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There are two types of protests normally available to a homestead exempted property owner: (1) determination of the appraised value of the property; and (2) unequaTexas Property TAZl appraisal of the owner’s property. The first protest type is what is says it is, that the property owner simply disagrees with the value of the property provided in the notice of appraised value. The second type deals with taking a reasonable number of comparable properties within the taxing district, appropriately adjusted based on the factors above, and showing that the appraised value of the subject property in the notice of appraised value is above the median of those property values. Disparities in the timing of the reappraisal of properties within the district may lend certain properties to be at lower values. Due to advancements in technology and the growing need for governmental funding, larger taxing districts have significantly cut down on this time lag.

The property owner will be notified of the hearing time, date, and place at least 15 days prior to the date of the hearing. The chief appraiser is required to provide notice of the rights of the taxpayer, notice of the right to inspect and copy the district’s evidence, and a copy of the hearing procedures. The property owner may appear at the hearing in person, through an agent, or by affidavit. If the property owner fails to appear in some form, they will be precluded from appealing the appraisal review board’s decision. The hearing procedures are very informal. All parties are allowed to offer evidence, examine and cross examine witnesses, and present argument to the board. The property owner is permitted to testify to the value of their property, and may offer an opinion of market value or the inequality of the appraisal by the district.

So long as all of the administrative procedures have been followed to completion, a property owner may further appeal the appraisal review board’s decision to a district court or may elect to engage in non-binding arbitration. Under either avenue, the property owner is required to pay the taxes determined to be due before their delinquency as a precondition of further review. The taxpayer’s petition for review must be filed with the district court within 60 days of the receipt of the appraisal review board’s notice of determination of protest. The review by the district court or arbitrator will be “de novo” or new, so neither the taxing authority nor the property owner is bound by the prior rendition of value. Thus, it is possible for the appraisal district to seek a higher value than it sought in the protest hearing or that set by the appraiser.
A taxpayer may pursue non-binding arbitration by moving the district court to refer the case. However, if the taxpayer wants to engage in non-binding arbitration, the appraisal district must give its consent.

A taxpayer who prevails in a judicial review proceeding may be awarded reasonable attorney’s fees. Those fees may not exceed the greater of $15,000.00 or 20% of the total amount by which the property owner’s tax liability is reduced by the appeal. Further, the fees may not exceed $100,000.00 or the total amount by which the property owner’s tax liability is reduced by the appeal, whichever is less. These fee caps prevent property owners from receiving reimbursement for attorney’s fees where the reduction being sought is only a relatively small amount. The award of fees is, however, mandatory when the taxpayer prevails on a judicial review.

R. Scott Alagood is board certified in residential and commercial real estate law by the Texas Board of Specialization and can be reached at alagood@dentonlaw.com or http://www.dentonlaw.com.

 

Texas Property TAZThe State of Texas’ power to tax does not come from the U.S. or Texas Constitution. It is an inherent power associated with the sovereignty of the state. On the other hand, the taxing power of Texas counties, cities, and school districts is solely derived from the Texas Constitution, statutes, and municipal charters. The Texas Tax Code grants these subdivisions of the state the authority to tax all real property located within the state. Real property includes land, improvements, mines, quarries, minerals in place, and standing timber.

Only real property located within the jurisdiction of a particular taxing unit as of January 1 is taxable by that unit for that tax year. The tax on real property is primarily based upon the market value of the property as of January 1 of a particular tax year. Market value is determined by using generally accepted appraisal methods and techniques which are supposed to be consistent in appraising the same or similar kinds of property. Each property must be appraised in light of the specific individual characteristics that affect market value, and appraisal process must consider all available evidence in determining a property’s market value.

Typically, sales of nearby residential property will be used to determine comparable property values in the appraisal process using the market data method. These sales, which may even include certain foreclosure sales and properties located in a declining market, must have occurred within 24 months, and should have similar locations, square footages, ages, conditions, access, amenities, views, occupancy, easements, deed restrictions, and other benefits and burdens which may affect marketability. In counties with a population of at least 150,000, sales must have occurred within 36 months and be adjusted to account for changed market conditions.

