As a real estate agent attempting to represent family members selling a property between themselves, there is a Texas specific nuance that is very important to understand before writing a contract. First, we need to review a few concepts that come into play with a family sale.
Lien Enforceability on Homestead Properties The why comes from a little backstory on the Texas Constitution and how it affects lien validity (which a title company very much cares about since we insure lien validity).
The Texas Constitution states that there are only 8 permissible lien types on a homestead: The money to purchase the home,
Money to build improvements (mechanic’s lien contract),
Refinance of a filed federal tax lien,
Owelty of partition,
Conversion of a personal property lien on a manufactured home into a real property lien.
Bona Fide Sale / Avoiding a Pretend Sale: In order to insure, the purchase money transaction must be a bona fide sale. This is a place where the family to family sale becomes an issue. Texas courts have held for decades that a sale deemed to be a pretended sale is void under the Texas Constitution. A pretended sale occurs when the parties intend to convey property between family members but the seller will not be moving out of the property.
The Texas Constitution treats a pretended sale of a person’s homestead as void.
Let’s say that a son wants to buy mom’s home because mom is getting older and they want to avoid probate. He also wants to give mom some “cash” (i.e. sales proceeds) for living expenses. The issue though is that mom is not going to move out and it’s still her homestead.
If mom stays in the home it is her homestead but the lien used to purchase the property from mom is in son’s name making it an invalid lien on her homestead. This is something that has been tested in case law and Texas courts have held for decades that a pretended sale is void under the Texas Constitution. That is quite problematic since the title company has been asked to issue an Owner’s Title Policy and a Loan Policy.
For this reason, in most cases, we have to be able to show one of the following items to be able to insure:
Seller owns and occupies another property as their homestead;
Seller is simultaneously buying another homestead property; or
Seller has a long term lease (this one requires pre-closing underwriter review and may have additional requirements such as copies of a moving contract, removal of exemptions pre-closing, or a physical inspection to confirm vacancy).
Both buyer and seller will be asked to execute documents at closing proving up the claims of this being a bona fide sale. In these affidavits the seller will disclaim the current property as homestead and claim other property as homestead, buyer will designate this property as their homestead, both parties will swear that they have no agreements to reconvey the property back to seller and additional certifications to title.
Value Considerations Assuming that we’ve cleared the pretend sale hurdle we then need to show that the sale is for fair market value. To substantiate this the parties can provide an appraisal, comparative market analysis or other documentation to justify the sales price.
Power of Attorney Use Power of attorney use in these types of transactions is limited and subject to underwriter review and approval. Specifically a POA cannot be used for the seller when the buyer is the agent under the power of attorney as this could be considered self-dealing. Also using a power of attorney could remove the seller’s liability for the affidavits and other representations required.
Are there exceptions? Cash transactions are less rigorous to close because there is not a lien to be insured. Instead we are able to take exception to the concerns listed above and proceed to closing.
Most consumers do not understand the complicated issues surrounding Texas homestead rights and the Texas significant Constitutional limitations on the kind of liens that can be legally created against a homestead. Likewise, they may not understand that a sale of the homestead property to a family member who can qualify for the desired loan, to circumvent homestead laws, is inappropriate, potentially illegal, fraudulent and/or qualifies under the law as a “pretended sale.” Before a real estate agent gets too far into writing a contract between family members it’s a good idea to call your favorite Texas National Title escrow officer so that we can discuss options for your clients.
Short Sale Transactions
With changes in the market we are starting to see short sale transactions come back around so this article is intended to share some important details about the short sale transaction.
What is a short sale? A short sale occurs when the payoff loan balance exceeds the possible sales price of a home. If the owner is going to be upside down on the house in the sale they can approach the lender to request that the lender allow the sale of the home for less than they owe on the mortgage. The lender of the original mortgage agrees to lower the payoff amount, receive all of the proceeds of the sale, allow the sale to occur and agree to release the lien on the property.
Why would a lender agree to a short sale? Obviously the short sale transaction is less than ideal for the lender, but if the owner is in financial distress, where foreclosure may be possible, the short sale can be a preferable alternative to foreclosure. When a lender forecloses on a loan there are several costs that are unknown to them at the time of foreclosure. These costs can include the cost of the actual foreclosure, the carrying costs of holding the property, repair costs and costs of sale when they re-sell that property.
