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SB 1079 – Bidder Beware

Updated: Feb 16

In 2020, California passed SB 1079, called the "Homes for Homeowners, not Corporations" bill, going into effect January 1, 2022. See especially Civ. Code section 2924m (which sunsets January 1, 2026). This bill creates a right of first refusal for real property sold at trustee sales in favor of certain preferred purchasers (especially, for example, tenants who want to buy the property).


However, this creates a difficult situation for some bidders. There are always unintended consequences of legislation. Here, it appears that one result will be the de facto preference of institutional investors to smaller investors.


What does this new right of first refusal mean?


A right of first refusal ("RFR") is the right of someone to purchase something before anyone else. For purposes of SB 1079, that "something" is residential property. Certain qualified bidders may submit bids after the auction and "win" the previously closed auction.


For real estate investors (including smaller operations), this means that there are post-auction procedures that could affect your bid. Your bid might actually be on hold for up to 45 days.


Who qualifies for this RFR?


The three categories of eligible bidders are: (1) eligible tenant buyers, (2) prospective owner-occupants, and (3) other eligible bidders. Civ. Code section 2924m(a).


An eligible tenant buyer is a natural person (meaning not an entity) who occupies the property as the person's primary residence. This person may not be a relative of the owner, and must have a lease agreement with the owner prior to the date of the sale. Civ. Code section 2924m(a)(1).


A prospective owner-occupant is a natural person who gives notice that they intend to use the property as their primary residence for at least one year. This person may not be a relative of the owner, and cannot be acting as an agent for another. Civ. Code section 2924m(a)(2).


"Other eligible bidder" refers generally to qualifying nonprofits, entities with managing partners or members that are nonprofits, the state of California and its agencies, community land trusts, and limited equity housing cooperatives. Civ. Code section 2924m(a)(3).


I will refer to all of these as "eligible bidders," and refer to each category by its own term.


What property qualifies?


Section 2924m limits its application to trustee's sales under a deed of trust or mortgage on real property "containing one to four residential units." Civ. Code section 2924m(c). This is fairly broad, and I understand it to include single family residences, multiple (up to four units) family residences (e.g., a duplex), condominiums, etc. By its use of the word "units," it does not include commercial property or vacant land.

The other caveat is that the property must be sold individually. Previously, trustees would bundle properties to be sold together. Such procedure clearly favors larger, institutional investors. That policy is at odds with the purpose of SB 1079, so now Section 2924g(a)(4) states explicitly that "a trustee shall not bundle properties for the purpose of sale and each property shall be bid on separately, unless the deed of trust or mortgage requires otherwise" (italics added). I'll note that the italicized clause is a big exception that sophisticated lenders (which will usually be larger, institutional investors) will take advantage of in future deeds of trust and mortgages.


How does this work?


SB 1079's right of first refusal arises in the trustee sale context (that is, non-judicial foreclosures). So if a property is foreclosed and goes to auction, you need to be aware of this before bidding on any property.


The procedure is deceptively simple:

  1. Day 0: the auction closes;

  2. Day 2: check to find the final and highest bid amounts;

  3. Day 15: last day for eligible bidder to submit a Notice of Intent to Bid;

  4. Day 45: last day for eligible bidder to submit an actual, binding bid along with a cashier's check (or cash, which I do not recommend) for the full amount.


In short, if you are not an eligible bidder, the sale is not final until 15 days after the auction (if no Notice is received) or 45 days after the auction (if a Notice is received, but no binding bid is received).


In practice, this means that if you bid on property, any earnest money paid will be on hold until the 15 or 45 day-period has run. You will not get to use those funds to bid on any other property.


If you are an eligible bidder, you might be encouraged to send the Notice of Intent to Bid whether or not you intend to bid, because the Notice is non-binding. Legally, that might be true, but I would recommend only submitting the Notice if you actually intend to seek financing for a bid. This is especially true for eligible tenant buyers, who might wish to remain at the property after the sale.


One caveat: if a prospective owner-occupant is the last and highest bidder at the trustee sale, the sale is final. In that situation, eligible tenant buyers and other eligible bidders will not have the opportunity to submit the Notice. Civ. Code section 2924m(c)(1).


How much does an eligible bidder need to bid?


It depends. For eligible tenant buyers, the bid amount must at least be equal to the last and final bid at auction. Eligible tenant buyers do not have to beat the winning bid amount. Civ. Code section 2924m(c)(3)(A).


For other eligible bidders (including prospective owner-occupants), the amount must exceed the last and final bid at auction. Civ. Code section 2924m(c)(4)(A).


How do eligible bidders get that kind of money in only 45 days?


California has authorized $500 million in funding for the Foreclosure Intervention Housing Prevention Program. You can read more about that here.


I have not been able to find any statistics yet, but I assume that many eligible bidders are unable to get financing in time. If that is the case, then this creates another de facto benefit to institutional investors.


What is the purpose of the law?


The stated purpose is to avoid another foreclosure crisis like that seen during the Great Recession. The bill's author, Senator Nancy Skinner, released a statement: "SB 1079 sends a clear message to Wall Street: California homes are not yours to gobble up; we won’t tolerate another corporate takeover of housing." The idea is to keep residential properties in the hands of the people who reside there: that communities have an interest in residential ownership in a way that investors and speculators don't.


After the COVID-19 pandemic, policymakers raised similar concerns. In December 2020, in the midst of the pandemic, the US Census Bureau's Household Pulse Survey suggested that as many as 35% of Americans could lose their homes.


It's unclear (and probably too early to tell) if SB 1079 is achieving its stated goals (for example, homeowners now have greater equity in their homes than they did during the Great Recession, so traditional sales might be preferable). But the fines included in Section 2929.3 might actually do some good in preventing blight. Section 2929.3 provide for fines of up to $2,000.00 per day for the first 30 days, and up to $5,000.00 per day thereafter, subject to the local government's discretion.


What are the downsides?


If you bid on property and the lister receives an offer from a qualifying person, your funds might be frozen until the qualifying person's deadline. You essentially have no control over your money until that person does (or does not) submits an equal or higher bid. This might discourage bidding (and, perhaps, this is part of the purpose of the bill).


For example, you find a really nice house that you would like to purchase and flip. You have the funds for it, so you bid $500,000 and win the property. But you never get the deed. You call the company overseeing the sale, and they inform you that they received a bid from a tenant. They are holding your money in trust, but they are keeping it until the tenant comes up with the money or the passage of 45 days.


Also, the fines set forth in Section 2929.3 are significant. If you are an institutional investor, you will want to keep an eye on the property's local fine amounts. At the maximum statutory rate, the fines are $60,000.00 after only 30 days. If you routinely purchase properties at trustee's sale, make sure you have a good general contractor at the ready.


I would also argue that smaller investors will be hardest hit. Institutional and larger investors can afford the added upkeep (thus avoiding the fines), they are better positioned to guarantee compliance requirements regarding eviction information, and they will be less inconvenienced by having funds tied up for an extra 45 days. There's also the possibility of financing having to be renegotiated in that time (especially when the real estate market becomes volatile).


Conclusion


SB 1079 might well provide benefits to communities. That is certainly the goal of the legislation. But real estate investors need to familiarize themselves with the provisions of the statutes, especially Section 2924m and Section 2929.3. Bear in mind that you are agreeing potentially to have your funds inaccessible for up to 45 days, and that you might well incur repair obligations on a quicker timeline than anticipated.


[Thanks to Lisa Duffy for this blog post idea.]

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