In most situations, the chief appraiser of the taxing district is required to send each property owner a notice of appraised value for homestead exempted property on or before April 1, and for other properties on or before May 1. This notice must accompany a copy of a notice of protest form and instructions on completing and mailing the form to the appraisal review board to request a hearing. If the taxing district fails to provide any required notice to the taxpayer, the taxpayer’s due process rights are violated, and any appraisal or tax assessed on the property is void. It should be noted that “failing to provide notice” doesn’t mean mailing the notice to the wrong address because the taxpayer failed to notify the taxing district of an address change. Failing to provide notice means that no notice was ever sent anywhere. It is the taxpayer’s duty to keep the appraisal district supplied with a current address.

If a property owner disagrees with a notice of appraised value, they are normally entitled to file a protest with the appraisal review board. The protest must be in writing and timely filed. Generally, the protest must be filed not later than the 30th day after the notice of appraised value was delivered to the property owner. For a homestead exempted property, the notice of protest must be filed before May 1 or not later than the 30th day after the notice of appraised value was delivered, whichever is later. Failing to comply with the administrative protest procedures will result in the preclusion of any further appeal of the appraisal review board’s ruling. Appraisal districts in counties with a population of 500,000 or more must allow a property owner with a homestead exemption to file a notice of protest electronically.

Scott Alagood is board certified in residential and commercial real estate law by the Texas Board of Specialization and can be reached at alagood@dentonlaw.com or www.dentonlaw.com.

work week

Employers trying to find alternatives to the traditional 9-to-5, 40 hour work week may want to consider a fluctuating work week schedule. A fluctuating work week schedule may lessen the financial burdens of personnel who are not exempt from overtime pay requirements. It may also increase productivity and enhance work/life balance, while meeting the operational needs of the office.

Administrative personnel and office workers are generally non-exempt employees, as defined by the Fair Labor Standards Act (“FLSA”), earning overtime at one and one-half times their regular rate of pay. The FLSA sets the standard work week at 40 hours. Employers are required to pay non-exempt employees no less than 1.5 times their regular rate of pay for hours worked in excess of 40 hours. However, there is an exception allowed to employers properly utilizing a fluctuating work week as an alternative method of satisfying the FLSA’s overtime pay requirement.

To take advantage of the fluctuating work week exception, specific conditions must be met. An employee employed on a salary basis may have hours of work which may change from week to week and the salary may be paid pursuant to an understanding with the employer that the employee will receive a fixed amount as straight time pay based upon the hours called upon to work in a particular work week.   Importantly, this arrangement must be previously agreed to by the employee. It cannot be claimed after the fact. It should be in writing and included in a written employee manual or policy. The amount of the salary must be sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked in those work weeks in which the number of hours worked is the greatest. For overtime hours, the employee should receive additional compensation beyond the fixed salary at a rate not less than 1.5 times the regular rate of pay. Currently, minimum wage is set at $7.25 an hour.

For example, an office worker has a fixed weekly salary of $500.00 and works 55 hours in a single workweek. Under the fluctuating work week exception, the employer must divide the $500.00 fixed salary by the 55 hours worked to determine the regular hourly rate of pay for that work week, or $9.09 an hour. In this example, the office worker actually earned $9.09 an hour straight time rate for all the hours including the hours worked in excess of forty (40) hours. To comply with the fluctuating work week exception, the employer must also pay the employee the .50 time rate for all hours worked in excess of 40. In this example, the amount of overtime hours worked is 15. Note that the overtime rate is a “time and a half rate” and the employee in this example has already received the “time rate” and is now due the “half rate” for the overtime hours worked in excess of 40. So, the employer divides the $9.09 rate in half ($4.55 an hour) and then multiplies the half rate by the 15 overtime hours worked, or $68.25 ($4.55 an hour x 15 hours = $68.25). The employer then pays the employee an additional $68.25 gross wage for the 15 hours overtime worked in the work week for a total gross wage of $568.25.
It is important to always remember that that the regular rate of pay calculation can go all the way down to the minimum wage ($7.25), but no lower. Also, the additional half-time pay cannot be included as part of the fixed salary and must be paid for all hours in excess of 40 that are worked in any week.   Continuing with the example of a fixed salary of $500.00 a week, in order to qualify for the fluctuating work week exception, the most the employee can work in any particular week is 68 hours ($500.00 divided by $7.25 an hour = 68.96 hours). Care must be taken not to set the fixed salary and/or the number of hours which can be worked in a particular week to produce a regular rate below the federal minimum wage.