The short sale is a way for a homeowner and lender to get out of a difficult financial situation by taking a loss that is a known amount instead of the unknown risk of foreclosure.
How does a short sale work? If a transaction is going to involve a short sale much of the application and negotiation must be done by the seller with their payoff lender. The process starts with the seller making a short sale application to their payoff lender. Each lender will have slightly different requirements for their application package but in general they will want to see lots of documentation including things like:
Hardship letter: The seller should list all issues contributing to their inability to sell for a higher price and/or pay the mortgage (i.e. loss of income, divorce, death of primary wage earner spouse, etc.).
Financials (income, assets available, etc.).
Copy of the listing agreement
Sales contract (most lenders will not approve a short sale until there is a contract)
Appraisal or Comparative Market Analysis
Preliminary net sheet showing estimated fees and sales proceeds
A few potential short sale pitfalls: Keep in mind that getting a short sale approved is a negotiation with the lender and for the most part the lender is the decision maker in the process. This does mean that they can control certain things in the transaction such as the permissible amount of realtor commission to be paid and who pays certain closing fees. A lender may also require that the seller bring some funds to closing to mitigate the lender’s loss on the transaction. They may often prohibit a flip transaction and they can rule out any sales to related parties. Also, if there is a second lien on the property the first lien lender may not allow any funds to be paid to the second lien. This means that a seller with a first and second lien has to do separate short sale negotiations with each of their lenders and both lenders have to agree before the deal can close.
These negotiations can take a lot of time to get approved which makes it very important that realtors writing contracts be sure to include the Short Sale Addendum www.trec.texas.gov/sites/default/files/pdf-forms/45-2_1.pdf with the contract negotiations. It is also very important to manage the expectations of buyer and seller as to the timing of closing. Use of the addendum provides that if the short sale is not approved by the date included in Paragraph D of the addendum the addendum gives the buyer the right to terminate the contract and receive their earnest money back.
Two other things that the seller needs to take into account is what happens to the remaining balance on the loan. Some short sale negotiations will result in the remaining balance being written off by the lender but others will want to obtain a judgment against the seller for that remaining balance (often called a “deficiency judgment”). A deficiency judgment allows the lender to pursue collection of that judgment at a later time against the seller. Lenders may also negatively report the short sale transaction to the credit bureaus which can negatively affect a seller’s credit score. This of course affects their borrowing potential moving forward post-closing.
What should buyers know about a short sale? Buyers (and their agents) should make sure they are using the Short Sale Addendum previously discussed. Buyers should also look out for any limitations on re-sale of the property that the lender requires to approve the sale. It is possible that a short sale lender will approve the sale but make it conditional upon the buyer not re-selling the property for a specific amount of time. If that requirement is made that exception will be included in the Owner’s Title Policy that is issued to the buyer.
Here’s the good news – our escrow teams at Texas National Title are experts at processing short sale transactions! Working with a knowledgeable title company is the key to success! The best thing a realtor can do is select a closing team at Texas National Title because we are the experts that you need! Give me a call if you’d like to discuss these types of transactions and more.
10 Fun Facts About Federal Tax Liens
When your client has a federal tax lien filed against them it can be a confusing item to navigate to get to closing. A Federal Tax Lien (herein after called “FTL”) is a lien filed by the Internal Revenue Service for unpaid taxes. Below are 10 fun facts for how an FTL can affect your closing.
1. An FTL is effective and applicable to the taxpayer immediately upon assessment of the tax liability. It becomes effective against third parties (like a buyer or title company) as soon as the Notice of Federal Tax Lien is filed in the real property records.
2. FTLs attach to all property and rights to property of a taxpayer. This means they attach to fee simple ownership in real estate. They attach to easement rights. They attach to liens held by the taxpayer. They even attach to the community property interest of a spouse, even if they are not in title under the warranty deed.
3. FTLs apply to property that is passed to heirs of a deceased person. For example, mom and dad own a homestead. There is an FTL against them. When mom and dad pass the property goes to their three kids through inheritance. The interest that the children receive in the property is subject to that FTL and the lien must be paid when the property is sold.
4. An FTL will also attach to property as soon as that property is acquired. In a purchase transaction the FTL is subordinate to the purchase money lien, but if property is acquired through inheritance or gift the lien attaches immediately. In the example above let’s assume that one of the children has an FTL instead. As soon as the parents pass, title to the property passes to the heirs – it is an immediate process (although there may be paperwork required to document the passing, it happens right away). That one child that has an FTL gets their one-third interest in the property but it is now subject to the FTL that they owe to the IRS. When the property is sold that FTL will have to be paid in full or paid in an amount that represents 100% of the child’s ownership if their lien exceeds their ownership interest.
