The following post was originally written in response to the following question posted on LinkedIn. The question appears are originally written, and has not been edited.Question:

Short sale investing in California: how to handle the purchase agreement per CA Civil Code 1695?

I am a beginning real estate investor seeking to buy and resell short sale residential homes in the Los Angeles area, with the assistance of a mentor. I have a few questions about properly handling the purchase agreement in order to be compliant with California Civil Code 1695.

1) Can I create an S-corp to buy these houses instead of buying in my own name? While I would like to do so, my concern is CA Civil Code 1695.15 and 1695.17. If my S-Corp was the purchaser, would I be considered the “representative” of my entity, and therefore have to have a CA Real Estate Sales License (which I do not have)?

2) Can I use my own purchase agreement? I don’t have to use the C.A.R. form NODPA Notice of Default Purchase Agreement, do I? (I don’t think I will be buying properties listed with Realtors.)

3) CA Civil Code 1695.16 says that any provision of a contract that tries to limit the purchaser’s liability for “damages” is void. What does “damages” mean? Is it okay for my contract to give me an out so that I don’t have to complete the purchase? Say, if the bank does not accept my offer or if I don’t find someone to resell to, then I wouldn’t have to buy, and the seller understands their property might continue to foreclosure. Would a clause like that be okay?

DCW Response:

Please don’t think me rude Sara, but you seem to know just enough to be dangerous. I would strongly suggest that you retain a qualified real estate attorney, not just a “mentor,” whatever that means.

CC 1695.15 and 1695.17 deal with agents, not principals. Basically, they are designed to preclude the statutorily defined “equity purchaser” from avoiding the provisions of CC 1695, et seq. through the artifice of using an agent or other liability limiting mechanism. If you’re going to use an agent, they have to be licensed. And you are STILL bound by the provisions of CC 1695 et seq. That’s what CC sec. 1695.15 says.

As for the LLC, I would say that your instincts are correct: 1695.17 refers to “an agent or employee” of the “equity purchaser.” You, as a member of that LLC would be an “employee.” So if the “equity purchaser” is going to be the LLC, and you personally are going to be negotiating the sale on its behalf, then you must comply with the provisions of CC 1695.17(a)(1) and (a)(2).

If you’re not licensed, the contract is voidable at the option of the seller, and you and the LLC will be liable for damages. Your LLC will be bound by the provisions of CC 1695 to the same extent that you would be personally. And, as discussed below, jail and fines await you if there are other infirmities with the process.

As for using the CAR form, part of the whole reason it exists is to provide a safe harbor. If there is a CAR form that has been determined to satisfy the provisions of CC 1695.3 through 1695.6, I would STRONGLY suggest you use it. It’s an approved contract, the provisions of which agents, brokers, lawyers, judges, courts, expert witnesses, etc are all familiar. Why you would want to use your own form when dealing with vulnerable home sellers who are about to lose their home in foreclosure–a clearly and statutorily protected class–is a mystery. In any event, if you choose to use your own form, make sure it complies with the provisions of CC 1695 et seq. in all respects.

As for the meaning of the term “damages,” you should read Civil Code sec. 3333, et seq. Basically damages = $$$.

As long as you’re reviewing CC 1695, make sure you read 1695.8: It provides for fines of up to $25,000 and/or prison for up to a year for each violation. Given that the California State Bar, the DRE and the Attorney General are all coming down very hard right no on the many, many scam artists that are popping up to take advantage of the current climate, these are not things you want to be getting wrong right now.

Seriously, go hire a lawyer. You’ll be glad you did.

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