What is an Equity Purchase Contract and when would you use it versus a Purchase & Sale Contract?
Never heard of one. What are you trying to accomplish?
I’m looking into wholesaling preforeclosure properties in california and I read from another post that I have to do an equity purchase contract because there are laws in california that protect the home owner in a foreclosure situation. Such a contract stipulates that the seller has a 5 day right of recission and a whole bunch of other stuff that a regular purchase and sale contract does not contain.
I just wanted to double-check with other investors to see if this was true. My exit strategy is simply to assign a contract but I want to make sure that I am using the right contract in a preforeclosure situation.
Yep,
If you google for “equit purchase contract”, you will find
an excellent pdf form of the contract along with a
cancellation form that should be provided to the sellers.
-Krish
Actually my question is more on when would I need to use one versus using a standard Purchase & Sale contract?
My market in California is preforeclosure properties and my exit strategy is to wholesale the contract to another investor.
In this scenario, would I have to use a Equity Purchase Contract and if so, why? Is it for legal issues or something else?
I just want to make sure that I’m using the right contract for what I want to do.
The equity purchase contract from what i have seem is not an actual contract. Its a supplement to a purchase contract. The equity contract is a cover your asset agreement.
So basically, I do not need to use it even when dealing with preforeclosures? I can simply use a purchase and sale contract and still be able to do a terms deal, subject to, etc?
You need to use this form if this is a 1 to 4 residential unit that is in foreclosure (a notice of default has been filed) and is owner occupied and the buyer (you) do not intend to occupy the property once you purchase it. In their attempt to govern people, they have hindered the general public. See California Civil Code 1695 for more details.
So then, this is the contract that I must use on every preforeclosure deal, even when I’m wholesaling it? Subject to? Terms?
Is this how it is in other states?
During any deal, for that particular situation. You want to use a cover your asset agreement. It will keep you out of trouble.
The equity purchase agreement should be tailored for every real estate transaction.
If a notice of default has been published, then you must use that contract, even if you plan on assigning the contract. I don’t know about other states, but I am a licensed real estate broker in California and I know this to be true here.
Regards
satarnag:
Yes, a notice of default has been recorded. What legal considerations should I keep in mind so that I’m following California’s foreclosure law?
I know that in the Equity Purchase contract, it states a 5 day recission period and some other stipulations that the State mandates to be in the contract but…well, let me just give you an example.
Let’s say the ARV is $500,000
Seller accepts a purchase price of $370,000 which includes the default amount and some cash for the seller.
So, basically I just got a $130,000 in equity to make repairs, profit and so on. And the seller signs the Equity Purchase contract.
After the 5 day recission period, does the seller then become bound by the contract and cannot back out?
As the buyer, do I still have a 14 day cancellation period?
Do I start doing my due diligence before or after the 5 day period?
Can I still have the seller authorize me to look up his mortgage information from his lender within the 5 day recission period?
What other legal factors do I have to be aware of?
Are Equity Purchase Contracts Assignable?
I apologize in advance for so many questions but I would like to start making offers and getting them under contract as soon as possible but I want to make sure that I know what I’m doing.
Thanks for your help.
"Yes, a notice of default has been recorded. What legal considerations should I keep in mind so that I’m following California’s foreclosure law?
I know that in the Equity Purchase contract, it states a 5 day recission period and some other stipulations that the State mandates to be in the contract but…well, let me just give you an example."
That’s all you need. Is that 5 day to rescind. You can only get the deed signed after the 5 day grace period.
"Let’s say the ARV is $500,000
Seller accepts a purchase price of $370,000 which includes the default amount and some cash for the seller.
So, basically I just got a $130,000 in equity to make repairs, profit and so on. And the seller signs the Equity Purchase contract.
After the 5 day recission period, does the seller then become bound by the contract and cannot back out?"
He does become bound by the contract, but if there is any dispute, by the time you resolve it, the property is in foreclosure and owned by the bank. Also, we’re in a community property state so if he’s married or recently divorced, make sure you get his wife’s signature as well.
“As the buyer, do I still have a 14 day cancellation period?”
Only if you state that you do in the contract.
“Do I start doing my due diligence before or after the 5 day period?”
I don’t understand the question. You can do anything you want as long as you don’t make the owner sign over the deed during this time.
“Can I still have the seller authorize me to look up his mortgage information from his lender within the 5 day recission period?”
Yes, you can do this anytime and for any reason. It’s one of the first things I do when I talk to someone is I get this to understand what i am dealing with. A person can authorize anyone anything at any time. Doesn’t mean another person or institution will accept it. 
“What other legal factors do I have to be aware of?”
If you’re licensed, then you need to disclose it. I even state that they understand that that I am a licensed real estate broker and that I have bought their house for x amount of dollars which is below the average normal price and that I plan on making a profit in the near future by selling this property. I do this because I don’t want to be dragged in court and have them state that I took advantage of them. Besides, I am honest and I am one of those rare people who actually cares for others.
“Are Equity Purchase Contracts Assignable?”
All contracts are assignable unless it states otherwise. To make it assignable, just put the following words after your name: “and/or assigns”. Mine is long because, I buy under my corporate name. So mine looks like the following when it asks to put the buyer’s name: ACME Corp, a Nevada Corporation, represented by John Doe and/or assigns. Also, put an assignment clause in the contract for added protection.
"I apologize in advance for so many questions but I would like to start making offers and getting them under contract as soon as possible but I want to make sure that I know what I’m doing.
Thanks for your help."
Not a problem. I am not a lawyer, and am merely stating my opinion based on my knowledge on California law and how it pertains to real estate transactions and the conveyance of real property. You should seek professional legal advice before entering into any contract.
Since you’re in california, you might want to pay to get these forms from this company:
http://www.firsttuesdayonline.com/downloads.cfm
Regards
satarnag:
Wow, thanks for taking the time to answer ALL of my questions. I truly appreciate it.
The due diligence question that I asked was regarding whether or not it was worth time finding out the repairs cost, contacting their lender to find out the seller’s mortgage information, etc before the 5 day recission is over because what if I did all that work and the seller decides to back out. From your experience, do you already start doing the things that I stated from the get-go or wait after the 5 day recission period?
Thanks for the link. I’ll be sure to check it out. Thanks again for your response and time.