The Wisdom of Purchasing a Property in Foreclosure in California

Signing a real estate contract

If you are considering purchasing a residential property in California that is in foreclosure, you should be aware that you are about to engage in heavily regulated activity. Those of you that know me are aware that I am no fan of burdensome regulation.  But, if you are seeking to invest in residential properties, you will have to contend with some of this regulation.  The California Home Equity Sales Contract Act sets forth various requirements you will need to comply with if you are involved in this type of transaction.[1] These requirements are designed, in part, to preserve home equity and the value of homeownership; and to protect homeowners in financial distress, many of whom are vulnerable and likely to be easily deceived or taken advantage of by investors.[2] Failing to comply with some of these requirements could expose you to being sued, incurring fines, and even imprisonment in county jail.[3]

          The purpose of this article is to give you basic information concerning the main requirements. For detailed information about purchasing a property in foreclosure in California, you should contact a real estate attorney.

Who Do the Requirements Apply To?

          First, the requirements generally apply to any person who acquires title to any residential property consisting of one- to four-family dwelling unit that is in foreclosure – in other words, that has an outstanding notice of default recorded against it.[4] There are some exceptions, including but not limited to a person who plans to use the property as a personal residence; or a person who acquires title to the property from a spouse, blood relative, or spouse’s blood relative.[5]

Main Requirements of the Contract

          There must be a signed, written contract reflecting the terms of the transaction. California goes so far as to require that the font must be 10-point bold type.[6] California law requires the purchaser to provide the appropriate contract.[7] The contract must include specific terms, including:

  • Specific contact information of the purchaser;
  • Address of the residence in foreclosure;
  • Description of the terms of payment including the total amount to be paid;
  • The time at which possession of the residence will be transferred to the purchaser;
  • The terms of any rental agreement;
  • A notice of cancellation with very specific requirements; and
  • Specific language set forth in 14-point boldface type, warning the seller they cannot sign a deed until their right to cancel has expired.[8]

Right to Cancel

          The seller has a right to cancel the contract. This right expires at midnight on the fifth business day following the day the seller signed the contract, or until 8 a.m. on the day scheduled for the sale of the property pursuant to a power of sale conferred in a deed of trust, whichever occurs first.[9]

          If the seller provides a notice of cancellation, you, as the purchaser, have 10 days to return the original contract and any other documents signed by the seller, to the seller.[10]

Things the Purchaser Cannot Do

          If you are going to buy a property that is in foreclosure, you must be careful not to do any of the following while the seller still has a right to cancel:

  • You cannot accept any signed document from the seller that transfers an interest in the property to you, and you cannot try to persuade a seller to sign any such document until the time for the seller’s right to cancel has elapsed.
  • You cannot record any document signed by the seller, with the county recorder, until the time for the seller’s right to cancel has elapsed.
  • You cannot transfer or purport to transfer any interest in the property to any other person until the time for the seller’s right to cancel has elapsed.
  • You cannot pay the seller for the property until the time for the seller’s right to cancel has elapsed.[11]

          California law also prohibits sellers from making untrue or misleading statements regarding the sale of the residence in foreclosure to the purchaser, including untrue or misleading statements concerning any of the following:

  • The value of the residence in foreclosure;
  • The amount of proceeds the seller will receive after a foreclosure sale;
  • Any contract term;
  • The seller’s rights or obligations; and
  • The nature of any document which the purchaser gets the seller to sign.[12]

Consequences for Violations

          Failing to comply with many of the requirements listed above when you buy residential property that is in foreclosure could expose you to being sued; if you lose, you may have to pay the other party’s damages, as well as their attorney’s fees and costs. In some circumstances, you may be required to pay three times the other party’s actual damages or a civil penalty up to $2,500. Any such lawsuit must be filed within four years after the date of the alleged violation.[13]

          Violating many of the provisions listed above also exposes you to a fine of up to $25,000 for each violation and/or imprisonment in the county jail for up to a year.[14]

Author’s Comment

As well-intentioned as the sponsors of the California Home Equity Sales Contract Act may have been in their efforts to protect the equity of these homeowners’ properties, the sponsors ignored the effects of the foreclosure alternative.  This regulatory scheme, due to its’ risk, discourages investors from making offers to purchase covered properties and falsely assumes that buyers intending to occupy the property after purchase will not attempt to capitalize on the financial misfortune of the seller by making low-ball offers to purchase the property.  Increased competition for a property drives up the price for the property.  Conversely, decreasing competition, especially with a desperate seller, drives down the price of the property.  If the seller holds out for a “fair price” for their property with a foreclosure sale pending, they will likely find their lender forcibly taking their house from them along with their equity.

Disclaimer: 

The information provided here is not meant to be exhaustive nor is it intended to be legal advice. The law changes over time. For detailed information or advice on this subject matter, you should contact a real estate attorney licensed to practice law in California.


[1] Cal. Civ. Code § 1695, et seq.

[2] Cal. Civ. Code § 1695, subd. (a), (b), (d).

[3] Cal. Civ. Code § 1695.8.

[4] Cal. Civ. Code § 1695.1, subd. (b).

[5] Cal. Civ. Code § 1695.1, subd. (a).

[6] Cal. Civ. Code § 1695.2.

[7] Cal. Civ. Code § 1695.6, subd. (a).

[8] Cal. Civ. Code § 1695.3; see also, § 1695.5 for the Notice of Cancellation.

[9] Cal. Civ. Code § 1695.4.

[10] Cal. Civ. Code § 1695.6, subd. (c).

[11] Cal. Civ. Code § 1695.6, subd. (b).

[12] Cal. Civ. Code § 1695.6, subd. (d).

[13] Cal. Civ. Code § 1695.7.

[14] Cal. Civ. Code § 1695.8.