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“ CASH FOR KEYS” – INFORMATION FOR CONSUMERS AND DRE LICENSEES

The c ha llenge to suc c essfully ma rket REO p roperties ha s g iven rise to a growingprac tice known as “ c ash for keys” . The Dep artment of Rea l Esta te (“ DRE” ) has bee nreceiving questions and complaints from consumers about “cash for keys”solic ita tions. This a rticle is intended to p rov ide som e g uida nc e fo r c onsume rs andlicensees when involved in a “Cash for Keys” program to minimize anymisund erstand ings or violations of the law.

“ Ca sh fo r Keys” ProgramsWhen a lender takes a home back as a result of a foreclosure action, it becomesresponsible for tha t prop erty. The long er the lend er has to w a it to sell the p rop erty,

and the more money it has to spend to repair damage to and/or to maintain thep rop erty, the g rea ter will be its ultimate loss. The c onseq uenc es of forec losure a ndthe looming legal eviction action affects the prior resident owner of the foreclosedprop erty and / or the tenant(s) living in the prop erty the same way – they must, unlessthere is an existing landlord-tenant rental or lease agreement which survives theforec losure by law, or a written ag reement with the new ow ner/lender to ma inta inor mo d ify the tena nc y, vac a te the p rop erty in a relatively short period of time .

If the lender can make a deal with a tenant to pay for the tenant’s security andutility deposits, moving expenses, and maybe even temporary living expenses, and

perhap s a bonus for a q uic k moving d ate, it would b e in the lender’s interest to do soto avoid the inevitable minimum 3 to 6 month delay associated with formal legaleviction proc eed ings. In the ma ny circ umstanc es, the lende r wo uld m ost certainlyp refer that the tenant a gree to va c ate the p rop erty within a c ertain numb er of days,lea ve the p rop erty in “ b roo m-swe pt cond ition” , rem ove a ll deb ris from the interiorand the yard, lea ve a ll fixtures and land sc ap ing intac t, and turn ove r the keys andga rag e d oor op eners.

Prac tic a l App lic a tion of “ Ca sh fo r Keys”Generally, the amount offered to tenants vary and is usually negotiable. Anecdotalreports from those who have had experience with “cash for keys” programs reportthat $500 is generally the minimum and $5,000 the maximum amount offered totena nts for their keys.

The a mo unt a n ow ner is willing to p ay for a tenant’ s keys dep end s on several fac tors,including the value and physical condition of the property, and the plan(s) thelend er has for the prop erty. Other fac tors inc lude the amo unt of time the tenantneed s to move out.

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Laws Protec ting Tena nts’ Rights With Respec t to Forec losed PropertiesAs rec ently as ea rly 2008, in the a bsenc e of a written lea se a gree me nt req uiringgrea ter notice , Ca lifornia law req uired tha t an o wne r p rovide only a 30-da y notic e toa tenant to va c ate the p rop erty for any rea son (other than the fa ilure to pa y rent,which req uired a 3-day notice). How ever, rec ent legisla tion ha s c hange d the rules.

Signed as an urgenc y mea sure in 2008, Sena te Bill 1137 g ives tenants a t least 60 daysa fter a fo rec losure b efore they can be asked to vac a te the p rop erty. The p rovisionsof SB 1137 are d ue to sunset (b e repea led ) on January 1, 2013. To review a c op y ofthe b ill and get mo re d eta ils, please v isit www.leginfo.ca.gov.

Federal legislation was enacted effective May 20, 2009, requiring property owners

who have taken a residential property by forec losure, to g ive their tena nts a t least a90 day notice to vac ate the property before beginning the eviction proc ess. Tha tfed eral law is app lic ab le na tionw ide, and it is known as “ Prote c ting Tena nts AtForec losure Ac t” . The law is found a t Title 7 US Co de sec tion 701 (“ the Ac t” ). Seehttp://thomas.loc.gov.

