RPL 265-a: The Home Equity Theft Prevention Act: Protections When Selling a Home in Distress

New York Real Property Law § 265-a (the Home Equity Theft Prevention Act, universally known as HETPA) regulates sales of owner-occupied homes that are in foreclosure or in mortgage default. The statute was enacted in 2006 and took effect on February 1, 2007, in response to a wave of "equity stripping" schemes in which investors approached homeowners facing foreclosure, promised to "save the house," and walked away with the deed and the accumulated equity. HETPA does not prohibit distressed sales. It imposes strict contract formalities, a mandatory cooling-off period, substantive rules for sale-leaseback and buy-back arrangements, and powerful remedies (including rescission of the deed itself) when an investor-purchaser fails to comply.

This page explains what RPL § 265-a actually requires, who it applies to, the deadlines that control, and the mistakes that most often generate litigation on both sides of these transactions.

What RPL § 265-a Does in Plain Language

If you own and live in a one-to-four-family home that is in foreclosure, and someone other than an ordinary home buyer wants to purchase it from you, HETPA gives you five core protections:

1. A written contract with mandatory disclosures. The deal must be reduced to a written contract containing every term of the agreement, in the language in which the negotiation was principally conducted.
2. A right to cancel. You may cancel the contract, without penalty, until midnight of the fifth business day after you sign, or until 8:00 a.m. on the day scheduled for the foreclosure sale, whichever comes first (RPL § 265-a(4)).
3. A freeze on performance. Until your cancellation right expires, the purchaser may not take your deed, record anything you signed, encumber the property, or pay you consideration.
4. Substantive rules for buy-back deals. If the arrangement contemplates that you will remain in the home and repurchase it later (a reconveyance arrangement), the purchaser must verify that you can realistically afford the repurchase, and if the repurchase never happens, the statute sets a floor on what you must be paid for your equity.
5. Rescission and damages. A transaction that materially violates the statute is voidable. The homeowner may rescind within two years of the recording of the conveyance, and may sue for damages, attorney's fees, and, in appropriate cases, exemplary damages.

The Transactions HETPA Covers

HETPA's obligations attach to a "covered contract": a contract between an equity seller (the homeowner) and an equity purchaser concerning either:

• a residence in foreclosure, whether or not the deal includes a buy-back; or
• a residence in default, but only where the contract includes a reconveyance arrangement: that is, some promise or expectation that the seller will retain an interest, remain in occupancy, or later reacquire title.

"Residence in Foreclosure" vs. "Residence in Default"

Two practical consequences follow. First, an ordinary arm's-length sale of a home whose owner is behind on the mortgage but not yet in foreclosure, with no leaseback or buy-back, is generally not a covered contract. Second, once a lis pendens is filed, virtually every investor purchase becomes covered, and the compliance burden shifts squarely onto the buyer.

Who Is an "Equity Purchaser"

An equity purchaser is any person who acquires title to a residence in foreclosure, with important exclusions. HETPA does not apply to a person who acquires title:

• for the purpose of using the property as his or her own primary residence;
• by deed in lieu of foreclosure of a voluntary lien or encumbrance of record;
• at a sale authorized by statute, or pursuant to a court order or judgment (including the foreclosure auction itself);
• from a spouse or close relative of the seller;
• as a not-for-profit housing organization or public housing agency; or
• as a bona fide purchaser or encumbrancer for value in the circumstances the statute specifies.

In other words, HETPA targets investors, flippers, and "foreclosure rescue" operators, not the family that buys a distressed home to live in it, and not the lender that forecloses.

What Kind of Property Is Covered

The statute is directed at one-to-four-family residential real property occupied by the owner as a principal residence. Cooperative apartments occupy a different legal category: a coop sale is a transfer of shares and a proprietary lease rather than a deed to real property, and distressed coop transactions raise their own set of transfer and board-approval issues. If your situation involves a cooperative, see our reference page on selling a coop building.

