Homestead Rules

I. HOMESTEAD IN A REAL ESTATE TRANSACTION?
The Texas Constitution makes a requirement that before someone’s homestead be sold or borrowed against, the owner and their spouse, must consent to the transaction. A common misconception is that the spouse is required to sign because of the Texas community property rules. It is important to understand that it is not community property rules that require a spouse to consent at closing, unless the property was acquired while the spouses were married. The proper explanation about why a spouse has to sign is because homestead protections provided for in the Texas Constitution require their signature. The two concepts are often present in a closing, and sometimes overlap in the result to require a spouse to sign for closing, but they are separate and distinct laws.

The Texas Constitution, Article XVI, Section 50(b) states the following: An owner or claimant of the property claimed as homestead may not sell or abandon the homestead without the consent of each owner and the spouse of each owner, given in such manner as may be prescribed by law.

II. MARRIED PERSONS:
WHY MUST THEY SIGN CLOSING DOCUMENTS?
In every sale transaction a title company is required to determine if the seller of the property is married. If they are married, their spouse is typically required to sign a document at closing and the document changes depending on the classification of the property as homestead or investment. There are a couple of different signature options that can be used:

a. Homestead Property Was Acquired Before Marriage:
When a spouse owns a piece of property before they get married that property is separate property. Absent a written agreement, their subsequent marriage does not change the property’s classification to community property but if they live in the property, it is their homestead. As discussed above, when it is their homestead, the Constitution requires the spouse to consent to the sale when the property is sold. Their consent is documented by signing the warranty deed at closing. When the spouse signs the warranty deed, they may do so as “pro forma” to evidence their consent to the transaction only. When they sign this way, they are not necessarily asserting any ownership in the property, but they are merely evidencing their required consent under the Constitution. This prohibits them from later arguing that they did not consent to the sale of their homestead.

b. Homestead Property Was Acquired During the Marriage:
When property is acquired in Texas by married couples the presumption is that the property is acquired as community property. This is where the community property and homestead laws can overlap. If the couple acquired as community property, they are joint owners, and both must sign at closing. If they occupy the property, they also have to both sign because it is their homestead. Some owners will offer their prenuptial agreement for justification for why their spouse is not required to sign. While a prenuptial agreement may alter the classification of the property from community property to separate property for one spouse, it does not satisfy the homestead requirements. That means even in cases where a title company is provided with a prenuptial agreement the spouse is still required to sign to consent to the sale of their homestead.

c. Investment Property Acquired by one spouse only:
In a sale of non-homestead property a title company may be able to close without the spouse signing the warranty deed as long as the spouse will sign a Non-Homestead Affidavit and they own other property that can be claimed as a homestead. Presuming there are no facts that contradict the property being a non-homestead property, this affidavit is used instead of having the spouse sign the deed to obtain the sworn statement that the spouse is not occupying the property. This removes the concern of needing to comply with the Constitution.

III. Pre-Nuptial and Post-Nuptial Agreements: 
Often the sellers will come to title with a copy of a pre- or post-nuptial agreement using it as a reason why the spouse is not required to participate in the transaction.  While a marital agreement can classify the property as separate or community property for ownership purposes, these agreements cannot supersede the homestead laws which require participation in the sale of the homestead by the spouse.  For this reason, in most cases, if the seller is married their spouse always has to join in the transaction.  Keep in mind though – joining in the transaction does not always mean they have to sign the deed and joining in the transaction does not mean they’re making a legal assertion of ownership.  Joinder in this instance generally means consent to the sale.    

The scenarios discussed above are the most common issues addressed with homestead. Different facts can affect the requirements for closing so always check with your trusted escrow team on what will be required for any specific file.

FinCEN and Geographic Targeting Orders

Fin CEN: What is it?
FinCEN is the Financial Crimes Enforcement Network (FinCEN) and it is a division of the U.S. Treasury Department.  

Geographic Targeting Order (“GTO”):  What are those? 
As defined by the U.S. Treasury department, the mission of the Financial Crimes Enforcement Network is to safeguard the financial system from illicit use, combat money laundering and its related crimes including terrorism, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence. If the Director of FinCEN finds that reasonable grounds exist for required reporting to carry out the purposes of the Bank Secrecy Act (“BSA”) or to prevent evasions thereof, the Director may issue a reporting order on any domestic financial institution or nonfinancial trade or business or group of domestic financial institutions or nonfinancial trades or businesses in a geographic area.

Why have we started to see FinCEN reporting here in our market? 
The FinCEN GTO orders requiring the collection and reporting of information to the U.S. Treasury date back several years but we have not seen the impact very much as the orders have been specific to Texas counties that are outside of our market here.  Our closest neighbor that was subject to the order was Bexar County for quite some time.  In November last year, Travis County was added to the list of counties that are subject to the GTO. The Texas counties that now require FinCEN reporting are Bexar, Tarrant, Dallas, Harris, Montgomery, Webb, and Travis County. As the government expands these orders over time, we can expect to see the addition of more Texas counties. In short… you’re seeing them now because the order expanded to include Travis County effective 
November of 2023.  