5. Every FTL will include a “Last Day for Refiling” date shown on the recorded lien. This date is important because IRS liens are valid for 10 years plus 30 days. The IRS can renew their lien if they refile the lien prior to the Last Day for Refiling. If they miss the deadline the lien is no longer enforceable and the property could be sold without paying the lien. To sell a property under this line of thinking the title company has to be able to verify that nothing was filed in the real property records by the last filing date.
6. If an owner has an FTL filed against them that lien must be addressed when the property is sold. One way to do this is to order a payoff statement from the IRS and pay the lien at closing. The IRS will issue a “Conditional Commitment to Discharge” letter and in this letter they inform the title company what amount must be paid in order to release the lien. A title company is required to follow this letter exactly as to its instruction because it is the payoff statement for our file.
7. Sometimes the FTL exceeds the available seller proceeds in the property. When this happens the IRS will issue the “Conditional Commitment to Discharge” letter accepting all sales proceeds from the sale. This is an important piece of the puzzle when selling the property because without this instruction from the IRS a title company cannot issue an Owner’s Title Policy to the buyer (or their lender) insuring against liens affecting the property. It’s important to note that this agreement from the IRS is “conditional” because the instructions in the letter must be followed exactly. If the requirements set forth in the letter are not followed exactly the IRS will not release the lien.
8. On occasion there is an FTL filed and the seller has since paid the lien. The IRS does not always go back and file a release of lien even though the debt has been paid. In these cases the seller will have to approach the IRS to obtain a “Certificate of Discharge.” This certificate is filed to act as the release of lien. This certificate must be obtained from the IRS prior to closing in order to close without collecting for the lien. The seller, not the title company, must pursue obtaining this from the IRS. The IRS does not move quickly so if your seller is taking this approach they need to start working on obtaining this well before you are under contract – they should start on it when you start talking about listing.
9. Ordering a payoff statement from the IRS can be a very slow process. With the pandemic their response time has increased and in many cases a title company may be ordering the payoff statement very early on in the transaction and still end up having to delay closing because the payoff has not been obtained. It is very important that you review your Schedule C of the title commitment for listed FTLs. If you see one you should be contacting your title company right away to see how your seller can help. Many times your sellers can obtain a payoff faster than a title company can if they work on it diligently.
10. Clearing FTLs can be a tough thing to do but it is required before your transaction can close. The best way to navigate a transaction involving a FTL is to work closely with your Texas National Title escrow team. While we cannot complete the process for the seller but we can definitely help your client figure out what steps are required for them to get to closing!
Title Policy Coverage
WHAT IS A TITLE POLICY? One of the single most expensive transactions someone may enter into in their personal lives is often the purchase of real estate. Because of the significant investment involved in a real estate transaction, purchasers and their lenders want to know their investment is safe when it comes to the title of the property or their lien priority. The buyers want to be sure that the correct seller is selling to them. The lenders want to be sure that there are no liens that have a superior interest to their interest. These are the matters that title insurance was designed to be used for. While title insurance does not guarantee that there are no adverse interests in the property, it is a contract of indemnity that can be issued in favor of an owner, lessee, lender or other holder of an estate, interest or lien on real estate. The policy agrees to protect the insured from actual loss because there was a superior interest in the property that was unknown at the time of closing.
What is a policy of indemnity? Indemnity means the title insurer agrees to insure against loss or damage related to the insured’s right in the property. If loss or damage occurs from a covered risk, compensation can be paid to the insured. This would include coverage against items such as other persons claiming an ownership interest in the property. It can also include defects or liens aﬀecting the property that were otherwise not set out in the policy. Lender’s coverage insures the priority and validity of the lender’s lien against the property.
Essentially the title commitment is a report for the buyer (and lender) that discloses how the property will be insured. This commitment is provided up front so that a buyer has the opportunity to review the commitment during their contractual due diligence period, typically referred to as the option period. All buyers should review this document in detail to be sure they understand (a) the coverage they are receiving and (b) what, if any, encumbrances affect their property.