Mandatory Contract Terms

A covered contract must be in writing, must be in the same language principally used in the oral negotiations, and must contain the entire agreement of the parties: side deals and oral promises are themselves a compliance failure. Among other required contents, the contract must state:

• the name, business address, and telephone number of the equity purchaser;
• the street address of the residence;
• the total consideration the seller will receive and the terms of payment;
• the terms of any rental agreement or right of occupancy the seller will retain;
• the terms of any reconveyance arrangement, including the repurchase price and conditions;
• a conspicuous notice of the seller's right to cancel, in immediate proximity to the signature line, stating the date and time the cancellation period expires; and
• an attached, completed Notice of Cancellation form, in duplicate, easily detachable, that the seller can simply sign, date, and deliver to cancel (RPL § 265-a(5)).

The statutory notice language and type-size requirements are not stylistic suggestions. Courts treat the disclosure and notice provisions as strict requirements, and a missing or defective cancellation notice is one of the most common grounds on which these transactions are later unwound. Critically, if the required notice of cancellation is never properly given, the cancellation period arguably never begins to run.

The Right to Cancel: RPL § 265-a(4)

The equity seller may cancel a covered contract at any time until the earlier of:

• midnight of the fifth business day following the day the seller signs the contract; or
• 8:00 a.m. on the day scheduled for the foreclosure sale of the property under a judgment of foreclosure and sale.

Mechanics of cancellation:

1. Cancellation must be in writing. The detachable statutory form is sufficient, but any written notice expressing intent to cancel works.
2. Notice may be delivered personally or by mail. Mailed notice is effective when deposited in the mail, properly addressed with postage prepaid, not when received.
3. Cancellation is without penalty or obligation. Within ten days after receiving the notice, the purchaser must return, without condition, any original documents the seller signed.

Any purported waiver of HETPA's protections is void and unenforceable as against public policy. An investor cannot cure a compliance problem by having the homeowner sign an acknowledgment "waiving" the cancellation right.

The Freeze on Performance During the Cancellation Period

Until the cancellation right has expired, the equity purchaser may not:

• accept from the seller the execution of any deed or other instrument of conveyance;
• record any document signed by the seller, including the contract itself;
• transfer or purport to transfer any interest in the property to a third party;
• encumber or purport to encumber any interest in the residence; or
• pay the seller any consideration.

The purpose is to keep the transaction fully reversible during the cooling-off window. A deed signed at the kitchen table on the same day the contract is signed (a signature feature of equity-theft schemes) is itself a statutory violation, regardless of what the seller was told.

Reconveyance ("Buy-Back" and Sale-Leaseback) Arrangements

The classic foreclosure-rescue pitch is: "Deed me the house, I'll pay off the arrears, you stay as a tenant, and you can buy it back in a year." HETPA does not ban these arrangements, but it regulates them heavily. Where a covered contract includes a reconveyance arrangement, the equity purchaser must:

• verify, before entering the deal, that the seller has a reasonable ability to pay for the subsequent reconveyance, including the repurchase price and any interim lease or occupancy payments. A purchaser who never ran the numbers cannot enforce the arrangement against the homeowner later;
• actually reconvey title if the seller performs; and
• if title is not reconveyed and the seller loses the home, ensure the seller receives consideration reflecting the equity, the statute sets a floor of at least eighty-two percent of the fair market value of the property, so the purchaser cannot pocket the spread between a token "purchase price" and the home's true value.

Courts scrutinize these transactions for what they really are. A "sale" coupled with continued occupancy and a repurchase option is frequently recharacterized in litigation as an equitable mortgage (a loan secured by the home) which means the "purchaser" never truly owned it and must foreclose like any other lender.

Remedies: Rescission, Damages, and Deadlines

HETPA's enforcement provisions are strong:

• Rescission. A transaction involving a residence in foreclosure that is in material violation of RPL § 265-a is voidable, and the equity seller may rescind it within two years of the date the conveyance was recorded. Rescission is exercised by written notice to the equity purchaser; the purchaser must then reconvey title within twenty days, free of any encumbrances the purchaser created.
• Damages. The seller may bring an action for actual damages within six years of the violation. The court may award reasonable attorney's fees and costs to a prevailing seller, and may award exemplary damages for violations undertaken in bad faith.
• Defensive use. HETPA violations are routinely raised as defenses and counterclaims when the investor sues to evict the former owner or to enforce the leaseback.
• Bona fide purchaser protection. Rescission does not defeat the rights of a genuine bona fide purchaser or encumbrancer for value who took without notice of the violation. Whether a downstream buyer or lender qualifies is often the central battleground, parties who closed with red flags on the record (the seller still living in the home, a fresh lis pendens, a below-market price) frequently do not.
• Criminal exposure. Egregious deed-theft conduct can also draw prosecution under New York's criminal laws, separate and apart from HETPA's civil remedies.