What do the orders require? 
The GTO orders require a title company to collect and report information about the persons involved in certain residential real estate transactions.  During the closing process the title company is required to identify (and report to the GTO department) the individuals behind legal entities used in all cash purchase transactions. 
 
What types of transactions trigger FinCEN reporting? 
When a transaction has all of these components the title company is required to report the sale: 

  1. Cash transaction; 
  2. Without a bank loan or similar form of external financing (this means seller finance and private money loans are subject to review); 
  3. Residential property; 
  4. Being purchased by a legal entity (i.e. corporation, limited liability company, partnership, etc.); and
  5. A sales price of $300,000 or more.  

If a transaction has all five elements then the sale must be reported to the FinCEN.  

What does “report” mean?
This part sounds scarier than it really is.  When a transaction has all of the trigger components it is as simple as the buyer filling out a form that lists out all beneficial owners of the company (someone owning 25% or more of the company), providing copies of their entity governing documents, copies of their IDs, and providing the type of funds that will be used for closing.  This is all the information that the title company can (and should) collect from the buyer well before closing so that we can proceed towards an easy closing.  

Historically this information has not been required for closing so these requirements will feel unique to a real estate agent representing a cash buyer.  For that reason it is a good idea for realtors to educate themselves about this change that has been put into place for Travis County properties effective November of 2023. 

Not sure how this affects your client? 
Feel free to call your Texas National Title escrow officer.  Our closers are very well versed on the new requirements and can help your client navigate the transaction.

HOA Resale Certificates: Can My Client Waive One?

We are often asked if a buyer can waive obtaining a resale certificate in the transaction. This month we will discuss reasons why that might cause trouble in a transaction.

How Does a Buyer Waive The Resale Certificate?
Paragraph A(4) provides for the buyer to waive a resale certificate entirely. By checking this box buyer and seller are instructing the title company to completely skip the process of obtaining information from the homeowner’s association for the transaction:

Is it a Good Idea For a Buyer to Waive the Resale Certificate?
In short, no that is not a good idea for the buyer and that is true even if they are familiar with the subdivision already. Sometimes a buyer will waive the resale certificate because they already live in the neighborhood or they’ve already been provided with a copy of the bylaws so they mistakenly think they do not need a resale certificate.

Before a realtor advises a buyer that the resale certificate can be waived all of the things that can be disclosed by the resale certificate should be considered. Some of those matters include:

• If the homeowner’s association is involved in any type of lawsuit;
• If there are any current restrictions violations on the property;
• The HOA may charge for their transfer fees post-closing if a certificate is not ordered and without the resale certificate for closing, the buyer will have no idea how much those fees are;
• There is no certificate provided to the buyer to show if HOA dues are current, unpaid or past due.

Are There Other Reasons a Realtor Needs To Consider?
Yes! Many of the endorsements that are issued to an Owner’s Title Policy and Loan Policy require that we have a copy of the resale certificate in order to issue a complete policy. The most common endorsements that lenders require are the T-19 and T-17 endorsements, neither of which can be issued in full if a resale certificate is not obtained for closing.

Similarly the buyer cannot get the full T19.1 endorsement that protects them against restriction violations, lot encroachments and mineral extraction issues.

Let’s look at how this plays out in reality. The contract is negotiated with Paragraph A(4) above marked. Title opens the order and does not place an order for the resale certificate. The parties proceed towards closing and as we get close to the closing date the lender starts to issue closing instructions to title. As title is working up the closing statement we see that the lender requires the T-19 and T-17 which cannot be issued since we do not have the resale certificate.

Now we have a few not-so-great options:
1. Talk the lender into taking the requirement for these endorsements off (which is not likely to
happen if the buyer wants to get the loan);
2. Postpone closing until the resale certificate can be obtained; or
3. Either buyer or seller has to pay a large rush fee to get the resale certificate in so that the CD can be
worked up.

In all of these scenarios we are likely to have buyers and sellers that are upset about the last minute fire drill. Moral of the story – before agreeing to waive the resale certificate there are many factors that need to be considered. It’s best to talk to your closing team before finalizing an offer that waives the resale certificate. We will be able to guide you on what is, and what is not, available for your transaction.

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!

Foreign Investment in Real Property Tax Act (FIRPTA)

Do you know why the following requirement is included in the TREC Contract?
 

Let’s look at what FIRPTA does
The Foreign Investment in Real Property Tax Act (FIRPTA), enacted in 1980, requires foreign persons to pay U.S. income tax on the gains they make from selling U.S. real estate.  

