Honesty with sellers and the Foreclosure Protection Act

Bottom line first. Wholesaling depends on buying from people who often need to sell. Colorado law protects them in two ways. A general law bans deceptive business practices. A special law, the Colorado Foreclosure Protection Act, adds hard rules when the seller lives in the home and is behind on the mortgage. This lesson covers both. It is general education, not legal advice.

Be honest about who you are and what you may do

Colorado's list of deceptive trade practices applies to a person who acts “in the course of the person's business, vocation, or occupation” (C.R.S. 6-1-105(1)). Several items matter to a wholesaler:

• “Knowingly or recklessly” making a false representation about your “affiliation, connection, or association” with another (C.R.S. 6-1-105(1)(c)). So do not claim to work for the seller's lender, a government program or a well-known company.
• “Knowingly or recklessly” making a false representation about the characteristics, uses or benefits of property or services (C.R.S. 6-1-105(1)(e)). So do not misstate what your offer includes, what the house is worth or what the seller will receive.
• Failing to disclose material information known at the time of the sale, when the failure is intended to induce the person into the deal (C.R.S. 6-1-105(1)(u)). A fact is material when it would matter to a reasonable person's decision.
• A catch-all: knowingly or recklessly engaging in “any unfair, unconscionable, deceptive, deliberately misleading, false, or fraudulent act or practice” (C.R.S. 6-1-105(1)(rrr)).

“Recklessly” means “a reckless disregard for the truth or falsity of a statement” (C.R.S. 6-1-105(4)). Not checking is not an excuse.

Practical rules: say your name and company; say you are an investor and not an agent working for the seller; say plainly that you may assign the contract to another buyer and may be paid a fee for it; never push a seller to guess at value, and if you give a number, base it on that house's facts; put terms in writing; and do not hurry a person past the chance to ask a lawyer or an adviser.

The Foreclosure Protection Act

The legislature found that “home owners in financial distress, especially the poor, elderly, and financially unsophisticated, are vulnerable” to practices “designed to dispossess them or otherwise strip the equity from their homes,” and said the Act is to be “liberally construed” (C.R.S. 6-1-1102). That means courts will read it in favor of the owner.

When the Act applies

The key phrase is residence in foreclosure: a home “occupied as the home owner's principal place of residence” that is “encumbered by a residential mortgage loan that is at least thirty days delinquent or in default” (C.R.S. 6-1-1103(8)(a)). A home owner is the owner of a dwelling who lives in it as the principal residence, including a buyer under a contract for deed (C.R.S. 6-1-1103(7)). For the equity purchaser part of the Act, the test is also met when a foreclosure action has been started or when the buyer “otherwise has actual or constructive knowledge” that the loan is at least thirty days delinquent or in default (C.R.S. 6-1-1103(8)(b)). Constructive knowledge means knowledge the law says you have because you should have known.

So a vacant house, a rental the owner does not live in, or a home with no late mortgage is outside these definitions. An owner-occupied home with a mortgage 30 days late is inside. When you are unsure, assume the Act applies.

Two roles the Act names

An equity purchaser is a person who “acquires title to a residence in foreclosure” (C.R.S. 6-1-1103(2)). People who buy a home to live in themselves, buy from the public trustee after a foreclosure sale, buy by court order, or buy from a relative are among those left out (C.R.S. 6-1-1103(2)(b) to (h)). A wholesaler who double closes buys title, so is a plain fit. A wholesaler who only assigns never takes title, so the definition does not neatly cover that role, but the end buyer who does take title is an equity purchaser, and the Act's bans on unconscionable deals reach an equity purchaser's “associate,” which includes an agent or “any other person working in association with” one (C.R.S. 6-1-1103(1), 6-1-1119(1)). The text does not say in so many words where a pure assignor sits, so treat every such deal as covered and have a lawyer decide.

