This article was published in The Offer, a publication of the Georgia Real Estate Investors Association, July 2003.
Your Seller Have a Right to Rescind?
J. Reed, Esq.
application of the law of the State of
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.
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
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.
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.
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
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.
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.
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.
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.
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