Proper use of the fluctuating work week exception may be a good way to provide a benefit to employees and reduce an employer’s risk of extensive overtime pay. Care has to be taken that all provisions of the fluctuating work week exception are followed and include written policies which evidence a clear understanding between the employer and employee that this method of compensation is being used. Finally, never allow the fixed pay rate and/or the weekly hours worked reduce the employee’s regular pay rate below the federal minimum wage.

Special thanks are due to Hugh Coleman for his contributions to this article

Scott Alagood is board certified in Residential and Commercial Real Estate Law by the Texas Board of Legal Specialization and can be reached at alagood@dentonlaw.com and www.dentonlaw.com.

 

MediationIn 1987, Texas passed the Alternative Dispute Resolution Act which is now found in Chapter 154 of the Texas Civil Practices and Remedies Code. This Act introduced formal mediation to the State of Texas. Since that date, mediation has been used to resolve countless disputes between citizens, businesses, and governmental subdivisions of the State of Texas.

What is mediation? Mediation is a forum and process in which an impartial person, called the mediator, encourages and assists parties to a dispute to reach a settlement or resolution of that dispute between themselves. The mediation may be ordered by the court or through voluntarily participation by the parties to the dispute. Where the parties have retained attorneys to assist with the dispute, the attorneys participate in the mediation with their respective clients.

The mediation process in Texas is strictly confidential. Unless the parties agree, the statements of the parties, their conduct, demeanor, and their legal and factual positions may not be disclosed to anyone by the mediator. This rule encourages the parties to be entirely forthcoming with the mediator during the course of the mediation.

The mediator is not there to impose a decision on the parties. Even if the mediator is a licensed attorney, the mediator should not provide the parties with any legal advice or make ultimate judgments on the potential outcome of the dispute if it were to go to trial or arbitration.

Mediations are usually held in private and without any public fanfare. Most court cases are public record, and typically hearings or trials will be open to the public. Mediation allows the parties to settle their disputes quietly.

Mediation allows the parties, instead of a judge, jury or arbitrator, to reach a resolution of their dispute on terms that are acceptable to them. Note the term, “acceptable”, as many mediations actually result in outcomes in which one or more of the parties reach settlement terms that are not necessarily a “win”, or what they would want if the case had to be litigated. Mediation involves the parties negotiating to reach an acceptable outcome rather than fighting one another in an expensive and time-consuming forum to potentially achieve a win-lose or sometimes lose-lose outcome.

The mediator tries to use specific methods and techniques to assist the parties in reaching a settlement. For example in resolving a business dispute, it may seem necessary for one partner to end up with the business while the other ends up with the monetary value of his interest in the partnership. Looking at the dispute in that fashion is an example of an evaluative method of resolving disputes. “Horse-trading” is another example of an evaluative method of resolving disputes, and focuses on reaching an outcome in the most direct manner. Much of the time this technique works well to resolve simple disputes where the sum of the whole is equal to its parts, and those parts must be divided up to settle the case.

However, if the mediator delves deeper into the backgrounds of the parties, the origin of the disputes, and the motivations of each party to become involved in the dispute, many times it becomes clear that the mediator has more to deal with than simply dividing up ownership and money. A facilitative method can be best described as an attempt to find a resolution which has mutual benefits for all parties. Under the facilitative method the mediator looks for subtle undertones of the dispute. Those subtleties usually require the mediator to delve into areas that on the surface may not seem to have any direct relevance to the dispute.

