Protecting Yourself From CFPA – When Buying Subject-To

Real estate investors need to be focusing on pre-foreclosures over the next few years.  A pre-foreclosure is when a homeowner is headed towards foreclosure but the house has not actually been foreclosed.  It is still owned by the person falling behind on their payments.  We have seen a lot of these and it is expected to continue.  An old mentor of mine once told me to always eat the low hanging fruit.  Pre-foreclosures in this market are the low hanging fruit. 

 If you are going to focus your business on pre-foreclosures and you’re in Colorado you need to understand the Colorado Foreclosure Protection Act (CFPA).  Last month we discussed buying pre-foreclosures using the subject-to strategy where you take over the homeowner’s payments.  There are a lot of advantages to both you and the homeowner.  Check out our blog if you missed that article.

Before I get into the meat of this article I need to say that this is not intended to be legal advice and I am not an attorney.  This is just my understanding of the law after reading it.  This is also just a summary.  I strongly encourage you to seek professional advice before buying any home that may have a delinquent mortgage.   

CFPA is specifically directed at two groups; consultants and purchasers.   A consultant is someone who works with the homeowner for a fee but does not intend to purchase their home.   The purchaser, according to the Act, is someone buying the property and specifically does not include the following:

• A person purchasing the home as their primary home
• The current lien holder
• Transferred by order of the Court
• Relative of the person in foreclosure
• Any business regulated by the Government acting in their normal course of business

As you can see real estate investors buying for their own investment is pretty much the only thing that is not excluded. 

Here is a list of what needs to be done to comply with the law.

1. Of course there needs to be a written contract and it needs to be in at least nine point font and signed by all parties involved before you can take title to the home.   The contract also must contain the following:
   1. Name, address, and phone number of buyer.
   2. Street address and legal description of the property
   3. Total amount to be paid by the buyer.  This includes the amount of the loan that will be taken subject-to.
   4. Date and time when the purchase will take possession.
   5. The following notice must be on your contract exactly as it is written.  It needs to be in at least nine-point font and bold.

NOTICE REQUIRED BY COLORADO LAW

Until your right to cancel this contract has ended, (Your name)

or anyone working for (your name) CANNOT ask you to sign or

have you sign any deed or any other document.

1. You must provide a notice of cancellation as the last provision before the signature line.  It must be in nine-point font and bold.  It also must clearly state the date and time that their cancellation rights end.  You must give the homeowner the right to cancel until midnight of the third business day after the contract is signed or until noon on the day before the foreclosure sale, whichever is first.  My recommendation here is to give them all the way until you are ready to close to play it safe and don’t close until at least the fourth day after the contract is signed.  Write you notice of cancellation as the last provision exactly like this:

You may cancel this contract for the sale of your house

without any penalty or obligation at any time before (date and time). 

See the attached notice of cancellation form for an explanation of this right.

1. You must provide a notice of cancelation form as a separate page of the contract and it must have a clear heading “Notice of Cancellation”  This needs to be in ten-point font and needs to have the following verbiage:

NOTICE OF CANCELLATION

(Date contract signed).  You may cancel this contract for the sale of your house,

without any penalty of obligation, at any time before (date of time of end of cancellation

rights).  To cancel this transaction, personal deliver a signed and dated copy of this

Notice Of Cancellation in the United States mail, postage prepaid to (your name) at

(your address) NOT LATER THAN (date of time of end of cancellation rights).  I hereby

cancel this transaction.

___________________________ (date)

___________________________ (seller’s signature)

This is just for subject-to purchases.  There are other steps you must follow if you are purchasing short sales or just buying a home that is in foreclosure.  There are also a lot more items that need to be done if you plan to leave the homeowner in the home.  I strongly urge you to help them find a new home and not allow them to stay.  You could easily open yourself up to lawsuits under the CFPA especially if you give them the option to buy it back from you or give them any type of owner financing.

The penalties for not following this law are fines up to $25,000 and up to one year in jail.  If you are serious about subject-to transactions (and you should be) than I would work on getting a solid contract together and have an competent attorney review it.  Again I am not an attorney and am in no way giving you legal advice.   

Like I mentioned in the last article this is a great way to build a large portfolio of cash flowing properties without needing to qualify for loans and could prove to be one of your most profitable strategies.   If you are interested in this strategy but want some help getting it done I may be interested in partnering with you.  I don’t have time to track down leads but if you know someone that is interested in selling their house this way,  I am happy to negotiate the deal and share profits OR and would love to buy your subject-to contract from you.  You are welcome to join me when I meet with your lead to see how I negotiate these deals.  Feel free to call me with any questions.