Overview
The Colorado Legislature passed Senate Bill 71 in 2006 to discourage predatory practices against persons in foreclosure. Violations of Senate Bill 71 can lead to criminal sanctions and, unlike the major changes to Colorado’s foreclosure statutes, Senate Bill 71 has been in effect since the summer of 2006.
Senate Bill 71 regulates “Foreclosure Consultants” and “Equity Purchasers.” Foreclosure Consultants are persons who advise persons who are in foreclosure. Equity Purchasers would be more commonly referred to by real estate brokers as “foreclosure investors.” In thinking through Senate Bill 71 issues, real estate brokers should distinguish between the regulation of Foreclosure Consultants and Equity Purchasers.
Foreclosure Consultants
A real estate broker who lists a property for an owner in foreclosure advises that owner. Real estate brokers would be considered foreclosure consultants under the Bill except that real estate brokers are explicitly exempted from the definition of a Foreclosure Consultant because real estate license law already imposes substantial duties on brokers.
In theory, sellers’ agents need not concern themselves with Senate Bill 71 as a sellers’ agent doesn’t owe a duty to keep a buyer out of Senate Bill 71 hot water. Yet it is in the seller’s interest to see that deals proceed smoothly. A seller might be hurt by a buyer who, after contracting to buy the property, learns that the contract might put the buyer in jail. Because of duties a listing broker owes a seller, listing brokers should, all other things being equal, seek to avoid contracts that violate SB-71.
Yet this can present conflicting duties for a listing broker. Colorado law forbids a listing broker from revealing the seller’s motivation to sell (without the consent of the seller). Colorado law obligates listing brokers to disclose adverse material facts of which they are aware to buyers. How do brokers balance the competing considerations if the seller’s motivation to sell is that the seller is in foreclosure and the seller doesn’t want you to disclose the existence of the foreclosure? Does it make a difference if the seller has plenty of equity to cover the debt against the property? Does it make a difference if an offer from a buyer reveals that the buyer will be a non-owner occupant? (See discussion of definition of “Equity Purchaser” below.) Since the title commitment should reveal the existence of the foreclosure, and since the Colorado Real Estate Commission Approved contract gives the buyer an open out if the buyer is dissatisfied with the title, does a listing broker have any pre-contract or pre-closing obligation to disclose the existence of the foreclosure.
Of course, if the seller’s agent sought to buy a listed property in foreclosure, the seller’s agent would then become an Equity Purchaser and subject to all of the regulations governing Equity Purchasers. A broker purchase of her own listing is fraught with conflicts of interest and enhanced liability. These problems are multiplied in the foreclosure situation. Regardless of how well intentioned it seems, brokers should avoid purchasing their own listings that are in foreclosure, unless the buyer’s independent attorney signs off blessing the transaction.
Equity Purchaser
Senate Bill 71 defines an Equity Purchaser as follows:
- Equity Purchaser means a person who,
in the course of the person’s business
- , vocation, or occupation,
acquires title to a residence in foreclosure
- , except that the term does not include a person who acquires such title: (a)
for the purpose of using such property as his or her personal residence for at least one year
- . (Emphasis added.)
The Bill imposes mandatory provisions in any contract between an Equity Purchaser and an owner in foreclosure. Among these provisions are a right for the seller to rescind the contract and notice to the seller of the seller’s recision rights.
Paragraph 27 of the new Colorado Real Estate sales contract has check boxes for the seller to indicate whether the property is in foreclosure. Since most offers are made from a buyer to a seller, it isn’t clear how selling or listing brokers are to handle section 27. (The ambiguity is irrelevant for a selling broker working with an owner occupant buyer.)
In some situations it will be obvious that the non-occupant buyer is an Equity Purchaser, but in many situations, it won’t be clear. If a “would be” investor’s first purchase is a residence in foreclosure, is that investor an Equity Purchaser? An apartment building is a residence (although one not often occupied by the seller). Is an investor purchasing an apartment building in foreclosure an Equity Purchaser? If there is ambiguity about whether the buyer is an Equity Purchaser, how does the broker take the time to get the title work to determine whether the property is in foreclosure when the investor is in a hurry.
In an effort to help brokers draft SB-71 compliant contracts, the CREC has promulgated a Foreclosure Property Addendum, to be attached to the regular CREC sales contract, to address the simplest Equity Purchaser deals. The addendum makes it clear that if the contract isn’t simple (for example, if it gives the seller a right to lease back the property), then the buyer should not use the addendum and should instead work with a lawyer. It remains to be seen whether this addendum will do more harm than good. While it enables brokers to write offers for Equity Purchasers on property that is in foreclosure, it may also enable brokers to make SB-71 mistakes. It may be simpler for brokerage firms to establish a protocol precluding garden variety licensees from writing offers on the rare occasion when they represent a true Equity Purchaser. True Equity Purchasers, if they work with brokers at all, tend to work with brokers who specialize in foreclosures. Custom practices can be developed for brokers who are expert in foreclosures.
One option for brokers to address the ambiguity of SB-71 is to clarify those obligations with buyers in the Exclusive Right-to-Buy agreement. In light of the ambiguity about brokers’ responsibilities under the new law, brokers should be able to simply disclose the SB-71 risk to all investor buyers, disclaim responsibility for SB-71 compliance, and advise investor buyers to seek legal assistance to ensure SB-71 compliance. This is similar to the CREC system for general title issues, common interest communities, and special districts. Just like a real estate broker isn’t expected to evaluate title concerns as they arise, brokers should be able to disclaim responsibility for SB-71 compliance.
