You’ve recorded the deed to Joe’s house and as far as you know, he’s planning to move to Oregon or Nevada to start over. If you’re lucky, you’ve determined that there are no other encumbrances against the property, such as tax liens, waste liens, medical liens, and/or other deeds of trust.
As any pre-foreclosure buying course will instruct you, if you intend to buy a home in foreclosure, DO YOUR HOMEWORK. Most liens will be of public record. The advantage of buying a home of someone in your area is that you can head down to the Recorder’s office and search the title record of the Grantor.
Searching the record is not a guarantee that the property doesn’t have other defects, neither does relying on a preliminary title report from a title company. For one thing, title reports are prone to numerous defects and for another, they state right on the report that they are only an offer to sell title insurance for that information. That means that if they are incorrect and you have not yet actually purchased the title policy, then the results on the prelim cannot be enforced.
Now you’re got the property and you start rehabilitating it. There’s some deferred maintenance, and hopefully you do not have major capital improvements like a new roof that has to go on. After a month of sweat equity from you and your family into the house, you have it in good condition. Now you have to determine whether you wish to sell or rent the property.
Perhaps it’s fall and you decide to do a short term lease until spring when real property sale prices are usually more favorable. Now you have to decide on the rental price. This is a problem because the monthly mortgage and property taxes are going to require $4000 a month.
Rental values are about $2300-2700. Can you afford to go negative, even with the additional tax benefits? Well, in a rising market, you may be ok. You’d eat about $1,500/mo. for 6 months, but the difference in house prices between the Fall and the Spring could exceed the $9k loss and you’ll be able to sell it for more.
This is all sounding rather smooth, right? Why have you always heard such negative things about equity purchasing? Well, for one thing, the negative press is almost certainly on those the purchasers who offer to lease back to the owner, along with a buy back provision at a fixed price.
Such a scheme would most likely be construed as a loan rather than real purchase. If someone can’t afford to keep their home, what is the likelihood that they can afford to lease their home and repurchase it?
However, say you had offered to lease back to Joe at $2,800/mo. to give him a few months to get himself ready for the move, with the understanding that you hope to sell the house in the spring.
Joe has the $50k that you paid for the house. He’s agreed to vacate the property when you are in escrow. A few months down the road, you think about listing the house and after looking at comps, find that it is likely worth over $800k. This is turning out to be a really good investment for you.
You didn’t fall into the scheme of some equity purchasers, by offering a buyback. Joe is happy to have some cash, and the luxury of time to make decisions. So far, it’s been a win win, with the exception that you have to supplement the monthly obligation to the tune of $1500+ per month since the rent does not cover the mortgage or taxes and property insurance.
However, Joe has found a good job in Santa Clara. He no longer feels motivated to leave the area and he’s feeling optimistic about remaining in Silicon Valley.
He learns that house prices are still rising and now he’s feeling a bit sour that he’s losing out on the upside to his home. This could become a huge problem for you. For one thing, California Statutes govern equity purchasing. California Civil Code Section 1695 clearly lays out the obligations of the equity purchase, as well as the language of the form contract. Equity sellers have a mandatory five day right of rescission.
If you did not use this contract, then you’ve got a big issue. If you used this contract, but no one got around to signing it, you’ve got a big issue. If you used this contract, and it’s signed but no one dated it, you’ve got a big issue. If you used this contract, and it’s signed and dated but the dates allotted fewer than 5 days, you’ve got a big issue. If you used this contract, and it’s signed and dated, and the dates allotted 5 days, but not 5 business days, you’ve got a big issue.
Why? Because Joe could seek rescission of his sale to you. The Code clearly states that for any violation (no matter how technical):"The equity seller shall recover actual damages plus reasonable attorneys’ fees and costs. In addition, the court may award exemplary damages or equitable relief, or both, if the court deems such award proper, but in any event shall award exemplary damages in an amount not less than three times the equity seller’s actual damages for any violation of paragraph (3) of subdivision (b) of Section 1695.6 or Section 1695.13; or the court may award a civil penalty of up to two thousand five hundred dollars ($2,500), but it may not award both exemplary damages and a civil penalty…"
But wait, you think, Joe would have lost the house in foreclosure sale but for your purchase. That is true and if you were embroiled in litigation with Joe, he would have to demonstrate that he had the ability to keep his house if he wants to claim damages for the increase in value.
Lesson to take away is that while it is tempting to offer the equity seller the incentive to stay longer in the property, it also adds a seller’s remorse factor in an upward market. To further minimize the risk of litigation, make sure you use the statutory language and that you carefully complete the required equity purchase form to avoid the seller’s claim of rescission.