Law Review: Buy a home in foreclosure at your peril |

Law Review: Buy a home in foreclosure at your peril

Jim Porter
Law Review

It’s fair to say that most of us like a good deal. There’s nothing wrong with that.

One potentially good deal you should be very careful about: buying a home in foreclosure. Whether trying to help a friend in foreclosure or looking to buy a home in foreclosure on the cheap, beware.


California protects owner-occupied, 1-4 unit residential property in foreclosure, which means a Notice of Default has been recorded. A home equity purchase occurs when such property is purchased for rental, investment or dealer purposes. If you’re buying to live in the home, you are not subject to the home equity sales restrictions.

The prefatory language of Civil Code section 1695 reads: “The Legislature finds and declares that homeowners whose residences are in foreclosure have been subjected to fraud, deception, and unfair dealing by home equity purchasers.”

In short, the Legislature presumes that buyers of homes in foreclosure are taking advantage of the unfortunate homeowner who is unable to keep current on a home loan. Failure to comply with the home equity law is a crime.


A home equity purchase contract, which could include a short sale if an investor is buying from a homeowner in foreclosure, must be printed in at least 10-point bold type and contain specific notices to the seller, including a 5-Day Notice of Right to Cancel. Failure to use the correct form, in particular, the Notice to Cancel allows the home equity seller to later cancel the contract and also subjects the buyer to damages and harsh penalties. (California Association of Realtors has a perfectly fine form.)


The home equity purchase legislation also regulates real estate agents when they act as the buyer’s agent for home equity purchases of an owner-occupied home in foreclosure that their buyer client does not intend to live in. Such an agent when negotiating a home equity purchase must deliver to the seller-in-foreclosure a disclosure statement that he or she is a licensed real estate agent, and the agent must be bonded for twice the property’s fair market value. Wow.


Buying an owner-occupied home in foreclosure to help the homeowner is no defense for failing to comply with the home equity purchase contract requirements. In one case a real estate broker purchased a home in foreclosure, then leased it back to the previous owner, giving her a one-year right to re-purchase her own home. You would think that is a win-win.

Nope. The homeowner in foreclosure got her home back and recovered a judgment for actual and punitive damages against the broker.


Bottom line, if you are buying an owner-occupied home in foreclosure you do not intend to use as your personal residence, you must use the very detailed home equity contract with specific notices, and must fully comply a the law that has many trip-wires designed to protect the seller-in-foreclosure.

Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee and Tahoe City, and Reno. His practice areas include: real estate, development, construction, business, HOA’s, contracts, personal injury, accidents, mediation and other transactional matters. He may be reached at or

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