This article was published in The Offer, a publication of the Georgia Real Estate Investors Association, July 2003.

Does Your Seller Have a Right to Rescind?

By David J. Reed, Esq.

October 4, 2004

The application of the law of the State of Georgia to real property transactions is developing rapidly.  In the two most recent sessions of the Legislature our representatives have had lending transactions in their sights.  The statute discussed below is not the latest or most recently talked about change in the law affecting real property but its application is becoming more important given the evolving nature of real property investing.   

This article focuses on a provision of our laws contained in the Fair Business Practices Act, Official Code of Georgia Annotated (“O.C.G.A.”) § 10-1-393 (b) (20), and its application to real property transactions likely to be engaged in by members of GAREIA. 

While the membership of GAREIA is diverse and the methods of real property investing are many and varied, there are many members that engage in “no money down” or “subject to” investing.  The basic structure of the transaction is to purchase a parcel of real property “subject to” the existing security deed or underlying indebtedness.  This methodology frequently involves purchasing property from a seller that is in distress.  The seller may have lost a job, need to move, be facing foreclosure, bankruptcy, or other adverse financial circumstances.  The seller’s distress presents the investor with an opportunity to purchase the property on favorable terms.  Frequently it also means that the seller is in default on their note.  We will see that whether the seller is in default is important in the analysis below. 

In a conventional residential real estate transaction the parties engage in a basic two step process by first entering into a purchase and sale agreement that provides for a closing date typically in 30 to 45 days, and then second, proceeding to a closing.  At closing title is passed and money changes hands. 

As recently as three or four years ago it was more common among professional real estate investment advisers that recommend the “no money down” approach to advocate a two step approach to acquiring real property that more closely resembled the conventional transaction, contract followed by closing.  The recent trend is to increasingly recommend that, if an investor can get a deed, do so.  The advice is being followed by many investors.  In other words it is more common of late for the investor to meet a seller, bypass the purchase and sale agreement, and go right to obtaining a deed.  This has many important implications for the legal status of the parties. 

Among other issues is that no closing occurs in the traditional sense.  Typically there is no lawyer involved, representing the buyer or seller.  The investor purchaser has no one to blame if the right paperwork is not obtained or is filled out incorrectly.  The law of the State of Georgia contains many pitfalls for parties entering into real property transactions.  The analysis below focuses on one of those pitfalls, and given the trend toward obtaining a deed directly, this problem is increasingly likely to trip up investors. 

Georgia ’s Fair Business Practices Act at O.C.G.A. § 10-1-393 (b) (20) provides as follows.  Unfair and deceptive practices are declared unlawful.  Many examples of deceptive practices are set forth.  One specific provision deals with situations in which a seller of real property is in default and remains in possession of the premises after the sale.  The statute requires a written contract, with a fully executed copy provided to the seller at the time of execution.  The statute requires the contract to contain several specifics such as the date, names and addresses of the parties, a statement that the transaction is a sale, and the amount of cash proceeds or benefits to the seller.  The following statement is required to be in boldface type and is to be signed by both buyer and seller: "The provisions of this agreement have been fully explained to me. I understand that under this agreement I am selling my house to the other undersigned party."  The statute gives the seller 10 days to rescind the transaction.  That’s right 10 days, which is a long time for the seller to get cold feet, it is a long time for the investor to remain in limbo, and it can be very problematic if the seller is less than 10 days from foreclosure.  The statute requires that a very specific notice be provided to the seller.  The notice must be in at least 10-point, boldface type and shall specify the following, the right to rescind, that the right to rescind may not be waived, that money paid to the seller must be returned within 30 days of recission, and disclose that it is best to mail the notice of cancellation by certified mail and to retain the post office receipt.  Note that the foregoing is intended to describe the particularity of the statute and not to replace review of the statute and strict compliance with or without the assistance of counsel. 

This provision of the Fair Business Practices Act is only applicable where the seller’s loan is in default and the seller remains in possession.  However, this may be the case more often than one might think at the outset.  Technically a homeowner may be in default and entitled to the rights provided by the statute even if they are only a single day late with their payment.  Often a seller in a “subject to” transaction is in financial distress and is several payments behind.  In addition while lawyers might argue over how many days it takes to become in “possession … as a tenant at will” as set forth in the statute, or what facts create that status, the prudent investor will want to avoid that fight at all costs.  The prudent investor will assume that the statute is applicable unless the seller is driving off in their U-Haul minutes after signing the deed. 

The problems created for the investor that fails to follow the provisions discussed above can be complex and problematic to resolve.  What if the investor has sold the property to a buyer on an agreement for deed?  What if that buyer then transfers the property?  How about if that subsequent transaction is for value with conventional financing?  When the original seller sues, files a lis pendens, and seeks to rescind his sale the number of lawyers, title insurance companies, and parties seeking relief from the investor can be overwhelming in terms of time and money. 

The prudent investor will review all relevant facts in each transaction, ensure contract forms comply with the statute, issue the required notice, and consider obtaining a written declaration of intent from a seller to waive any rescission rights the seller may have.  

About the Author

David J. Reed is in the private practice of law with the firm of Law Offices of David J. Reed.  For inquiries see davidjreed.com or call 770-751-0900. 

Send mail to davidjreed@davidjreed.com with questions or comments about this web site.
Last modified: December 05, 2006