Unconscienable Clause and FMV


I found this website as a result of a search, and I like the balanced attitude of trying to be helpful and informative to both investors and the distressed homeowner I see here. I have bought one foreclosure in No. California thus far this year and it turned out well but, it was a deal fraught with legal minefields.

Anyway, I would like to ask a question about the ?unconscienable? clause of the civil code regarding equity purchases of homes in foreclosure. How do you determine what to offer a homeowner in preforeclosure? Do you believe offering 50% of equity based on Fair Market Value is sufficient (or overly generous in a declining market)? If so, how do you determine Fair Market Value ? internet sites, realtor comp values, a professional appraisal at your expense, etc.?

Here is a case example of a house facing trustee sale in 20-some days:
Rough estimate of FMV=500,000,
Loan plus arrears=325,000,
realtor selling expenses6%=30,000,
carrying costs(piti)x4 months=14,000,
Closing costs upon resale=3,000,
Repairs=3000(house in very good shape).
Therefore, it seems the equity in this house is 125,000. I would consider offering seller half of that (62,500) if I knew I could resell house at 500,000. But the market is declining rapidly and houses are not selling so I do not believe FMV will be 500K in four or five months but more likely 475,000 or 480,000. So it seems I should offer the equity seller a number based on my realistic resale price. But if I do that I will be paying seller less than 50% of his equity as of right now thus possibly triggering the unconsciencability clause. I am curious if anyone dealt with this situation. I know the law does not say an equity purchaser has to offer 50% of FMV but I am curious what to offer that would be fair to both homeowner and investor. Thanks for your time.

(PS?If this question is too technical or not appropriate for here then I apologise. Still like this website)


It is a good question. There are a number of issues with California Civil Code 1695 that are often overlooked or misunderstood. With regard to 1695.13 which states that it is unlawful to take “unconscionable advantage” of a homeowner, you should be especially careful and certainly not rely on a formula like 50% or more of FMV.
The reality is that if you are taken to court the deck is stacked against you as this is a subjective question that will come down to the bias of the judge (or appeals court). That bias is likely to give the benfit of the doubt to the homeowner.
Your best bet is to carefully disclose the fact that you intend to resell at a profit, recommend that they get 3rd party advice and have a neutral 3rd party witness the signing while you reiterate these points.
If you don’t feel you can do that and still get the deal, chances are that you are taking “unconscionable advantage” and should probably not do the deal.


How do lenders determine FMV for the 1099 form filed with the IRS resulting from Forclosure?


I believe they use the price the property sold for at trustee sale - even if that “sale” just resulted in the property going back to the bank. But to be honest I’m not sure, and would love to know the answer. Anyone?


Get them to sign suitable disclosures at the time you sign the purchase and sale agreement. ?Get them to do a video testimonial for you on a portable video camera. ?The judge may have a hard time favoring them, if they are extolling you.