In our example, the mediator may find out that one of the partners is a really good business person, while the other may be really good with the manufacturing of the good or the generation of the service which makes up the business. The mediator may find out that the two partners were once best friends, who but for the dispute (which may or may not have anything to do with the business), no longer can operate all parts of the business together. Under the facilitative approach, the mediator will attempt to repair the relationship, and try to find a resolution which may allow the parties to stop fighting each other and go back to work in their respective areas of strength for the benefit of the business and themselves as its owners.

Clearly, these are extremely simple examples. But a good mediator will always look at several methods and techniques of dispute resolution in order to determine which methods or combinations will achieve a positive result.

Since its inception, mediation has been a positive process for litigants in Texas. It has helped reduce the case load of our courts and saved millions of dollars for the participants involved. Just about any type of dispute can be mediated. From disputes between countries, NFL quarterbacks and commissioners, divorces, collection suits, and just about any other type of disagreement, mediation can be a tool to save money, time, and public scrutiny.

Scott Alagood is board certified by the Texas Board of Legal Specialization in Commercial and Residential Real Estate Law. Scott may be reached at alagood@dentonlaw.com or www.dentonlaw.com.

As social media expands at an exponential rate and communication to the masses is made as easy as a click of a button, the world is spewing their thoughts, views, and opinions for everyone to see.  Can such statements come back to haunt the party making them.  Certainly, in many different ways.  Just ask Donald Sterling.

However, when do statements rise to conduct which may place the party making the statements in jeopardy of being sued for fraud.  Fraud or misrepresentation claims must be based on false statements.  So long as a statement consists of “pure” opinion, it cannot constitute a false representation.  Purity in anything is hard to find.  Purity is not so much a condition fixed in time and space, but an ideal or a standard that may be sought after.  Like perfection, it is a pursuit and not something that is necessarily attainable.

It is also difficult to determine whether a statement is one of “opinion” or “fact”.  Webster’s definition of opinion is “a belief stronger than an impression and less strong than positive knowledge.”  Courts seem to follow this definition in most instances.  Courts group “opinions” along with “judgments”, “probabilities”, and “expectations”.  Therefore, statements made about matters that fall short of positive knowledge should not be actionable as an “opinion”.

 There are a few exceptions to the general rule that “opinions” are not actionable fraud or misrepresentations.  These exceptions are: 1) opinions the speaker knows to be false; 2) opinions mixed with false statements of fact; 3) and opinions based on special knowledge.

 The first exception is creates a situation that is difficult to prove in court.  The party accused of making an actionable misrepresentation is put in the position having to prove that although their opinion was wrong, they didn’t know it at the time.  This situation requires the party asserting the exception to prove a negative, which is difficult if not impossible.  So at best, the party ends up testifying that they didn’t know their opinion was untruthful, hopefully backed up by some sensible rationale, and hope that there isn’t any direct or circumstantial evidence to the contrary.  Otherwise, the simple fact of making an incorrect opinion may be enough to allow the fact finder to imply knowledge of the untruthful nature of the statement.

 The second exception is fairly self-explanatory.  Where a party expresses an opinion mixed with statements of fact that are false, the opinion portion of the statement will not clothe the false facts with any protection.  Reliance upon the false facts by the other party will support an action for fraud.  Further, where facts are included with “opinion”, such “opinion” cannot be considered “pure”.

 The final exception relates to opinions based on special knowledge.  Special knowledge means knowledge of specific facts that underlie the false opinion.  However, many courts appear to often confuse special knowledge with special expertise held by persons such as doctors, lawyers, or engineers.  In practice, this exception often makes it difficult for the accused to use the “opinion” defense where the accused party is significantly more sophisticated than the other party to whom the statement was made.  When correctly applied, this exception will negate the “opinion” defense if the party making the statement has actual knowledge of or special access to particular facts underlying the false statement and the party relying upon such statement does not have such knowledge or access.

