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Distressed Property Law

Distressed Property Law

As the number of homeowners in danger of foreclosure increased, so too did the number of individuals and companies looking to profit from these distressed homeowners. Washington responded to this problem by passing the Distressed Property Law in 2008 to protect homeowners in financial distress from exploitative foreclosure rescue scams.  In general, the Distressed Property Law imposes special duties on distressed home consultants.

A distressed home is a personal residence that is in danger of foreclosure because the homeowner is delinquent on mortgage or tax payments.

A distressed home consultant is defined as anyone who offers to help a homeowner stop or postpone the foreclosure sale, purchases the home within 20 days of the foreclosure sale (unless the homeowner is represented by an attorney or real estate licensee), or arranges for the homeowner to lease or rent the home so he can retain possession of it. A person who meets the definition of a distressed home consultant must enter into a formal contract with the homeowner that should be drawn up by an attorney. The distressed home consultant agreement must include a full disclosure of the specific services that will be provided, and how much compensation the consultant will receive.

The agreement also makes clear that the consultant owes a fiduciary duty to the homeowner. A fiduciary is a person who occupies a position of special trust in relation to another person. A distressed home consultant owes the homeowner duties that include disclosure of material facts, reasonable care, full accounting, and loyalty.

Distressed Home Conveyance

A distressed home conveyance is one where a buyer purchases a property:

  • from a distressed homeowner (as defined by statute),
  • allows the homeowner to continue to occupy the property for more than 20 days past the closing date, and
  • promises to convey the property back to the homeowner or promises the homeowner an interest in or portion of the proceeds from a resale of the property.

A licensee who is participating in a distressed home conveyance must complete a distressed home consultant agreement with the homeowner. An attorney should draft the distressed home consultant agreement which should be attached as an addendum to the distressed home listing agreement.

The buyer in a typical distressed property transaction—when the seller is represented by a real estate agent—will not be considered a distressed home consultant. This is true even if the homeowner is behind on his mortgage payment.

However, as we said earlier, a distressed home conveyance is one in which a buyer allows the distressed homeowner to occupy the property for more than 20 days past the closing date. It’s important to keep this time limit in mind. If the seller is allowed to stay on the property for longer than 20 days after closing, the buyer may become a distressed home consultant. If so, the provisions of the distressed property law will then apply to the buyer