Civil Code 1695 in plain English
If you buy houses from owners in foreclosure in California, there's a law written specifically about you. It's the Home Equity Sales Contracts Act, Civil Code sections 1695 through 1695.17, and it was passed in 1979 because people were losing their homes, and their equity, to buyers who moved fast and wrote one-sided contracts.
Most investors I've met know it exists. Fewer have read it. Here's the short version.
When it applies
The law covers a purchase of a residence in foreclosure from the owner, the "equity seller," by an "equity purchaser." A residence in foreclosure is generally a one-to-four unit owner-occupied dwelling with a notice of default recorded against it. The definitions have exceptions, including for buyers who will live in the house as their own primary residence, so if you're an investor buying to resell or rent, assume it covers you.
The contract has to say certain things
The law requires a written contract with specific terms and specific notices, in specific type sizes, in the same language the negotiations were mainly conducted in. It has to describe the property, the total price, the terms of payment and any services the buyer is promising. It has to include a prominent notice telling the seller about their right to cancel.
This isn't something to improvise. Use a contract a California real estate attorney drafted for equity purchases, and don't modify the notices.
The five-day right to cancel
The most important part for a buyer is the seller's right to cancel. Under Civil Code section 1695.4, the seller can cancel the contract until midnight of the fifth business day after signing it, or until 8 a.m. on the day of the trustee sale, whichever comes first.
And during that window, section 1695.6 says the buyer can't take a deed from the seller, can't record anything the seller signed, and can't transfer or encumber the property. You wait.
That's why contracts signed a day before an auction are a problem. The cancellation window and the sale date collide, and the law favors the seller.
What the law prohibits
The act also prohibits misrepresenting the value of the house, the terms of the deal, or the seller's options. It puts tight conditions on lease-back and repurchase arrangements, which were common in equity-stripping schemes. Violations can bring civil liability and, for some conduct, criminal penalties.
There's a related statute that matters too. Civil Code section 2945 and the sections after it regulate "foreclosure consultants," people who offer to stop or delay a foreclosure for a fee. If your pitch drifts from "I'll buy your house" to "I'll help you save it," you may be in that territory, which has its own rules and its own restrictions on collecting fees.
Wholesaling and assignments
Some wholesalers sign a contract with a homeowner in foreclosure and then assign it to another buyer. That's exactly the kind of deal where the 1695 rules, the timing and the disclosures all get tested. If you wholesale, read how California's wholesaling rules intersect with this law, and talk to a lawyer before assigning anything on a residence in foreclosure.
The Department of Real Estate also has views on when unlicensed activity crosses into brokering. The DRE's website is the place to check licensing rules and look up whether someone you're dealing with is licensed.
After the five days
Once the cancellation period has passed, the deal moves forward like a normal purchase, with escrow, a title company and a closing date. But the protections don't disappear. The contract still has to have been compliant from the start, and any misrepresentation along the way can unwind the deal later.
This is also when the homeowner should have their own advice. Encourage it. A seller who talked to a HUD-approved housing counselor before closing is a seller who understood their options, and that protects you as much as them. You can point them to HUD's counselor search. It's free for the homeowner and takes them a few minutes to find someone local.
Keep copies of everything: the contract, the notice of cancellation rights, your communications, and the dates. If anyone reviews the transaction later, the paperwork is your defense.
How to do this right
- Use an attorney-drafted equity purchase contract with the required notices.
- Give the seller a copy and explain the right to cancel out loud, not just on paper.
- Don't take a deed, record anything or line up a resale until the cancellation period has passed.
- Never promise to "save" the house unless you're prepared to follow the foreclosure consultant rules.
- Point the seller to a free HUD-approved counselor so they understand every option.
Buyers who do these things rarely end up in court. Buyers who don't are the reason the law exists. If you'd rather start with homeowners who contacted a buyer themselves, a California-only lead marketplace is one way to find them.
This is general information about California's Home Equity Sales Contracts law, not legal advice. Have an attorney review your contracts and process.