Question: I am listing a property for an owner who is behind in his payments. The mortgage debt secured by the property exceeds it's fair market value. The seller has no ability to bring money to the closing to make up the shortfall, so I am trying to sell the property through a "short pay off." An investor buyer has contacted me about writing an offer.
A. Do I need to use the Colorado Real Estate Commission's "Foreclosure Property Addendum?"
B. What if my seller does not speak English, may I use the foreclosure property Addendum to put together a contract that complies with the foreclosure protection act?
Answer:
In 2006, the Colorado legislature passed Senate Bill 71, which has come to be known as the Foreclosure Protection Act. Among other things, the FPA regulates "equity purchasers," who are essentially real estate investors whose business model involves pursuing residential properties in foreclosure. Equity Purchasers are more commonly referred to as foreclosure investors.
This article is Part II of a two part series explaining the Foreclosure Protection Act and the Real Estate Commission's Foreclosure Property Addendum. Part I (available at Goldilocks & The Foreclosure Protection Act - Part I), used the Goldilocks metaphor to help answer the A question above and explain the situations in which the contract does not need to comply with the FPA and brokers do not need to use the Addendum (the deal is "too cold").
If the deal is hot enough for the FPA to apply, then we need to determine whether the deal is too hot (i.e. too complicated) to use the Addendum. For the deal to be just right to use the Addendum, all of the provisions in its section 3 must be true. This Part II uses the B question above to help brokers evaluate whether the deal is too complicated to use the Addendum. If the deal is too hot to use the Addendum, then the contract needs to be prepared by someone other than the brokers.
If the language principally spoken by the Seller is not English, then section 3.5 of the Addendum is false and the deal is "too hot" to use the Addendum. The contract must be translated into the language principally spoken by the Seller.
If the deal proposed by the Equity Purchaser gives the Seller the right to re-purchase the property from the Equity Purchaser, then section 3.3 of the Addendum is not true and the deal is too complicated for the Addendum. If the deal proposed by the Equity Purchaser gives the Seller the right to lease the property back from the Equity Purchaser, then section 3.2 of the Addendum is not true and the deal is too complicated for the Addendum.
Equity Purchasers and their brokers can't circumvent the conclusion in the preceding paragraph by putting the option terms and/or lease back provisions in a side deal. The FPA requires that an FPA compliant contract include all of the terms of the deal between the Equity Purchaser and the seller.
Even if the seller speaks English, there is no lease back and the seller has no right to repurchase, it will be unusual for Equity Purchasers to proposed deals that are "just right" for the Addendum because of section 3.1 which requires that: "There will not be any financial or legal obligations of Seller (related to the Property) after Closing, except income tax liability, if any."
In most transactions proposed by a foreclosure investor, the seller will remain liable for some portion of the debt that was secured by the property. Consider, for example, the facts in the question above. In short sales, the seller typically remains liable for the lender's or lenders' post closing losses. In such deals, section 3.1 will not be true and the deal is too complicated for the Addendum. If the deal is too hot to use the Addendum, then the contract needs to be prepared by someone other than the brokers.
Jonathan A. Goodman is a shareholder in Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate, Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. He can be reached at contact Jonathan Goodman.
David A. Farus is an associate in the law firm of Frascona, Joiner, Goodman and Greenstein, P.C. His practice areas include Real Estate, and Business Law. He can be reached at contact David Farus.
A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.
Disclaimer -- Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.