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California Foreclosure Contracts

By: John S. Brooks

Foreclosures and Short Sales are the new investing game in town, and likely to be the dominant method for some years to come. But what happens if someone actually agrees to do a deal with you?

Do you feel fear creeping in? Do you start getting nervous because now you have to pull out the contracts and actually fill them out? You are not alone - many investors feel the same way.

There are a few things you can do so you can confidently whip out that paperwork and ask for them to initial and authorize – because as trained sales professionals, we of course do not refer to crass things like contracts and signatures!

First we need to choose our tools properly. In this case, contracts that are written and/or reviewed by local attorneys specializing in creative real estate are essential. You cannot use a contract from some out of state guru and use it here. If they have the best ever contract that protects you in 96 different fail-safe ways and you want to use it, that is fine – after you have taken it to an attorney and made it legal for your area.

I have seen a number of contracts used in California by investors when they are working with homeowners in foreclosure that are not compliant with California law. Consider that there are penalties of up to $25,000 and one year in prison PER VIOLATION! Considering the specific language used in the statutes, such as requiring 12 point font in one area, 14 point in another, that the contract be in the primary language it was negotiated in, and proscribed language in many other key areas, there are potentially many violations per contract (Note: NCREI is translating the Equity Purchase Agreement into Spanish).

So if you are buying a house, the first thing to check in California is if they are a homeowner in foreclosure:

1. Are they living in the residence?

2. Is it between one to four units?

3. Has a Notice of Default (NOD) been issued?

If you answered yes to these questions, then you are dealing with a homeowner in foreclosure and you must use an Equity Purchase Contract or Agreement compliant with 1695 (copy on NCREI Resource Page).

If you don’t have a contract you can get a California legal contract from First Tuesday. They are even free until November 2007 FirstTuesday.us.

You must use an Equity Purchase Contract if you are buying the home:

1. in a short sale situation – even if there is no equity.

2. 'Subject to' and leaving the financing in place.

3. even for full market value of the property.

In short, no matter how you intend to buy the property, there are things you must do if they meet the definition of a homeowner in foreclosure. There is one exception. If you intend to occupy this property as your primary residence – then you are exempt.

What contract should you use if you are working with a homeowner who is behind, but has not been issued a Notice of Default?

It depends. If you are going to buy the house and do not need to do a short sale than you can use a regular contract. However, if you need to do a short sale, then you should use an equity purchase agreement! Because you cannot put the purchase price or a closing date in the document, you cannot complete a valid legal contract.

Chances are that by the time you get your short sale negotiated, the NOD will be issued – so you should go ahead and use the Equity Purchase Contract. Because you should go back to the sellers after you have completely negotiated the deal, have them sign the documents again, and start the five day right of rescission period clock again.

Many investors will not do this, and think that restarting the clock is being overly cautious and may cause them to lose a deal. If you are a small player, you may get away with taking risks. If you plan on being a serious investor and doing a lot of deals then you are a target and should ensure that your deals are completely clean. As for losing the deal – if you are doing your job of keeping in touch with the homeowners, you won’t have to worry about them bolting.

Before you go out on your first deal, take out five or six forms and fill them out for different situations. Get comfortable with them. Practice reading them upside down so you can explain them as you go and finally have a few jokes ready for the inevitable screw-ups when you start out such as 'I guess that’s why I never went to law school'.

So to be more comfortable at the kitchen table, read the law about working with homeowners in foreclosure. Make sure you understand it. If you are using contracts from an out-of-state guru, get them checked for California compliance. Finally, realize that it is just a house and just one deal – there are literally hundreds of thousands more distressed properties in Los Angeles County alone. If you mess up the first few, chalk it up to practice and keep going.

Happy Investing,

John S. Brooks

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Article Source: http://ezine-articles-planet.com

John S. Brooks, is Vice-President at the National Club of Real Estate Investors and an expert on owner financing issues. This article was first published at NCREI. To claim five FREE real estate training CD’s and to get more articles on owner financing go to NCREI.COM.

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