A foreclosure consultant is a person who does not take any interest in the home but offers, for pay, a service that the person represents will stop or postpone a foreclosure, get a forbearance, help cure a default, obtain a loan, reduce credit harm, or in any way delay or prevent the foreclosure (C.R.S. 6-1-1103(4)(a)). A licensed real estate broker acting within the license is excluded (C.R.S. 6-1-1103(4)(b)(VII)). If you tell an owner “pay me and I will stop your foreclosure,” you are in consultant territory.

Rules for equity purchasers

• Written contract first. It must be in at least nine-point type and fully completed, signed and dated by both sides “prior to the execution of any instrument” that quitclaims, assigns, transfers, conveys or encumbers an interest in the home (C.R.S. 6-1-1111).
• Required contents, including the buyer's name and address, the legal description, the total price, the terms of payment, when possession transfers, and the notice of cancellation (C.R.S. 6-1-1112).
• Right to cancel. The owner may cancel until midnight of the third business day after signing a compliant contract or until noon on the day before the foreclosure sale, “whichever occurs first” (C.R.S. 6-1-1113(1)). Until the buyer complies with the notice rules, the owner may cancel (C.R.S. 6-1-1114(4)).
• Quiet period. Until the cancellation time has fully run out, the equity purchaser may not accept or induce a deed, record any document signed by the owner, transfer or encumber an interest to a third party, or pay the owner any consideration (C.R.S. 6-1-1117(2)). That means no early resale and no early payment.
• No untrue statements about the home's value, the proceeds the owner will receive, any contract term, the owner's rights, or the nature of any document the owner signs (C.R.S. 6-1-1117(4)).
• No unconscionable deals. Unconscionable means bad-faith overreaching with terms unreasonably favorable to the buyer (C.R.S. 6-1-1119).
• Repurchase options that look like a sale with a right to buy back are allowed only under extra conditions (C.R.S. 6-1-1115). In a short sale that will be resold, full disclosure of the resale terms is required (C.R.S. 6-1-1121).

A violation of the quiet-period or return-of-documents rules, or an intentional untrue statement, is a misdemeanor punishable by up to one year in county jail, a fine up to $25,000, or both (C.R.S. 6-1-1118).

Rules for foreclosure consultants

The contract must be in writing and given to the owner to keep, unchanged, at least twenty-four hours before signing (C.R.S. 6-1-1104(1)). The owner may cancel at any time, and the right may not be conditioned on repaying anything (C.R.S. 6-1-1105(1) and (6)). A consultant may not collect any pay until every promised service is fully performed, take a lien or other security for the pay, acquire an interest in the owner's property, or take a power of attorney (C.R.S. 6-1-1107(1)(a), (c), (e) and (f)). Violating those prohibitions is a misdemeanor with the same penalty range (C.R.S. 6-1-1108).

Example with real numbers

Made-up numbers. Marcus meets Dana, who lives in her home and is three months behind on her mortgage. He offers $190,000 for a house worth more than that, plans to resell for $205,000, and signs a compliant contract with her on a Tuesday. The foreclosure sale is the following Monday week.

1. Cancellation time: midnight of the third business day after Tuesday = Wednesday (1), Thursday (2), Friday (3), so midnight Friday (C.R.S. 6-1-1113(1)). The sale date is later, so Friday is the earlier time.
2. Until then Marcus may not take a deed, record anything Dana signed, resell to his buyer, or pay Dana (C.R.S. 6-1-1117(2)).
3. If the sale had been on Thursday, her right would end at noon on Wednesday, the day before the sale, because that comes first.
4. Marcus's gross spread is $205,000 minus $190,000 = $15,000. That does not change the honesty rule: if he tells Dana her home is worth $170,000 and he knows it is not, that is an untrue statement about value (C.R.S. 6-1-1117(4)).

If Marcus instead asked Dana for $3,000 up front to “stop the foreclosure,” he would be acting as a foreclosure consultant and could not collect until the service was fully performed (C.R.S. 6-1-1107(1)(a)).

Bottom line: tell the seller the truth, put it in writing, wait out the cancellation period, and ask a Colorado real estate lawyer before you do any deal with an owner who lives in the home and is behind on payments.