California legislature to protect sellers who have defaulted on loans secured by their homes and are preyed upon by investors attempting to take advantage of the sellers’ situation.  If the Act is violated, the penalties are extraordinary.

Any violation of the Act by the Buyer or agent could lead to any or all of the following remedies:  (a) payment of Seller’s lost equity including attorneys’ fees and costs; (b) exemplary damages in an amount not less than three times the seller’s lost equity; (c) a fine of not more than $25,000; (d) imprisonment of up to 1 year; and (e) the Seller can rescind any transaction found to be unconscionable within two years of the close of escrow.

The Act applies if the following conditions exist:

  1. The property is residential, one to four units;

 

  1. The seller is a person who is currently occupying the property;

 

  1. The property is in foreclosure; and

 

  1. The purchaser is an investor.

 

The first element of residential, one to four units, is fairly straightforward.  The second element of the seller currently occupying the property means that the seller must consider the property to be their residence.  However, that can be a gray area.  If a seller has two homes or is temporarily living somewhere else, agents should view this condition conservatively.  If there is any argument that the seller is occupying the property, agents should consider it occupied for purposes of application of the Act.

The third element of being in foreclosure means that a Notice of Default (NOD) or Notice of Sale (NOS) has been recorded against the property.  However, if a notice has been rescinded, the Act likely does not apply.

An investor is someone who is purchasing the property without the intent to occupy it.  Even if a third party is purchasing the property to help (i.e., a friend or relative) who does not intend to occupy the property, the fourth element should be considered met.

The Act requires that the seller be given a five-day option to rescind the purchase contract.  This gives the seller a “cooling off period” to consider whether the seller really wants to sell the property.

Some investor buyers may attempt to ask the seller in the purchase offer to waive or limit the provisions of the Act.  However, any attempts to waive or limit protections in the Act are strictly prohibited.

It is recommended that if a seller discloses to an agent that they have not been paying their loan secured against the property, the agent should check with the title company to see if a NOD and/or NOS have been recorded.  If so, the Act may apply if the other elements are met.

If the Act applies, agents should use California Association of Realtors’ Notice of Default Purchase Agreement (NODPA), and a fully completed Notice of Cancellation of the NODPA (CAR Form HENC) which must be included with the NODPA. (This form is bundled with the NODPA on zipForms).  If agents need assistance, they should consult with their manager who can contact BRM.

PRACTICE TIPS:

  1. If an agent receives an indication from a seller that the property could be in foreclosure, the agent should contact the title company to determine if a NOD and/or NOS have been recorded. If so, the agent should undertake an evaluation as to whether the seller is occupying the property and whether any potential buyer submitting an offer is an investor.  If all elements have been fulfilled, CAR’s NODPA should be used.

 

  1. If an agent has questions or concerns, the agent is encouraged to consult with their manager, who can consult with BRM.

 

  1. If a NOD and/or NOS is recorded midway through the transaction after an RPA has been executed, it is recommended that a new purchase contract on CAR’s NODPA form be utilized. While the Act does not specifically address this situation, because of the extraordinary penalties affiliated with violating the Act, handling should be viewed cautiously and conservatively.

 

RESOURCE: For more information see 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

WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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 LLP. 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 practice.