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August 30, 2007

Investing In Pre-Foreclosure Properties After a Notice of Default is Filed

There is a little known California law that affects the ability of real estate agents to represent investors in the purchase of a property that has received a notice of default. If the law is not followed, agents and investors can face large fines and possible criminal charges.

This law also affects properties that have not received a notice of default before an offer is accepted, but then receive a notice of default after escrow has opened. This is a real possibility when dealing with short sale properties, so beware.

The following information was provided to agents of RE/MAX Gold during our yearly legal update:

California Civil Code Section 1695 relates to property where an owner has received a Notice of Default.

There are four tests to determine if CCS 1695 applies:

1) 1-4 residential property

2) The property is owner occupied by the seller

3) There is an outstanding notice of default (NOD) recorded against the property

4) The buyer does not intend to be an owner occupant for at least one year after close of escrow

If these conditions are present and CCS 1695 applies, a real estate licensee cannot represent the buyer without posting a bond for at least twice the purchase price.  These bonds have not been available for the 18 years this law has been in effect.

If CCS 1695 applies there are certain procedures that must be followed by any purchaser, including investors who are working without an agent. These include a notice of the 5-day right of rescission, and the right of the seller to claim he or she was taken advantage of and take the property back at the original sales price within one year of COE.

If a purchaser violates any of the provisions of CCS 1695 they may be subject to a fine of up to $25,000 and/or up to one year in state prison for each violation.  An investor in the Bay Area who bought 60 such properties is currently facing 60 felony counts brought by the District Attorney.

A recent trial court judge ruled in two recent cases that the filing of an NOD while the property is in escrow triggered the provisions of CC 1695.  CAR has suggested that if agents are working with and investor and they are in an escrow with an owner who is given a NOD, the agent should cancel the contract and enter into a new contract where they is not representing the investor.

In light of these decisions it is thought that the CAR NODPA (Notice of Default Purchase Agreement) may not provide the level of protection originally intended.

CAR is pursuing legislation that would remove the requirement for the bond which is not available and allow a broker to represent a Buyer/investor if the transaction is covered by E and O insurance, or in the alternative, to give the seller access to the DRE recovery fund.

Civil Code Section 1695 relates to property where an owner has received a Notice of Default.

There are four tests to determine if CCS 1695 applies:

The moral of the story is be careful when investing in pre-foreclosure properties. This is one of the few times where the law is set up to protect the seller from the buyer.


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Joe D Says:

I'm curious, is this a law that only applies in your state? If you happen to know.

Patrick Hake Says:

This law is part of the California Civil Code. I probably should have been clearer on that in the original article.

I think I will go back and add California to the beginning of the article, so that it is clearer in the future.

I would not be surprised if there were similar laws in other states as well.

Roy Smith Says:

Where can I obtain a CAR NODPA (Notice of Default Purchase Agreement)?

Patrick Hake Says:


If you are a member of CAR, you can download it from Winforms. If you are not a member, you should still be able to purchase it from a local Realtor Association store.

The Sacramento and Placer County associations both have stores on site that are open to the public. The price is lower for members, but it is still open to the public.

I assume this would be true for other Realtor associations in California.

Patrick Hake Says:

I just did some more research and was able to find a package on the CAR website that includes the Home Equity Explanation and Agency Agreement, Notice of Default Purchase Agreement and the Notice of Cancellation of Notice of Default Purchase Agreement.

They do not seem to have the NODPA for sale seperately.

The page for this packet can be found at: http://store.car.org/Default.aspx?tabid=53&PageType=1&Param1=SF0HEAA

They describe the packet as, "This tri-partite package of forms is only used when an owner-occupant of residential property, against which a Notice of Default has been recorded, is selling the property to an investor purchaser. The HEAA describes the law regarding this particular type of transaction, the consequences for violating the law, and the withdrawal of the buyer’s agent from the transaction. The NODPA is the actual purchase agreement printed in the statutorily required format. The HENC is the form the seller uses if the seller desires to rescind the sale within the statutory period. (1/06)"

John Beck Says:

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Patrick Hake Says:

The bond requirement stipulated by CCS 1695 was determined by the appellate courts to be too vague and therefore unenforceable.

Based on that decision and the following denial to review the decision by the state supreme court, Realtors can now represent investors in the purchase of properties that have received a notice of default.

News of this decision can be found at http://www.foreclosureforum.com/mb/messages/25778.html.

Special contracts prepared by the California Association of Realtors must still be used to provide the adequate rescission periods required under the law.

All that has been changed is the requirement that Realtors hold a bond for each transaction in the amount of the purchase.

Tax Foreclosures Says:

Investing in foreclosed properties is common , the process can be rapid or lengthy and varies from state to state. Other options such as refinancing, a short sale, alternate financing, temporary arrangements with the lender, or even bankruptcy may present homeowners with ways to avoid foreclosure.

Ken Z Says:

I bought a property from an owner who asked me to buy him out 20 years ago. He asked me to take over his loan and pay of his second so he would not have a foreclosure on his record. I did. Now he wants to invoke 1695. Is this possible.

Patrick Hake Says:

Hello Ken,

I do not know the specific application of this law. I was sharing the information to help warn investors that they need to be careful when considering pre-foreclosure properties and that they need to take specific steps and use specific contracts to avoid issues.

I suggest that you contact a real estate attorney.


Ed Miclat Says:

Is NODPA required on all short sales?

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