[EQUITY] BUYER BEWARE: HOME EQUITY SALES CONTRACT ACT (CIVIL CODE 1695-1695.17)
A shortage in inventory has caused home prices to jump over the last year. Homeowners that avoided foreclosure through the federal and state protections may be able to capitalize on increased values and sell their homes before the moratoriums expire later this year. With the anticipated market changes in 2022, investors, professional and otherwise, should take care to follow the requirements of the Home Equity Sales Contract Act when purchasing residential properties in default.
What is the Home Equity Sales Contract Act?
Home Equity Sales Contract Act (“HESCA”), codified at Civil Code section 1695 et. seq., was passed in 1979 to protect homeowners in financial distress. More specifically, HESCA seeks to regulate the transactions between an equity purchaser and equity seller to prevent fraud, deception, and unfair dealings.
What Does HESCA Apply to?
Residential properties consisting of 1-4 family dwelling units
Occupied by the owner [equity seller] as his or her principal place of residence
Where there is an existing outstanding notice of default against the property
Where the buyer [equity purchaser] does not intend to occupy the property as a personal residence
General Requirements
HESCA imposes several requirements that apply to the sales contract, as well as the circumstances of the transaction itself. The code outlines certain requirements for the format and content of the sales contract (see below), and prohibits the equity purchaser from making untrue or misleading statements regarding the value of the residence, the equity seller’s rights or obligations, or the nature of any document which the equity purchaser is induced to sign. Any attempt to obtain a waiver of any provision of HESCA will be found void and unenforceable as contrary to the public policy.
Note that the Act applies regardless of whether the equity purchaser holds a real estate license or not.
Sales Contract
The contract must be in writing and must contain the entire agreement of the parties including:
Name and address of the seller
The property address;
The total consideration to be paid and payment terms;
The date of transfer;
A conspicuous statement of a 5-day right to cancel using specific language and formatting requirements set forth in the code (“cooling off period”); and
Rental terms, if any.
Cooling Off Period
HESCA grants the equity seller a 5-day cooling off period which runs from the time the equity seller signs the contract and expires at midnight on the fifth business day following the day the seller signed the contract. During this time period the equity purchaser is prohibited from issuing payment, taking title, or encumbering the property.
If the equity seller delivers notice of cancellation during the cooling off period the equity purchaser must unconditionally return the contract and related documents.
Damages
Parties injured by a violation of HESCA can recover their actual damages, as well as exemplary damages, attorney’s fees and costs, and equitable relief. The equity seller may be entitled to rescission if the request is made within two years unless the property has been transferred to a bonafide purchaser for value. Violators of HESCA may also be subject to civil and criminal penalties.
Exceptions
HESCA does not apply where the buyer takes title for his/her primary residence or by:
A deed in lieu of foreclosure of any voluntary lien or recorded encumbrance;
A deed from a trustee following a nonjudicial foreclosure sale;
At a sale authorized by statute;
Following an order or judgment of any court; or
From a spouse, blood relative, or blood relative of a spouse.
HESCA is a complex and detailed statutory structure. The information above is by no means exhaustive, and does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only and do not create an attorney-client relationship. The experienced and knowledgeable attorneys at Blake Law Firm are available to help you navigate HESCA, foreclosures, and other real property concerns.