WHAT RECORDS ARE SEARCHED TO PRODUCE THE COMMITMENT? When a title company is preparing a title commitment only the official public real property records are searched. The property is examined for deeds, liens, easements, building lines and similar restrictions. The names of the owners are searched in what is called a general name search to locate things like court cases, bankruptcies, divorces and judgments against the seller. Only the official public records are searched for a title commitment because that is the search needed to issue a title policy.
WHAT ELSE COULD BE OUT THERE THAT WOULD AFFECT A PROPERTY? Lately we have been seeing an increasing trend in post-closing municipal issues. Municipal issues (such as open permits, zoning violations or whether or not the buyer will be able to obtain a permit on their property) fall outside of any type of search done by a title company. Since these items are expressly excluded from title policy coverage they are not searches that are performed by the title company. Researching municipal issues is a buyer due diligence responsibility and the contract provides for an option period in which the due diligence is to be performed.
Let’s look at a sample scenario pattern to see how this plays out in real life:
John is buying a property with the legal description of “The West 14 feet of Lot 11 and all of Lot 12.” John buys from Sam who has owned this same property since 2013. The parties close and a title policy is issued. After closing John goes to the city to obtain a building permit on his property. What John learns is that this was an illegal subdivision of the lot, meaning it was not done with city/county approval, and now the city is assessing a $5,000 fine for the illegal lot status. The city also refuses to issue any building permits until the property is subdivided. John’s idea of building an investment property to sell is completely halted by this issue.
John is obviously upset by this and wants to file a claim under his title policy. This is a municipal issue and municipal issues are excluded from coverage in the title policy, meaning the issue is not covered. Who is John most likely going to go to next about this issue? It is not long before John calls his agent upset about this.
How do agents protect themselves? To avoid this, an agent should always suggest to their clients that they perform the necessary searches and due diligence to check into municipal, city and county issues.
The closing teams at Texas National Title are all well versed in the benefits of title insurance. Any time a client has questions about coverage they can be directed to your escrow officer at Texas National Title. We are the experts that you need and the partners that you can trust in all things escrow and title!
Curious About Creative Financing?
With rates being what they are these days we are seeing more and more inquiries about creative financing methods so this month we will discuss some of the more common methods.
Assumptions In an assumption the buyer takes over the existing loan that the seller has. The rate and payment terms do not change and the buyer essentially steps into the shoes of the seller for payment of the outstanding balance.
The seller’s current lender generally must approve the assumption before it can be done and typically the lender will have closing documents that need to be signed by both buyer and seller. For that reason an assumption requires participation and approval by the seller’s existing lender. It is also important to note that the Deed of Trust that is filed in favor of the lender will be a Schedule B exception in the Owner’s Title Policy since it is not being paid in full at closing, but instead is being assumed by the buyer.
It’s noteworthy that not all types of liens are liens that can be assumed by the buyer so before an agent representing a buyer makes an offer that includes an assumption it’s a good idea to make sure the seller’s lien type is assumable.
Wraps A wrap transaction involves a transaction where the seller’s existing lien is left in place and is not paid as part of the transaction. The buyer then signs a new Deed of Trust in favor of the seller and that new lien essentially wraps around the existing lien.
Let’s look at an example: Seller has a loan to Chase for $525,000. He got this lien when he purchased the property in 2019.
The new sales price is going to be $650,000 and the buyer is going to put down a $100,000 down payment. At closing Buyer will sign a second Deed of Trust showing the seller as the lender for $550,000. This new Deed of Trust is technically in a second lien position as far as the first lender is concerned and that first lien must continue to be paid to avoid foreclosure.
The wraparound mortgage allows the seller to maintain their existing mortgage while the buyer’s mortgage “wraps” around the existing amount owed. While the exact structure is negotiable, generally the buyer makes their payment to the seller and the seller in turns pays their original first lien.
With a wrap transaction the existing Deed of Trust is also shown as a Schedule B exception in the buyer’s title policy.
Seller Finance In a seller finance transaction the seller becomes the buyer’s lender for the purchase. Essentially instead of funding the full amount of the sales proceeds to the seller the lien amount is held back from closing and applies to the purchase price as a loan. At closing the seller will execute the typical warranty deed that conveys title. Title transfers to the buyer at closing and the buyer also signs a Promissory Note and Deed of Trust to evidence the lien amount that they will pay over time to the seller. This method allows the parties to negotiate the interest rates, decide what the payment terms are and permits the buyer to pay the sales price over time instead of all at once.
