Practical Real Estate Texas

Practical Insight and Commentary on Texas Commercial and Residential Real Estate Law

Don’t Forget the Real Estate Attorney

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Farm, home, or business—every transaction can benefit from a real estate attorney’s guidance!

Don’t Forget the Real Estate Attorney!

Whether you’re a Fortune 500 company, real estate investor, first-time homebuyer, or anyone in between, real estate is one of your most valuable assets (if not your MOST valuable asset). Given the value of these assets in our personal or business portfolios, why do so many people attempt to purchase or sell property without an attorney?

At first glance, the process seems deceptively simple:

  • Standard contracts are available for nearly all situations from the Texas Real Estate Commission
  • Real estate agents handle negotiations and complete the contract for you
  • The title company issues a report to inform you of any encumbrance on the property
  • The escrow officer holds the money and deeds until the sale is complete, and ensures all liens are released

With all these professionals already involved, it’s easy to think you don’t need to involve an attorney. While this may be true in many situations, there are several instances where you should not proceed without consulting a real estate attorney first.
Here are some examples:

1) You plan to change the property’s use, or you have a specific use in mind for the property

Imagine this: you find an empty lot one block away from a busy intersection in a developing neighborhood. Based on your research into the area and the businesses already in existence, you determine this community needs a coffee shop. The nearest Starbucks is miles in the opposite direction, and there are no coffee specialty stores nearby.

You engage a real estate agent and make an offer on the property. Unfortunately, you do not specify in the contract that you intend to use the lot for a retail/coffee shop. You do not pay too much attention to the title commitment; after all, you’re buying title insurance, and you know the title insurance company won’t underwrite anything that doesn’t convey you good title.

When you start to develop the property, you learn about the city’s zoning requirements for the first time. Specifically, your newly purchased lot is zoned for an office complex – not retail. In short, unless the property is re-zoned, your coffee shop cannot move forward.

A residential example

Or, imagine you’re buying a home in an area near a college. You decide adding a garage apartment would be a great way to help pay your mortgage. Shortly after closing, you start construction of the living quarters above your garage.

A few days later, you receive a notice from the neighborhood Home Owners’ Association demanding your work cease, because the improvements have not been approved by the architectural control committee. After meeting with the committee, you learn the neighborhood does not allow living space above garages, they require square footage be at least 50% on the first level of the home, and there is no renting allowed.

In both of these instances, a real estate attorney would have reviewed any use restrictions on the property to advise the buyer of available options. Without an attorney, the buyer is now stuck with property that cannot be used as planned.

2) The title commitment lists easements or restrictions on the property

An easement provides a third-party the right to use your property in the manner described in the document. Easements can exist across, over, or under a property, and often limit the owner’s use of it. The most common types of easements will be utility or drainage easements. In rural property, you will also see pipeline easements and other access easements.

If you don’t read or understand the document, you may be agreeing to things you didn’t intend: not to build in a certain area of your property, build with the caveat that it may be torn down, or allow a third-party remove trees or other landscaping from your property.

For instance, let’s assume a property includes a 50-foot pipeline easement through its center, plus an additional 50-foot temporary workspace easement. Included in the language of the easement is a condition that the pipeline company may remove any trees located within either the pipeline or workspace easement. If the buyer is particularly attached to trees or other landscaping in these areas, this could be a problem.

If the pipeline has not yet been installed, then the pipeline company has the right to remove those trees. Had a real estate attorney reviewed the documents, the buyer could have negotiated a more equitable sales price, or decided not to purchase the property because of the limitations imposed by the easements.

3) The seller does not want to use a title company

Title companies provide valuable services in a real estate transaction:

  • They serve as a disinterested and trustworthy third party to hold funds and record the deeds for the transaction
  • They provide a title history/list of encumbrances on the property
  • They issue title insurance policies

It is a big red flag if a seller wants to close outside of the title company. In this case, the buyer must perform due diligence to determine the seller actually owns the property being conveyed, and that there are no outstanding liens or indebtedness secured by the property.

