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Many California residents are unaware that their state, like many others, has a Real Estate Recovery Fund. But what exactly is a real estate recovery fund, and how can it help people who own or purchase real estate in California? In this article, we’ll cover what a real estate recovery fund is and how it works.
A state real estate recovery fund is essentially a last resort court that provides partial financial relief for victims of real estate fraud that have tried all other methods of collection, including obtaining a judgment against the guilty defendant.
Real estate recovery funds provide financial relief when all three of the following criteria are met:
The California Real Estate Recovery Fund has been around since 1964, and the money that’s added to the fund comes from a portion of real estate license fees along with fines collected by the Department of Real Estate (DRE) in the state. In California, 12% of the license fees paid by real estate agents goes directly into the recovery fund account.
For victims who file a successful application to the recovery fund, a maximum of $50,000 per transaction is all they will receive, with an aggregate maximum of $250,000 per licensee.
It’s important to understand that to qualify as a claimant for the California Recovery Fund, the individual must have fallen victim to either deliberate fraud or the illegal conversion of trust funds. Simple incompetence or negligence by a licensed agent doesn’t qualify for compensation, and neither do cases in which the real estate agent was acting as a principal.
To have a qualified claim with the California Real Estate Recovery Fund, the financial loss must be a result of fraud committed when the guilty party was engaged in behavior for which a real estate license is required, and the victim must have already won a judgment, either in court, through arbitration, or through a bankruptcy proceeding.
Finally, the victim applying for help from the fund must prove they’ve made a diligent effort to collect and that the licensee, along with any other entities found liable, don’t have sufficient assets to satisfy the judgment.
Another key qualification for help from the real estate recovery fund is that the aggrieved person must be a client or member of the public who lost money when dealing with a licensee in the scope of the licensee's authority. Entities involved in real estate transactions, such as a title agent or appraiser, don’t qualify for help.
If the losses were incurred by a real estate investor and both they and the licensee were principal investors in the deal, the claim doesn’t qualify. The licensee can’t be a principal in the transaction.
The full requirements for qualifying for recovery fund help are set forth in the Business and Professions Code (Section 10470 and following). But we will cover the main points here that go beyond the basics we’ve already talked about.
First off, it’s crucial to note that the judgment debtor must have been a legitimate real estate licensee at the time the fraudulent transaction occurred. If, for example, the judgment debtor's license had expired at the time of the transaction, the claim doesn’t qualify. Similarly, if the guilty party was never actually licensed to begin with, the claim won’t qualify either.
The claim must also be based on a real estate transaction. You can’t get help from the recovery fund because a real estate licensee didn’t pay you for work you did at their home as a contractor. Further, the guilty actions must have involved fraud, misrepresentation, deceit, or an illegal conversion of trust funds. The losses can’t be due to a licensed agent inadvertently overlooking details of a transaction or being bad at their job.
Let’s be honest—the California Real Estate Recovery Account doesn’t provide windfall assistance by any stretch of the imagination. $50,000 isn’t much these days, especially in the California real estate market. So what does the typical case look like and how much has the fund helped?
The vast majority of successful real estate recovery fund cases involve mortgage fraud and the illegal conversion of trust funds. Over the course of more than 50 years since its inception, California’s real estate recovery fund has paid out more than $50 million to claimants—definitely not chump change, but still only a sliver of the losses actually incurred by the claimants.
If you’re an accredited investor who’s looking to diversify your investment portfolio in a stable way with strong returns, the prospect of dealing with potential real estate fraud is a non-starter. Thankfully, there are smarter ways to invest in real estate with far less risk than direct investment on individual properties!
Real estate funds like those offered by Saint Investment Group are the ideal choice for investors who simply want returns without the hassle of tenants and legal complications.
Call the expert real estate investing team at Saint Investment Group today and learn how you can seize the investing opportunities available in the real estate market with less risk. Call (323) 483-0291 now.
A master in Investment, Marketing, and Capital Raising.
Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.