Have more questions? We have answers! All three of these financing methods have different questions that can come up during the negotiation and closing process. Working with a knowledgeable title company is the key to success! The best thing a realtor can do is select a closing team at Texas National Title because we are the experts that you need! Give me a call if you’d like to discuss these types of financing more.
Seller Impersonation Fraud
Fraud is certainly a subject that no realtor wants to hear about but lately there is a huge fraud scheme happening that everyone needs to be aware of. Our industry is constantly targeted by fraudsters and it is important that all realtors stay current on the issues at hand.
What’s The Current Big Fraud Scam? Fraudsters impersonating an owner and trying to sell a property they don’t own. If you have not seen this scheme yet you should watch out because these attempts are running rampant!
What Are The Fraudsters Doing? The fraudsters are literally impersonating the owner of a property to make contact with a real estate agent to get a listing started so that they can go under contract and ultimately sell the property to collect the sales proceeds.
Targeted Property Types by Fraudsters:
Raw land / acreage
Free and clear properties
Some Common Red Flags:
“Seller” only makes contact via email or text or makes excuses on why they can’t talk on the phone, show up in person or appear virtually.
“Seller” wants a quick sale and either insists on a low asking price or is willing to take a lowball offer.
“Seller” tries to use their own notary (the “notary” of course is part of the fraud)
“Seller” offers incentives or is willing to cut corners for a quicker closing.
“Seller” wants to avoid closing at a title company
HERE’S THE REALLY SCARY PART – these fraudsters are finding agents to take their listings and they are getting these deals closed.
There Is Good News Though! Call me to discuss ways that you can help protect yourself and your listings. We can discuss some tips and tricks that will help you determine if your listing is potentially a fraudulent one before you waste any time on a fraudster.
HOAs, Resale Certificates, and Restrictions Violations
The resale certificate is a due diligence report for the buyer that allows them to understand how their property is affected by being in a homeowner’s association (“HOA”).
Obviously the buyer needs to understand what their initial capital contribution in that property will be. They also need to understand what their dues are and when they are paid and all of this information is contained in the resale certificate. There are also some lesser reviewed items in the resale certificate that buyers should be sure to review.
One of these items is lawsuits. The resale certificate will have a paragraph in it that reads something like:
If a buyer sees this it means the HOA is involved in lititgation of some sort which can affect the buyer’s costs associated with homeownership sometime in the future. The buyer should obtain and review a copy of this lawsuit to make sure that they understand the implications.
Another thing the buyer should review is restrictions violations. They are usually shown like this:
Existing restrictions violations can have two impacts on homeownership. First, the HOA may issue fines or assessments against the homeowner. Second, when it comes to closing time the title company may not be able to issue the T19.1 endorsement to the buyer. You can read more about that endorsement here: bit.ly/3IBgg6P More importantly, they may not be able to issue the T-19 endorsement to the lender which often times results in the lender not being able to fund the loan.
So what can be done? The seller can resolve the restrictions violation prior to closing and have the HOA issue a letter that the violation has been satisfied. This can of course take time so it is important that agents flag those violations early on in the transaction so that the agents can begin the discussion and negotiation process with their clients. These are also two very good reasons why a buyer should never waive obtaining the resale certificate.
What else should a realtor know about the Resale Certificate? Every management company operates on their own schedule and since they are not a party to the contract they are not bound by the delivery dates that real estate agents negotiate in the contract for delivery requirements. Realtors should understand that a failure to timely deliver the resale certificate gives the buyer the right to cancel the contract. Whether it is the buyer or seller that is responsible for ordering the resale certificate, failure to obtain timely is a cancellation contingency:
When filling out the Addendum for Property Subject To Mandatory Membership In a Property Owner’s Association a real estate agent should put a reasonable time frame in that allows for title to obtain the resale certificate from the management company. If a contract has too short of a timeline in this addendum then there is a good chance the buyer can terminate the contract due to failure to deliver the resale certificate.
Your closing teams at Texas National Title will also warn you up front if the management company has communicated to us that they cannot deliver by the due date. When you receive these notices it is important that you review your file to see if an amendment is necessary to preserve the interest of your clients.
Working with a knowledgeable title company is the key to success! Our escrow teams are the experts that you need and the partners that you can trust. Any time you have questions please do not hesitate to contact us!
Title Insurance FAQ
In this month’s Closer’s Corner we share information about title insurance. It is very important to the transaction and often quite misunderstood.
