California Law for Real Estate Investors - Including Forclosure Issues

Probate Issuesthan ten thousand dollars ($10,000) and/or
One mistake that California real-estate investorsimprisonment in the county jail for not more than
make is signing a purchase contract too soonone year, or in the state prison.
when a probate is required.If you are going to receive any type of
Some real-estate investors try to buy propertiescompensation for acting as a foreclosure
when the deceased left real estate to familyconsultant, you should have an attorney review in
members or friends who cannot make theadvance the agreements you will be using.
monthly loan payments. If the deceased had aPredatory Lending Law
trust, generally there is no problem: The currentCalifornia's predatory lending law (Financial Code
trustee has the power to sell the property.Sections 4970-4979.6) applies to certain loans
It is different, though, if the deceased either hadsecured by a lien on a residence.
only a will, or had neither a trust or a will. In thatBasically, the predatory lending law applies where
case there has to be a probate unless there is athere is a "consumer loan" (defined below) in
will leaving everything to a surviving spouse.which the original principal balance of the loan does
(There is also an exception if the assets of thenot exceed two hundred fifty thousand dollars
estate, without subtracting any loans, is less than($250,000), adjusted upwards every five years
$100,000, but that is very unlikely if real estate isafter 2001 in accordance with the California
involved.) With a will leaving everything to aConsumer Price Index, in the case of a mortgage
surviving spouse, it is often possible to bring aor deed of trust, and where one of the following
"spousal petition" in the probate court to transferconditions are met:
full title to the surviving spouse without having to1. For a mortgage or deed of trust, the annual
go through an entire probate.percentage rate at consummation of the
Otherwise, usually a probate must be filed ortransaction will exceed by more than eight
there will not be clear title to the real estate.percentage points the yield on Treasury securities
Basically a probate is a court procedure wherehaving comparable periods of maturity; OR
the will (if any) and a listing of the assets are filed2. The total points and fees payable by the
with the Probate Court, a person representativeconsumer at or before closing for a mortgage or
(executor) is approved by the Court, creditorsdeed of trust will exceed 6 percent of the total
and heirs are given a chance to submit claims, aloan amount.
representative of the Court frequently"Consumer loan" is defined to mean a loan that is
determines the value of the estate, and ultimatelysecured by real property located in California that
the Court issues an order directing how theused, or intended to be used or occupied, as the
money and property in the estate are to beprincipal dwelling of the consumer that is improved
distributed. The whole process can take eightby a one-to-four residential unit. "Consumer loan"
months or so, although the time depends on thedoes not include a reverse mortgage, an open line
complexity of the matter.of credit, or a loan that is secured by rental
Real-estate investors should understand that anproperty or second homes. "Consumer loan" also
executor has no authority to sign contracts fordoes not include a bridge loan, which is defined as
the sale of real estate until that executor isany temporary loan, having a maturity of one
approved by the Probate Court as the personalyear or less, for the purpose of "acquisition or
representative for the estate. Also, unless theconstruction" of a dwelling intended to become
petition for the probate asks that the personalthe consumer's principal dwelling.
representative be given "full authority" (and theWhat this means is that if the loan is for an
Court grants it), any sale of real estate from theamount greater than $250,000 (and is secured by
estate must be specifically approved by thea mortgage or deed of trust) or the term of the
Court. If the Court has to approve the sale, itloan is a year or less AND is for acquisition or
may be sold for no less than 10% below the fairconstruction, then the predatory lending law does
market value determined by the Courtnot apply.
representative who values estate property.If the law does apply, a number of complex
Sometimes executors try to handle the probaterequirements come into play. Among other items,
themselves without the help of an attorney; fewthere can be no prepayment penalty for the first
know to ask for "full authority" when the initial36 months, any other prepayment provision must
papers are filed - and if it is not requested initially,meet specific requirements, the interest rate
the Court frequently will be reluctant to grant itcannot increase on default, the originator must
later. On the other hand, once a personalreasonably believe the borrower will be able to
representative has been approved with "fullmake the scheduled payments, acceleration
authority", any agreement signed with thatcannot be based on the lender's sole discretion,
personal representative regarding the purchase ofthere are restrictions on payment of
real property should be binding.home-improvement contracts and there must be
Because probate is complex and non-attorneysan identifiable benefit to the borrower. In addition,
who try to handle a probate themselvesa person who originates a covered loan cannot
frequently run into problems, if you are dealingmake a covered loan that finances points and
with a probate situation as a potential purchaser,fees in excess of one thousand dollars ($1,000) or
try to get the executor to retain an attorney6 percent of the original principal balance, exclusive
who can handle the probate. This does cost someof points and fees, whichever is greater. Because
money (although the attorney is only paid at theof the complexity of the statute, if you are going
end of the probate), but otherwise the propertyto be making loans covered by the statute, you
may be lost to foreclosure. This is particularly trueshould seek an attorney's services.