The Ac t p rovides tha t if a tena nt is renting und er a lease e ntered into b efore thenotice of foreclosure was communicated to the tenant, the tenant may remain inthe property until the lease ends, unless the owner sells the property to a purchaserwho will oc c upy the p rop erty as his p rima ry residenc e. In tha t case, the ow ner ma y

prop erly give the tena nt a 90da y notic e to va c ate .

While the Ac t provides grea ter p rote c tion to tena nts than Sta te law , loc a l law m ayprovide even mo re protec tion. If a p artic ula r p rop erty is subjec t to loc a l “ rentc ont rol” or “ housing assistanc e” laws, or so-c a lled “ just c ause fo r evic tion”ordinanc es, those laws ma y provide e ven g rea ter p rote c tion tha n the Ac t itself. Asan example, even the Act itself provides that the owner of a residential propertywhich is subject to a “housing assistance contract”, and who has a lease with atenant in that property, is subject to any additional protections in the housingassistanc e c ontrac t (this typ ic a lly app lies to “ Sec tion 8” p rop erties).

Finally, there is a bill pending in the California legislature that would require tenantsbe to ld of their rights when the prop erty they o c c upy is forec losed . Sena te Bill 1149req uires tha t tena nts who are living in forec losed hom es be g iven notic e o f theirrights and responsibilities under these state and federal laws by requiring a coversheet be attached to any eviction notice that is served within one year of aforec losure sa le. The c over sheet w ould d elineate the laws and rights a tena nt ma yha ve in c ases where the prop erty he o r she oc c up ies is forec losed up on. The b ill also

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seeks to help protect tenants who would otherwise have a negative mark on theirrental history by prohibiting the release of court records in a foreclosure-relatedevic tion unless the p laintiff land lord preva ils. Whethe r the b ill is signe d into law w ill no tbe know n until Oc tob er 2010.

What Renters and Resident Owners Ca n Do to Protec t ThemselvesTena nts and resident owners of fo rec losed p rop erties must ta ke a signific ant a mo untof persona l responsib ility in this ma tte r. They should b ec om e ac qua inted w ith fed eraland Sta te law c onc erning fo rec losures and tena nt evictions, and a lso w ith loc a l lawswhich a pp ly to the ir partic ula r situa tion. For examp le, in the City of Los Ang eles,beginning December 17, 2008, tenants who are current in their rent payments cannot b e evic ted bec ause o f a forec losure. Ma ny c ities in Ca lifornia , inc lud ing SantaMonica, West Hollywood, Beverly Hills, Oakland, and Berkeley, are subject to local

“ rent c ontrol” and/ or “just c ause for evic tion” ordinanc es, whic h ma y provide evengreater protec tions. Without a w orking knowledg e o f ap plic ab le loca l law , a tenantis a t a d istinc t d isadvantage .

Tena nts and resident owners should make sure tha t a ny “ c ash for keys” offe r iscoming from the new owner of the property, which is often a lender or agovernment sponsored mortgage investor, such as Fannie Mae or Freddie Mac.Tena nts and resident ow ners should insist on ve rifying the ident ific a tion a nd autho rityof the p erson ma king the “ c ash for keys” offe r. They must insist on rec eiving a written“cash for keys” agreement, and carefully read and understand that agreement.

They should ha ve a trusted and c om petent a ttorney, rea l esta te lic ensee , familymember or friend review the agreement and provide counsel concerning its dutiesand o b liga tions.

Before signing the agreement, a resident owner should call his or her lender directlyto c onfirm the a uthority of the pe rson making the “ c ash for keys” offer. A tena ntmust be espec ia lly careful. The tena nt should c a ll his or her land lord a nd ask aboutthe forec losure and the identity and c onta c t informa tion for the new o wne r. It wouldnot b e unusual for the landlord to te ll the tena nt to c ontinue to ma ke rent p aymentsd irec tly to the land lord. That should no t be d one if the land lord is no longe r theow ner of the property. And fina lly, a tena nt or resident owne r should never hand the

keys over unless the mo ney is delivered . Cash is best. If pa id b y c hec k, the tenant o rresident owne r should make certain the chec k is goo d and/ or clears. If the keys arehanded over, and the owner fails to pay the money, or if the owner’s checkbounc es, the w ritten a greeme nt should b e suffic ient to a llow the te nant to p reva il ina sma ll c la ims ac tion a ga inst the o wne r. But ob ta ining a judgme nt is far easier thanc ollec ting it. Without a written agreement, the chanc es of ob taining a judg ment a resubstantially reduced.

