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Wednesday, September 5, 2018

The Home Equity Theft Prevention Act

Have you ever heard of the term “short sale”? If you are a lawyer, did you ever represent a buyer purchasing from a seller who was either in default on his mortgage or against whom a foreclosure action had already been commenced?
If you are buying from a homeowner whose property is in foreclosure or has defaulted on her loan, or as a lawyer you represent such a buyer, then you need to be aware that New York has passed a strict and somewhat draconian notice requirement to effectuate a sale.
This law can be found in the Real Property Law 265-a, and is known as the Home Equity Theft Prevention Act. It governs sales of homes that are in foreclosure or default. If the sale is protected by the Act, and the buyer fails to fulfill any of the requirements listed below including attaching a notice of rescission, a seller may be able to legally cancel the contract; even years after the house was sold. A seller may also be able to sue the buyer for triple damages.

This rule is not applicable in the normal situation where a typical buyer purchases a home with the intent is to make that home her primary residence even if it is in foreclosure.

The intent of the statute was to prevent real estate “operators” from stealing the equity from homeowners who were experiencing difficult economic times. The Legislature in Albany thought that these experienced real estate operators would prey on homeowners and acquire their homes at significantly discounted prices, and then flip the house for a much higher price. The Act defines such real estate operators as “equity purchasers” and they are the ones who have received the ire of the New York State Legislature. These operators are the ones who must comply with the Act or possibly lose their recently acquired house. Technically, the regular “mom and pop” buying the home of their dreams, need not comply with this Act. People who buy a home to live in as their primary residence and not defined as “equity buyers” and therefore do not come under the Act’s scrutiny. Nevertheless, if the house is in foreclosure, it may behoove all the parties to have the seller sign the three-page Notice of Right of Rescission as a precaution due to the draconian consequences of failing to comply with each step of the statute. But as long the buyers will occupy the newly purchased home as their primary residence they should be safe even without the Notice of the Right of Rescission.


The law generally applies to the sale of a home in foreclosure to a buyer who wants to purchase the home as an investment. And even if the house is in foreclosure, this law still DOES NOT APPLY to the sale of the home if: (i) the home is being sold in a court-ordered foreclosure auction; (ii) the buyer is a not-for-profit housing organization; (iii) the buyer is a member of the seller’s family or (iv) the buyer is “bona fide” or buying the home from someone who bought the home from you with no knowledge of or reason to suspect fraud committed against the seller by your original buyer. Also, the Act would not apply to the sale of where the buyer is just in default on his mortgage payments, but an actual foreclosure had not yet been commenced unless there is a “buyback” agreement in the sale contract.


So what happens if you are a real estate investor buying a home in foreclosure? You must comply with all the terms of this Act. You must give a seller notice of her right to cancel the contract until midnight of the fifth business day after the contract was signed by both sides. This notice must be in English or Spanish. The buyer is required to attach a form to the agreement that a seller can use to cancel the contract.

Failure to give this notice or to deceive a seller in any material way will allow him to vacate the deed and he will again the house and perhaps free of any mortgage. Sometimes "operators" were promising home-owners that they could buy back the home at a low price, but then they refused to honor those agreements which often were not reduced to writing. Even if an operator would obtain title insurance on such a transaction which violates the Act, a title company will likely refuse to defend a lawsuit brought by such a buyer. An operator could lose her whole investment unless she complies with the Act.

If an Attorney does not have a form for this statutory Notice of Rescission, then drop us an email (www.njslaw.com) and we will send you a file link containing this notice.

If a buyer has questions about a foreclosure or default situation or about the Home Equity Theft Prevention Act please contact the New York State Department of Financial Services Foreclosure Hotline at 1-800-269-0990. If you think you were a victim of Home Equity Theft, then call our office where we are handling those cases now.

Alexander Novak, Attorney
Partner, Novak Juhase & Stern

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