Worked Examples

Example 1: The Five-Day Cancellation

A lis pendens is filed against a two-family home in Queens where the owner lives in one unit. An investor knocks on the door, offers $340,000 cash, and has the owner sign a contract on Tuesday. Because the property is a residence in foreclosure and the buyer is an equity purchaser, this is a covered contract. The owner may cancel until midnight of the following Tuesday (five business days later, assuming no intervening holiday). If she mails a signed cancellation form on Monday, the cancellation is effective when mailed, even if the investor receives it Thursday. Any deed she signed in the interim was taken in violation of the statute and is voidable.

Example 2: The Sale-Leaseback That Was Really a Loan

An owner two months behind on his mortgage (no foreclosure filed yet) deeds his home to a "rescue" company for the amount of the arrears, signs a one-year lease at $3,800 per month, and receives an option to repurchase at $75,000 above the transfer price. Because the property is a residence in default and the contract contains a reconveyance arrangement, HETPA applies. The company never verified his ability to make the lease payments or fund the repurchase. When it later sues to evict him, he counterclaims: the arrangement violated RPL § 265-a and, on these facts, is properly recharacterized as an equitable mortgage. The deed is set aside; the company holds, at most, a lien for what it actually advanced.

Example 3: The Compliant Investor Purchase

An investor purchasing a home in foreclosure uses a written contract in the language of negotiation, discloses the full consideration, attaches duplicate statutory cancellation notices, waits out the five business days, and only then takes the deed, records, and pays. The seller receives the equity stated in the contract. HETPA is satisfied, and the investor's title is defensible. Compliance is not difficult; it simply cannot be skipped or back-dated.

Common Pitfalls

For Homeowners

• Signing a deed the same day as the contract. No compliant transaction closes on day one. Same-day deeds are the hallmark of equity theft.
• Relying on oral promises. If the buy-back, the leaseback rent, or the payoff figure is not in the written contract, the contract is defective, and the promise is likely illusory.
• Missing the rescission window. Two years runs from the recording of the deed, not from when you discover the fraud. Act promptly once you suspect a problem.
• Fiduciary sellers. If the distressed home is owned by an estate, held under a power of attorney, or subject to guardianship, HETPA compliance is layered on top of the seller's own authority problems. See our page on approval for selling real estate before signing anything.

For Purchasers and Investors

• Assuming HETPA is only about "scams." The statute applies to good-faith investor purchases of homes in foreclosure. Technical noncompliance by an honest buyer still renders the transaction voidable for two years.
• Defective cancellation notices. Omitting the duplicate detachable form, the expiration date and time, or the required type size can leave the cancellation period open indefinitely.
• Paying or recording early. Any performance before the cancellation period expires is an independent violation.
• Unverified buy-backs. Entering a reconveyance arrangement without documenting the seller's ability to repurchase invites both rescission and equitable-mortgage recharacterization.
• Title insurance. Insurers scrutinize purchases from owners in foreclosure; a HETPA-noncompliant file may be uninsurable or excepted, impairing resale.

Related Provisions

HETPA was enacted as part of a broader package. Two companion provisions come up constantly in the same fact patterns:

• RPAPL § 1303 requires the foreclosing plaintiff to serve the homeowner, with the summons and complaint, a colored "Help for Homeowners in Foreclosure" notice on distinct paper, warning about rescue scams. Noncompliance is a ground for dismissal of the foreclosure action.
• RPL § 265-b regulates distressed property consultants: those who charge homeowners for loan-modification or foreclosure-avoidance "services." It requires a written consulting contract with its own cancellation rights and prohibits taking up-front fees or a power of attorney from the homeowner.

You can contact the Law Offices of Albert Goodwin by phone at 212-233-1233 or by email at [email protected].