Without a title company, the buyer will be responsible for finding a vendor to confirm title is vested in the seller and that there are no encumbrances on the property. Without title insurance, there is nothing ensuring the buyer’s ownership interest in the property.

4) You are buying a property with someone who isn’t your spouse

If you are buying property with anyone who is not your spouse, then you are forming a general partnership to own the property. General partnerships work well when everyone is getting along and there is money to be made. However, you should always plan for the contingency of discord and disagreement.

With most real estate purchases, the partners are excited about the new venture and ready to start making money. But what happens when things don’t go as expected?

With most real estate purchases, the partners are excited about the new venture and ready to start making money. But what happens when things don’t go as expected?

The answer: have a plan. This plan should be a written partnership agreement that outlines each party’s ownership interest, rights, and obligations, and provides a plan for unwinding the partnership if necessary.

Additionally, you should confirm that the deed transferring ownership interest in the property matches the partnership agreement, and ask questions about the various documents. If you are meant to be a co-owner of the property, then your name should be on the warranty deed from the seller.

You should also be prepared to sign the deed of trust, which is the document securing a mortgage loan on the property (even if you aren’t a borrower on the loan). If you are not listed on the deed, then you are not a record title owner of the property.

If you are purchasing property through a business entity or general partnership, an attorney can ensure the documents are correctly drafted. The initial purchase contract must be in the name of the purchasing entity, or include a right to assign the contract (if you are forming a new entity to hold the property). The company agreement must accurately reflect the ownership interests of you and your business partners.

5) You want to seller finance or rent-to-own

Owner financing can be a landmine of liability for a seller. While it can be profitable, any potential profit must be carefully weighed against the potential liabilities for doing it incorrectly.

In standard owner financing, closing should proceed as a typical transaction. However, in this case, the owner is the lender and will not receive funds at closing. A deed will be executed and immediately recorded in order to transfer property title to the purchaser.

Additionally, the seller must obtain a promissory note and a deed of trust: the security instrument that will give you the right to foreclose if payments are not made. This deed of trust must be recorded in the real property records of the county where the property is located.

By recording as the seller/lender, you’re establishing your lien priority position. If the buyer/borrower takes on an additional loan, that loan will have a second priority position to yours. In short: if the borrower doesn’t pay, you will be guaranteed the first funds from a foreclosure sale.

This promissory note itself is an asset, since it provides the right to payment from another party. The language in the promissory note should also allow the seller to assign the note to someone else, include homestead requirements (if you want the borrower to live on the property), and contain insurance requirements.

During the life of the loan, you will be required to properly document the payments, record interest payments, confirm compliance with the promissory note, maintenance of insurance, payment of all applicable property taxes, and provide income tax statements to the buyer/borrower regarding amounts of interest paid. An owner-financer must confirm he is properly accounting for the loan proceeds.

Rent-to-own agreements

The second type of owner financing is a contract for deed (a rent-to-own agreement). The Texas Legislature calls these transactions executory contracts. In a contract for deed, the seller retains title to the property while the buyer makes monthly payments.

Historically, in contract for deed transactions, an unscrupulous seller could take advantage of a financially insecure buyer. As soon as the buyer missed one payment, he would be pushed out of the home AND lose all equity accumulated through earlier payments.

To prevent this, the Texas Legislature imposed strict requirements on sellers in executory contracts. As a seller, you must strictly comply with these regulations or face stiff penalties. Some required actions for sellers include: filing a record of the executory contract in the real property records, providing tax statements at the end of the year, and giving buyers property condition disclosures.

Do those sound like things you’re excited to take care of on your own? I’d venture to guess not.

Don’t Get Discouraged – Get Help!

Real estate can be complicated, but with the right information you can ensure you’re taking the smartest steps to protect yourself and your investment.

This blog is designed to be a source of information on pressing issues of commercial and residential real estate, and I hope you find it valuable. If there is a specific topic you’d like me to address, please contact me!

Cassie McGarvey

Cassie McGarvey

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