What is title insurance? Title insurance insures against financial loss caused by defects in title to real estate. Title insurance companies defend against lawsuits attacking the title, or in the case of a covered loss, reimburse the insured up to the policy limit.
What kinds of defects does title insurance protect you from? It protects the insured (i.e. the buyer or lender) against loss due to title defects, liens, or other similar matters. Title insurance protects the buyer from claims of ownership by other parties. It protects the buyer against losses from certain problems that arose before they bought the property and it offers coverage and assistance for the buyer post-closing if covered issues arise.
How long does it last? An owner’s policy lasts as long as the buyer or their heirs own the land. It could even provide warrantor’s coverage after the buyer no longer owns the property, depending on the policy provisions. The premium is paid only once when the policy is purchased.
What’s the difference between a title commitment and a title policy? The title commitment comes before closing and affords the buyer a preview of how their title policy will be issued. The title policy is issued after closing once we’ve funded and recorded all documents. The commitment says that a title company is willing to issue title insurance under certain conditions and if the seller fixes certain problems. The policy provides the actual coverage for the property.
What does the title commitment do? The title commitment shows that upon closing and funding the title company will issue a policy and the title commitment gives the buyer the opportunity to review exceptions and exclusions to coverage that will be itemized in the title policy.
A buyer should always review their title commitment in detail prior to closing so that they are aware of the limitations and encumbrances that exist on a property. Exceptions and exclusions are items not covered by the policy.
What types of polices are there? There are two types of policies: Owner’s Title Policy (“OTP”) and Lender’s Title Policy.
The owner’s policy protects a buyer against losses from some ownership problems that arose before they bought the property, but that were not known at the time of closing. For example, a buyer could lose title to their property due to fraud, errors or omissions in previous deeds, or forgery of a previous deed. The owner’s policy protects the buyer from the covered risks listed in the policy. The loan policy is issued to the mortgage lender. It protects the lender’s interest in the property until the borrower pays off the mortgage.
Why does a buyer need a loan policy? Often times we are asked if a buyer can waive getting an Owner’s Title Policy and that is an incredibly risky thing for a buyer to want to do. A buyer that does not get title insurance is 100% on their own for any issues that later arise from the purchase of the property and they wouldn’t have a title policy to help resolve the title matters. Additionally their lender will require a loan policy as a condition of the mortgage so waiving the OTP does not actually result in a significant cost savings to the buyer. When an OTP and loan policy are purchased at the same time, the loan policy is issued at a discounted price of $100. If a buyer decides not to purchase an owner’s policy, they would still pay full price for the loan policy (and they would receive no credit from the seller if the seller had agreed to pay for the OTP per contract).
What if my home increases in value? Am I still covered? The buyer is covered for the value of the initial sales price.
If they add improvements, or if the home increases in value over time, they can buy an increased value endorsement to cover the increased property’s value.
What is a title defect? A title defect is anything that can cause a title to be considered invalid or defective in some way.
Some examples are:
Invalid documents due to forgery, fraud, undue influence, duress, incompetency, incapacity, or impersonation.
Failure of any person or entity to have authorized a transfer or conveyance.
A document affecting title that is not properly executed, signed, witnessed, notarized, or delivered.
Undisclosed or unrecorded easements not otherwise apparent on your land.
No right of access to and from the land.
A document executed under a falsified, expired, or otherwise invalid power of attorney.
A document not properly filed, recorded, or indexed in the public records.
Ownership claims by undisclosed or missing heirs.
Defect arising from an improper prior foreclosure.
Undisclosed restrictive covenants affecting your property.
Lien issues can also cause title defects. Some examples of lien issues are:
A statutory or constitutional contractor lien for labor that began before the closing.
Lien for materials furnished by a contractor.
A previous owner failed to pay a mortgage or deed of trust
A judgment, tax, or special assessment
A charge by a homeowners or condominium association.
What doesn’t a title policy cover? A title policy won’t cover defects that are created after the policy is issued. It also does not cover defects created by the insured. Nor does a policy cover municipal issues such as zoning or city permitting requirements.
What is a good way to explain title insurance to customers? Did you know that TNT supplies a specific marketing piece addressing this topic in both English and Spanish languages that is available to you for buyer and seller presentations? Access TNT’s “What is Title Insurance?” flyer and many other Buying, Selling, and Closing themed marketing pieces through the TNT Website at: www.texasnationaltitle.com/austin/tools/brochures/buy-selling-closing
Our closing teams at Texas National Title are all well versed in the complexities associated with closings. We are the experts that you need and the partners that you can trust in all things escrow and title! Please do not hesitate to contact us with any additional questions that you have.