since, while many lenders will stop the foreclosureIf the person violating this section is licensed, the
process if they are given proof that an attorneylicensing agency can take disciplinary action,
is handling the probate, frequently they will notincluding suspension or revocation of the license. In
stop the process if no attorney is involved.addition, any person who willfully and knowingly
Preforeclosure Sale Requirementsviolates this law is liable for a civil penalty of not
Another mistake that real-estate investors makemore than twenty-five thousand dollars ($25,000)
is not following the requirements when purchasingin an action brought by the licensing agency.
residential property in California if a notice ofWhether licensed or not, a person who fails to
default has been recorded by the lender.comply with the law is civilly liable to the borrower
California has a detailed set of statutes settingin an amount equal to any actual damages
out requirements for contracts for residentialsuffered, plus attorneys fees and costs. For a
preforeclosure sales. (Civil Codewillful and knowing violation, the offender is liable
§§1695-1695.17.) These statutes applyto the borrower in the amount of fifteen
to any residential real property consisting ofthousand dollars ($15,000) or actual damages,
one-to-four family dwelling units, one of which thewhichever is greater, plus attorneys fees and
owner occupies as his or her principal place ofcosts.
residence, and against which there is anA court may, in addition to any other remedy,
outstanding notice of default. These statutesaward punitive damages to the borrower upon a
require, among other things, that the contract:finding that such damages are warranted.
Spell out all terms of the agreement (including, forWhile the City of Oakland had an even stricter
example, buyback rights).predatory lending law, the California Supreme
Contain certain notices that meet certain size andCourt struck it down as preempted by the State
bolding requirements.law in American Financial Services Assn. v. City of
Allow the seller to cancel, usually up until midnightOakland (2005) 34 Cal.4th 1239.
of the 5th business day after signing.Usury Law
Be accompanied by a Notice of Cancellation formUsury is governed by Art. 15, §1 of the
in duplicate.California Constitution, although some exemptions
Also, until the cancellation period ends, the buyerto it are scattered throughout the California
cannot:statutes.
Have the seller sign a deed or deed of trust.Subsection (1) governs loans primarily for
Record any deed or deed of trust regarding thepersonal, family, or household purposes, BUT
property.Subsection (2) applies to all other loans. The latter
Transfer any interest in the property to a thirdlimits interest to the higher of 10% OR 5% plus
party.the then-current Federal Reserve rate.
Pay the seller any money or other consideration.A lender may charge a borrower an extra and
In addition, the purchaser cannot make anyreasonable amount for additional incidental
untrue or misleading statements regarding theexpenses in negotiating, brokering, making, and
value of the residence in foreclosure, the amountsecuring the transaction without such charges
of proceeds the seller will receive after abeing treated as interest. To determine this, you
foreclosure sale, or any other untrue or misleadingprobably look at the points commercial lenders are
statement concerning the sale of the residence.charging for this size loan (at the same interest
Moreover, purchasers are forbidden from takingrate and same length of loan) at the time the loan
"unconscionable advantage" of the seller. Thiswas made. To the extent that points are in
applies if the seller is incompetent or does notexcess of that amount, those points count
understand the transaction (for example, if thetowards the usury limit.
seller is not fluent enough in English), and mayThere are a number of exemptions. The primary
apply in other situations as well. If "unconscionableone is for any loans made or arranged by any
advantage" is taken, the transaction may beperson licensed as a real estate broker by the
rescinded at any time within two years of theState of California and secured in whole or in part
date of the recordation of the conveyance of theby liens on real property, assuming that the
residential property.broker is compensated (however little) for doing
If any of these provisions are violated, the sellerso.
