The Washington State distressed property law RCW 61.34 is designed to make sure that homeowners who are struggling to pay on a mortgage are not being taken advantage of by investors or wholesalers who engage in a pattern of conduct which defraud innocent homeowners of their equity interest or other value in residential dwellings under the guise of a purchase of the owners residence in a practice called equity skimming.
It is important to note that this law does not apply to licensed attorneys or real estate brokers who do not meet the definition of a distressed home consultant as defined by RCW 61.34 as discussed below, but rather the likely targeted demographic are investors or wholesalers looking to purchase properties for profit at the expense of a distressed homeowner. Most of these investors, many of which may be new arrivals from other states other than Washington, are not aware of this law putting them at risk of criminal penalties as discussed below.
A typical fact pattern involves a distressed homeowner who cannot stay current on a mortgage and shows up on a notice of default list, whereupon a wholesaler/investor will offer to save the home from the auction block by having the property conveyed away, leased back by the seller (former owner) and finally taken back by the buyer for a profit. Leaving the seller will little to show for the transaction and without a home.
What is the purpose of the Washington State Distressed Property Law RCW 61.34?
In the last economic crash of 2008 that hit the real estate market hard, foreclosure rates soared and led to a growing problem with unscrupulous people trying to take unfair advantage of those facing foreclosure. In 2008, a new Distressed Property Law (“Law”) came into effect in Washington State (RCW 61.34) aimed at protecting homeowners at risk of foreclosure from scam artists (Equity Skimmers) who might wrongly try to take an owner’s equity. The Law was revised in 2009 and has potential implications for anyone purchasing a home in foreclosure or likely to go into foreclosure.
How Does the Washington State Distressed Property Law RCW 61.34 Affect Buyers?
Based on the Law, buyers who do not intend to do so should avoid acting in a way that would cause them to be considered “Distressed Home Consultants” and should avoid entering transactions that would be considered “Distressed Home Conveyances.”
A “Distressed Homeowner” means the owner of a principal residence that is either in foreclosure or in danger of foreclosure. A home is considered in danger of foreclosure if the mortgage payment is more than 30 days late, if the home is at risk of loss or foreclosure for failure to pay property taxes, or if the homeowner thinks he or she is likely to default on their mortgage within the upcoming four months due to a lack of funds. See Jametsky v. Olsen (179 Wash 2d 878).
A “Distressed Home Consultant” is a person who contacts a Distressed Homeowner and makes promises in one way or another and represents they will help prevent, delay or avoid a foreclosure or the adverse impacts of a foreclosure where the owner/seller will eventually share in some right to regain possession or receive some financial benefit upon resale of the home. Alternatively, it should be noted, that a person simply offering to purchase the home, without providing consulting services and remedies to save the home from foreclosure, as discussed in RCW 61.34.020, would not be considered a distressed home consultant unless the purchase is occurring within 20 days of a foreclosure sale and the seller is not represented by an attorney or licensed real estate broker.
Per RCW 61.34 a “Distressed Home Consultant” does not include: A financial institution; a nonprofit credit counseling service; a licensed attorney, or a person subject to chapter 19.148 RCW; a licensed mortgage broker who, pursuant to lawful activities under chapter 19.146 RCW, procures a nonpurchase mortgage loan for the distressed homeowner from a financial institution; or a person licensed as a real estate broker or salesperson under chapter 18.85 RCW, when rendering real estate brokerage services under chapter 18.86 RCW, regardless of whether the person renders additional services that would otherwise constitute the services of a distressed home consultant, and if the person is not engaged in activities designed to, or represented to, result in a distressed home conveyance.
A “Distressed Home Conveyance” means a sale transaction involved a Distressed Home in which the Distressed Homeowner is allowed to continue to occupy the Distressed Home after closing and the buyer provides some promise or representation that the Distressed Homeowner will have the right or option to reacquire the Distressed Home, or will receive some interest in or portion of proceeds from any resale of the Distressed Home.
If the Law applies to a buyer, specific heightened duties apply that are significantly different than obligations that would otherwise apply. These include
(i) Comprehensive duties to act in the interest of and be loyal to a Distressed Homeowner (seller). The Law refers to those duties as “fiduciary duties” will require a Distressed Home Consultant to put the interest of the Distressed Home Seller first in all of the parties’ dealings.
(ii) The contract documents in a Distressed Home Conveyance transaction need to all be drafted in at least 12-point type. The documents must be printed in the seller’s primary language and must include numerous disclosures and warnings to a seller. Further, the contract must provide the seller with a three day right to cancel the sale agreement. Finally, the buyer must use care to assure that the property is purchased at a price fairly close to market value and that the seller will have the reasonable financial ability receive the benefit of the promised right to reacquire the property or receive the expected profit.
The purpose for explaining the above is not to advise buyers that they can never act as Distressed Home Consultants or enter a Distressed Home Conveyance transaction. Rather, it is to advise buyers that they need to avoid these transactions unless they are prepared to comply with the specific requirements of the Law and to obtain the assistance of independent legal counsel qualified to educate them on their duties and draft the necessary documents (since those duties will not be met by using standardized real estate forms licensees are authorized to complete).
How to Avoid Violating the Washington State Distressed Property Act RCW 61.34
Assuming a buyer wants to avoid being considered a Distressed Home Consultant or becoming involved in a Distresses Home Conveyance transaction, there are guidelines to follow:
(i) Never try to give assurances to a Distressed Homeowner that you are acting to help them avoid a foreclosure or the impact of a foreclosure. After all, most buyers are really interested in simply purchasing a home for their own benefit.
(ii) Avoid any agreement that would cause you to agree to close the purchase of a Distressed Home within 20 days of the date set for foreclosure of a loan unless the Seller is represented by either an attorney or a real estate broker.
(iii) Avoid any agreement that would permit a Distressed Seller to retain possession of their Distressed Home unless the after-closing possession is for no more than 20 days, is for the purpose of allowing the seller to arrange for and relocate to a new residence, and the Distressed Seller is represented in the transaction by an attorney or a real estate broker.
(iv) Don’t agree to let the Distressed Seller retain possession of the Distressed Home after closing and offer some type of offer that would allow the seller a right or option to repurchase the home or share in some profit or financial benefit from the property or its equity upon the happening of some future action like the sale or refinance of the Home.
(v) Don’t act as an investor that systematically searches for Distressed Homes to purchase unless you are prepared to be considered a Distressed Home Consultant and to assume the applicable duties then owed to a Distressed Homeowner.
(vi) Have a real estate attorneys and licensed brokers on your referral list in order to make sure you are not the person giving legal advice and making sure distressed sellers are properly represented so they are not taken advantage of.
What is the Criminal Penalty for not complying with the Washington State Distressed Property Law RCW 61.34.030?
Per RCW 61.34.030 any person who willfully engages in a pattern of equity skimming is guilty of a class B felony. Each act of equity skimming found is considered a separate current offense for the purpose of determining the sentence range for each current offense pursuant to RCW 9.94A.589(1)(A)
If you live in Washington State and are looking for guidance regarding the Washington state distressed property law, give Symmes Law Group a call at 206-682-7975 or contact us to get the counsel you need.