FIRPTA applies to the sale of property held by nonresident aliens and foreign corporations. 

FIRPTA also imposes a duty on the buyer in the transaction (not the title company) to deduct and withhold a portion of the sales price to send and report to the Internal Revenue Service.  

This means that ultimately the buyer in a transaction is responsible for (1) determining if their seller is a foreign person or entity subject to FIRPTA and (2) if they are, withholding those funds and remitting them to the IRS.  

Woah! How much is withheld?
The percentage to be collected at closing depends on the facts of the file and whether or not those facts satisfy the requirements above. To calculate the withholding amount, a real estate agent can use the following chart: 

Under Option A above the buyer must be buying the house to be their homestead property and they must be willing to sign an affidavit stating their intent.  

Under Option B the property is not the intended homestead for the buyer or the buyer is unwilling to sign the occupancy affidavit.  

Wait, so the buyer can determine how much withholding applies to a seller?
While it does not make a ton of sense, the IRS regulations base the withholding amount on the buyer’s occupancy and/or execution of the affidavit.  It’s a codified calculation that is used for closing and the percentage is taken from the sales price not the sales proceeds.  

Let’s look at an example: 
You have a sales price of $750,000 and the seller is a foreign person.  If the buyer is going to occupy the property and they will sign the affidavit, the withholding will be $75,000. If the transaction is not a homestead purchase for the buyer or if they will not sign the affidavit, then $112,500 will be withheld from the sale and sent to the IRS.

Ask yourself this question – would this calculation have been included in the seller net sheet prepared for the seller? If not, it’s a great reminder to ask your sellers if FIRPTA applies to them when you are taking the listing.    

Are there any exceptions to withholding?
While there are several exceptions to withholding, only two are commonly relied upon for a traditional resale transaction. In general when we have a transaction that falls under FIRPTA the presumption is that the withholding needs to be done through closing. The responsibility then falls to the seller to “qualify” for the exception. 

Personal Residence Exception
This has been discussed above.  If the buyer is occupying as their homestead and will sign the affidavit, withholding may be avoided as long as the sales price is under $1,000,000.  

Something important for a real estate agent to understand is that the responsibility and liability to the IRS rests on the buyer. This responsibility does not rest with the title company. For that reason, the buyer is not required to sign the FIRPTA disclosure even if the facts otherwise meet the test for an exemption. Getting the buyer comfortable with signing the disclosure is something the seller (or their agent) has to negotiate with the buyer and their agent. When doing so it is important that a listing agent never make statements of fact or say anything that could be construed as tax or legal advice. It is also important to note that if the buyer signs the disclosure at closing but then later fails to occupy the property for the required timeline they could become responsible to the IRS for the withholding amount, plus interest and penalties. When acting as a buyer’s agent, a real estate agent should make sure their client is advised to seek counsel or advice from their accountant if they have questions.  

Withholding Certificate Exception
The amount that must be withheld from the disposition of a U.S. real property interest may be reduced or waived by the seller obtaining a withholding certificate issued from the IRS. This requires the seller to submit to the IRS for the certificate and in general these requests receive a response from the IRS within 90-120 days after receipt of a complete application including the Taxpayer Identification Numbers (TINs). If a real estate agent has a client that wants to use this option they need to have the seller start working on this well before they go under contract unless you have sufficient time in the close date to allow for working with the IRS. 

Important Tips for a Real Estate Agent
Before listing property, find out if you have a FIRPTA seller.  Remember that FIRPTA applies to individuals and companies. An individual should have a social security number and a company should have a taxpayer identification number that they can provide to the title company.  Sometimes a foreign seller will register with the IRS to obtain a taxpayer identification number that looks like a social security number but it really is not.  A last minute surprise that withholding is required is not a great situation for a real estate agent, to have so the prudent agent will make sure their client supplies their social or TIN to Texas National Title early on in the transaction so that we can check the numbers. If your seller has a number that starts with a “9” (individual) or a “98” (companies) then you have a foreign seller that could be subject to withholding. You should ask your sellers these questions before preparing any net sheets as their net proceeds may be affected by FIRPTA.  

Family Transactions

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, 

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: 

  1. Seller owns and occupies another property as their homestead; 
  2. Seller is simultaneously buying another homestead property; or
  3. 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: 

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.

HOW DO I KNOW WHAT MY TITLE POLICY WILL AND WILL NOT COVER?
The title company produces a document called the Title Commitment early on in the transaction. A commitment for title insurance (“Title Commitment”) provides a buyer and lender with terms and conditions for how the final title policy will be issued. An in depth explanation of the title commitment can be found here: www.texasnationaltitle.com/understanding-the-title-commitment/understanding-the-title-commitment

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:

Some Common Red Flags:

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.