may not only be able to rescind the agreementThere is another exemption for "industrial loan
but also recover actual damages, attorneys' feescompanies" that are licensed by California, and an
and costs, and exemplary damages in an amountexemption for licensed finance lenders.
equal to the greater of three times actualIn addition, there is an exception for
damages or $2,500. Fraud or deceit mayshared-appreciation loans.
additionally be punished by a fine of $25,000, byIf there is a violation and the interest has not
imprisonment in the county jail or in state prisonbeen paid, the interest provision is void and the
for not more than one year, or by both for eachlender recovers only the principal, although the
violation. Other remedies may apply as well.borrower could seek punitive damages as well. If
Any provision of a contract which attempts orthe interest has been paid, then an uncodified law
purports to limit the liability of the purchaser isallows treble damages.f you are going to pay a
void and, at the option of the seller, renders thelicensed real-estate broker to arrange the loan, it
purchase contract void.is strongly recommended that you have a brief
Moral of the story: If you are going to bewritten agreement in place with that broker as
purchasing preforeclosure residential property, youevidence.
should have an attorney review your forms.Licensing for Making Residential Mortgage Loans
Restrictions on Giving Foreclosure AdviceYou cannot be engage in the business of making
California also has specific statutes regardingresidential mortgage loans in California without
residential foreclosure consultants. (Civil Codebeing licensed in some way. (See, e.g., the
§§2945-2945.11.) Part of these statutesCalifornia Residential Mortgage Lending Act,
are directed at those who charge an owner forCalifornia Financial Code Section 50000 et seq.)
helping the owner obtain any money remainingThis means that either you will need to obtain a
after a foreclosure sale, although the statuteslicense or involve a licensed real-estate broker or
cover more than just that. "Foreclosuresome other appropriately licensed person for such
consultant" basically is defined as any person wholoans. For more information, see the California
makes offers to perform for compensation orDepartment of Real Estate's page at ("FAQs:
who performs for compensation any service to:Mortgage Loan Brokering in California").
1. Stop or postpone the foreclosure sale.Other Limitations on Real-Property Loans
2. Obtain any forbearance from any lender.The California "Real Property Loans" statutes puts
3. Assist the owner to exercise a right ofrestrictions on late charges and on prepayment
reinstatement.penalties. (California Business & Professions Code
4. Obtain any extension of time for the owner to§10240 et seq.)
reinstate his or her obligation.Any late charge imposed for late payment of an
5. Obtain any waiver of an acceleration clause.installment due on a loan secured by a lien on real
6. Assist the owner to obtain a loan or advanceproperty cannot exceed an amount equal to 10
of funds.percent of the installment due, except that a
7. Avoid or ameliorate the impairment of theminimum charge of five dollars ($5) may be
owner's credit.imposed. No charge may be imposed more than
8. Save the owner's residence from foreclosure.once for the same late payment of an installment,
9. Assist the owner in obtaining any remainingand no late charge may be imposed on any
proceeds from the foreclosure sale.installment which is paid or tendered in full within
With the exception of the last item, there are10 days after its scheduled due date.
exceptions for licensed real-estate brokers andAlso, only a prepayment made within seven years
agents, accountants, licensed residential mortgageof the date of execution of such mortgage or
lenders and servicers, etc.deed of trust may be subject to a prepayment
The owner has the right to cancel such acharge. An amount not exceeding 20 percent of
contract until midnight of the third "business day"the unpaid balance may be prepaid in any
after the day on which the owner signs the12-month period. A prepayment charge may be
contract.imposed on any amount prepaid in any 12-month
The contract must be in writing and, among otherperiod in excess of 20 percent of the unpaid
things, must:balance which charge shall not exceed an amount
Fully disclose the exact nature of the foreclosureequal to the payment of six months' advance
consultant's services.interest on the amount prepaid in excess of 20
Fully disclose the total amount and terms ofpercent of the unpaid balance.
compensation.There are additional requirements that apply if the
Contain a specific notice in a minimum size andloan is a first trust deed with a principal of less
with bolding.than thirty thousand dollars ($30,000) or is a junior
Have a Notice of Cancellation form attached inlien with a principal of less than thousand dollars
duplicate.($20,000). Such small loans seem unlikely.