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Is A Rea l Esta te License Required to Solic it “ Cash For Keys” ?There is no way to generalize a nd dec la re tha t a rea l esta te lice nse is, or is not,

req uired to solic it “ c ash for keys” . The pa rticu la r fac ts of ea c h transac tion willdete rmine the a nswe r to tha t question.

Responsibility o f Rea l Esta te Licensees Who Eng age in “ Cash For Keys” Transac tionsA lic ensee who solic its a “ c ash fo r keys” dea l should ident ify him or herself to theresident owner or tenant when requested to, and provide his or her DRE licensenumber. A consume r ma y loo k on the DRE web site (www.dre.ca.gov) and, on the“ Hom e” tab , under the hea d ing “ Consumers” , c lic k on “ Lic ense Sta tus Chec k” toverify tha t person’ s lice nse sta tus. Und er tha t same head ing, there is a lso a link to“ How to File a Co mp la int”. One w ho ha s bee n solic ited by a DRE lic ensee is

encouraged to file a complaint with DRE if the solicitor has not acted fairly andhonestly in the “ c ash for keys” transac tion, or if the solic itor ha s eng aged in anyother unlaw ful c ond uc t.

It should go without saying that California real estate brokers or salespersons whoengage in “cash for keys” negotiations with tenants must be aware of the federal,Sta te a nd loc a l laws relating to fo rec losed prop erties, and the tena nts’ rights withrespec t to the ir tenanc ies or lea sehold interests. The o ld saying “ ignoranc e o f thelaw is no excuse” rea lly doe s app ly in this c ontext.

It should also go without saying that DRE licensees who solicit a resident owner ortena nt to a c c ep t a “ c ash for keys” p rop osa l must ac t fairly and honestly with respec tto the transac tion. Dishonest be ha vior, misrep resenta tions, ha rassment, fa ilures tod isc lose ma teria l informa tion to a resident o wner or tenant, inc lud ing fa iling to a dvisethe resident owner or tenant of his or her rights with respect to eviction (that thelicensee has knowledge of) as a result of foreclosure, or negligence, could possiblylea d to lic ense d isc ip linary ac tion. A lic ensee who hires unlic ensed persons to solic itcash for keys deals can also be liable for the dishonesty, misrepresentations,ha rassme nt and / or neglige nce o f his or her unlic ensed agent.

Conclusion

A fair and equitable cash for keys agreement will mutually benefit both the newowner of the property and the resident former owner or tenant residing in theproperty.

For tena nts, resident ow ners, and Dep artment of Rea l Esta te lic ensee s, know led ge o fthe law concerning this subject is power – power to avoid problems that are justlooking for plac e to happ en.

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For resident owners and tenants in foreclosed properties, your only real safety lies inyour taking the responsibility to p rotec t yourself. Get the a greem ent a nd a ll othe rc ommunica tions in writing. Have someo ne you trust loo k the written doc umentsover. Ma ke sure the solic itor is autho rized to a c t for the rea l ow ner of the prop erty.And d o not give up the keys be fore you ge t the ca sh.

Ad d itiona l Resourc es: The office of the Ca lifornia Atto rney G eneral issued a NewsRelease on June 28, 2010, entitled “ Brow n Investiga tes Whether Tena nts’ Rights AreViolated in Forec losures” . You ma y wish to c onsult that Relea se fo r mo re informa tion.If you a re a tena nt or resident o wne r and believe your rights have b een violated , youcan contact the California Attorney General at www.ag.ca.gov, and/or theCa lifornia Dep artment of Rea l Esta te a t www.dre.ca.gov.