What is an endorsement? An endorsement is something that changes the terms of the coverage in the title policy to the buyer or lender’s benefit. It is an attachment to the policy that generally offers more coverage from what is included in the basic policy.
One of the endorsements that adds extra and important coverage for the buyer is the T19.1 endorsement.
What does the T19.1 do and what should an agent tell their client about the coverage? First, agents should be careful about going into too much detail in describing title policy coverage so as to avoid making legal representations. That said, it is good to have a general explanation and then you can refer them to your trusted escrow officer at TNT.
A good way to remember what the T19.1 covers is the acronym “M.E.R”: M – Minerals | E – Encroachments | R – Restrictions
Insurance Provisions for Minerals In general the minerals portion of the T19.1 includes provisions for damage to the improvements on the property that is caused from a future exercise of a right to use the surface of the property for extraction or development of minerals.
Insurance Provisions for Encroachments The Encroachment section includes provisions for certain encroachment issues on a property. Common examples are:
Removal of an improvement because it violates a setback line shown on the plat or in the real property records;
Encroachment of the improvements into an easement; or
Encroachment of the improvements into neighboring land.
Insurance Provisions for Restrictions This coverage generally provides coverage for enforcement of the existing restrictions. Some examples are:
Current violation of the restrictions that existed at closing but was not disclosed by the HOA;
First rights of refusal;
Without purchasing this additional coverage the buyer would have no protection under their policy for the examples discussed above.
Requirements for Issuance In order to issue the T19.1 Texas National Title must be presented with the survey and a current T-47 (if we are using an existing survey). If that survey shows existing encroachments then the coverage in the T19.1 may need to be modified.
Cost of Issuance This endorsement can be issued on residential or non-residential property and is a pretty nominal cost. For residential property the cost is 5% if purchased with Survey Deletion a/k/a Area and Boundary Coverage (as discussed in previous Closer’s Corners). If purchased on its own it is 10%. For non-residential properties the charge is 10% and 15% respectively.
This Closer’s Corner is intended to be a general overview of the T19.1 Endorsement that is available to be attached to an Owner’s Title Policy. To review the endorsement in full a copy can be located here: www.tdi.texas.gov/title/documents/form_t-19-1.pdf
Our closing teams are very knowledgeable about title policies and endorsements. While we cannot provide legal advice for a specific transaction we can always talk about our insurance products and help our clients get a general understanding of the coverage that can be obtained by a buyer. A prudent real estate agent wants to be able to inform the client of their options and then direct them to Texas National Title for more in-depth information.
Closing Into or Out of an Entity
It is not uncommon for a property owner to hold title in the name of a corporate entity. This can be a corporation, limited liability company, partnership or other entity type provided for by law. They do this for many reasons that can include liability protection and tax advantages.
When real property is going to be conveyed though, the title company needs to know a few very important things about that entity. When preparing to close our transaction we need to know the following:
1. Who has authority to complete the transaction? 2. What powers do our signers have? 3. Are there any limitations on those powers? 4. Does the entity properly exist? 5. Is the entity in good standing to conduct their transaction?
To confirm that we are ready to close we need to obtain the necessary governing documents from the parties. This typically includes the Operating Agreement or Company Resolutions (limited liability companies), a Partnership Agreement (partnerships) or a Corporate Resolution (corporations).
These governing documents must be reviewed in detail before a closing can occur and sometimes we need your help with getting these documents from your clients for our review.
CLOSINGS WITH ENTITIES: WHAT SHOULD A REALTOR KNOW? As a realtor, it can be a big help to notify your clients when they list the property, that the title company is going to request a copy of the governing documents and they are necessary for the file.
It is also very helpful to notify the title company if your clients intend to purchase in the name of the entity so that we have advance warning and can work with them to properly structure the file.
If you have a client ask you about deeding their property into an entity after closing you can send them this article and put them in touch with their TNT closer: bit.ly/3YbhZF6
Our closing teams at Texas National Title are all well versed in the complexities associated with closing into or out of an entity. We are the experts that you need and the partners that you can trust in all things escrow and title! Please do not hesitate to contact us with any questions that you have.