Only after the 65-day period following anyTrusts to Avoid Transfer Taxes and Due-on-sale
foreclosure sale, may the foreclosure consultantClauses
enter into a contract to assist the owner inA land trust (at least in California) is just a trust
arranging the release of funds remaining after thethat has a piece of real property as the trust
foreclosure sale. This agreement also mustasset. (Some states have specific land-trust
contain a specific notice in a minimum print size instatutes, but California does not.)
bold.Virtually all fixed-interest loans secured by a
Among other things, it is a violation for theresidence have a "due-on-sale" clause that allows
foreclosure consultant to:the lender to call the loan when the property is
1. Receive any compensation until after thesold, transferred, etc. Some purchasers have the
foreclosure consultant has fully performed.property put into a trust so that the lender does
2. Receive any fee or other compensation whichnot discover that a transfer of the property has
exceeds 10 percent per annum of the amount ofbeen made that would trigger the due-on-sale
any loan which the foreclosure consultant mayclause. More specifically, what they do is have the
make to the owner.original owners set up a trust and transfer the
3. Take any wage assignment, any lien of anyproperty into it via a deed. Then when sale
type on real or personal property, or otheroccurs, the beneficiaries and trustees in the trust
security to secure the payment of compensation.are changed to the new owners; no deed to the
4. Receive any consideration from any third partynew owner is recorded. Some take it step further
in connection with services rendered to an ownerand when they re-sell the property they again
unless that consideration is fully disclosed to thechange the beneficiaries and the trustees to the
owner.latest new owners.
5. Acquire any interest in a residence inLenders, though, have a variety of ways by
foreclosure from an owner with whom thewhich they learn that a transfer has taken place
foreclosure consultant has contracted.(for example, the signature of the trustee
6. Take any power of attorney from an ownerchanging on the checks). As a practical matter, a
for any purpose.year or two may go by, but the lender almost
7. Induce or attempt to induce any owner toalways seems to find out eventually. Some
enter into a contract that does not comply withlenders are governed by regulations that require
the foreclosure consultant statutes.them to exercise the due-on-sale clause if they
8. Enter into an agreement to assist the owner indiscover that a transfer has been made.
arranging the release of surplus funds prior to 65Probably the most a lender would do is call the
days after the trustee's sale is conducted.loan and not actually sue anyone, but taking this
Note that (e) means that someone cannot bothapproach seems to constitute inducing the original
be paid as a foreclosure consultant AND alsoowner to breach the due-on-sale provisions of the
purchase some or all of the property.loan agreement and might even be considered
A foreclosure consultant is also liable for the actsfraud. There are also Prop. 13 issues in California in
of any representative that he/she uses.that normally a transfer of real property (except
Any waiver by an owner of the statute is void,to certain family members) triggers a reappraisal
and any attempt by a foreclosure consultant toof the property at fair market value. That could
induce an owner to waive his/her rights is aalso expose a purchaser to liability in this situation.
violation of the statute.There are legitimate uses of a land trust, including
If a foreclosure consultant violates any of thepreserving privacy and avoiding - legally in some
statutes, the owner may receive a judgment forcases - some transfer taxes. If a piece of
actual damages, reasonable attorneys' fees andproperty is only going to be owned for a few
costs, and appropriate equitable relief. The courtweeks before resale where a deed is used with
also may, in its discretion, award exemplarythe last buyer, a land trust may be OK, since the
damages and must award exemplary damageslender and the county are notified of that sale.
equivalent to at least three times theOutside of that situation, using a land trust to
compensation received by the foreclosureavoid the due-on-sale clause or reappraisal may
consultant in violation of certain provisions, andexpose the purchaser to liability.
three times the owner's actual damages for anyYou are welcome to copy and distribute this
violation of other provisions, in addition to anydocument for non-commercial purposes, but both
other award of actual or exemplary damages.of the following must be left on it:
The owner may bring the action up to four yearsThe foregoing article constitutes general
after the date of the alleged violation. In addition,information only and should not be relied upon as
there may also be criminal penalties of not morelegal advice.