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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.
Evaluating recovery funds for real estate requires careful consideration of various factors. When choosing a fund, investors should look for the following:
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 real estate recovery fund is an investment vehicle that focuses on purchasing real estate assets that are undervalued or in distress with the aim of generating returns through appreciation or improvements to the properties. These funds target properties that have the potential for a turnaround and aim to generate higher returns for investors compared to traditional real estate investments by taking advantage of market inefficiencies or opportunities created by economic downturns.
A real estate recovery fund acquires undervalued or distressed real estate properties by combining the funds of many investors. The management of the fund then tries to enhance the properties, such as by completing repairs or recruiting new tenants, with the goal of earning returns via appreciation or higher rental revenue. The fund's profits are subsequently dispersed to investors in proportion to the size of their investments. Diverse techniques and approaches may be employed by a real estate recovery fund, but the ultimate objective is to earn profits for investors by rehabilitating troubled real estate assets.
Typically, real estate recovery funds invest in a range of undervalued or distressed real estate assets, such as non-performing loans, repossessed properties, and under-occupied buildings. The sorts of real estate assets in which a recovery fund may invest depend on a number of variables, such as the fund's investment strategy, market conditions, and the fund manager's experience. Some real estate recovery funds may specialize in residential homes or commercial structures, but others may have a more general investing emphasis. The objective of investing in these assets is to earn profits via appreciation or property enhancements.
Typically, big investors like pension funds, endowments, and insurance firms are the target audience for real estate recovery funds. High net worth people and family offices might also be able to access some money, though.
Recovery funds for real estate generate returns through asset appreciation or income from rent. Investors receive returns in the form of interest, which is the amount earned on the investment. The payment of interest can be made periodically, usually in the form of payments to investors. These funds typically invest in distressed assets at a discount and aim to improve the properties through renovations or other means, with the goal of eventually selling them at a profit.
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.