 Making false statements of opinion can place a party in potentially hot water.   To reduce the chances of being sued for fraud for incorrect statements, consider the following suggestions.  Make it clear when you are expressing an opinion that you are only expressing “your opinion”.  Phrases such as “in my opinion”, “I believe”, “speaking for myself”, or “I think”, will help bolster an argument that the statement was not a statement of fact, but instead an “opinion”.  Be certain that any factual statements are correct and you have the ability to justify their accuracy.  Indicate that you are not sure if that is the case.  In real estate or stock transactions, false statements of fact can create liability even if you honestly believed them at the time.  Give the other party access to the same information you have utilized in forming your opinion or statement of fact.  Give them the opportunity to review it for themselves.  Do what you can to encourage them to look into the subject for themselves.

 Finally, be careful who you talk to and how you disseminate information.  Know your intended audience, and realize that in today’s world, everyone is listening.

 R. Scott Alagood is board certified in Commercial and Residential Real Estate Law by the Texas Board of Legal Specialization.  Scott can be reached at alagood@dentonlaw.com and http://www.dentonlaw.com.

 

Land usePrivate land use restrictions are frequently found in planned community developments. Such restrictions may regulate the land use, as well as the size, location, quality, cost, and composition of the improvements constructed on the land. They may exist on both residential and commercial real property. So long as the restrictions are not against public policy and are imposed in an otherwise legal manner, an owner may restrict its property as it desires.

However, restrictions may not limit the use or prevent the assignability of the property to any person on the basis of race, color, religion, or national origin. Additionally, state and federal law prohibits the use of restrictions to discriminate against persons with handicaps or disabilities. Any restriction which prohibits the use of the land is not enforceable. Restrictions may not require the use of wood shingles on residential properties.

Restrictions are typically imposed on land by the owner through the use of signed and filed documents which may be referred to as deed restrictions; restrictive covenants, conditions and restrictions; easements; and servitudes. Instruments creating restrictions typically are for a limited duration and may provide for a mechanism to renew or extend them beyond the initial period. A restriction must contain an exact description of the land upon which the restriction is being imposed.

Restrictions may terminate automatically or through a process set forth in the instrument. Courts have refused to enforce restrictions where substantial violations exist and such amount to an abandonment or waiver of the right to enforce them. However, the violations must be so great as to place the average person on notice of such abandonment or waiver. For example, where a subdivision may be restricted to only allow metal ornate fencing, but 75% of the lot owners have built wooden privacy fencing, and an abandonment or waiver of that particular restriction. The number, nature, and severity of the violation, prior acts of enforcement, and whether it is still reasonably possible to utilize the benefits intended by the restriction are factors which will be considered.

Courts may not enforce restrictions where there has been a substantial change in the restricted property or the area surrounding the property such that enforcement of the restriction is no longer possible. Such change must be so drastic that the purpose of the restriction may no longer be achieved. Typically, this situation occurs when a long time residential neighborhood or area over the years becomes commercial in nature. However, the single factor that a lot may be more valuable as commercial does not necessarily entitle the owner to avoid residential use restrictions placed on the property.

Additionally, an action for breach of a restrictive covenant may be barred by the four-year statute of limitations. The statute begins to run on the beach of the covenant. However, if the initial breach is so insubstantial or inconsequential that the purpose of the covenant may still be realized, the statute does not begin to run until the violation becomes significant.

Government and other entities with the power of eminent domain may acquire property free of restrictive covenants through the eminent domain process. In utilizing such rights, the condemning authority may be required to pay compensation to other affected land owners for the removal of the restrictions. Sale of property for delinquent ad valorem taxes does not invalidate any restrictions on the land sold.

Municipalities may enact zoning ordinances for the general welfare of the community. Such ordinances may not destroy or impair otherwise valid restrictive covenants. Where the restrictive covenant is less restrictive that the zoning ordinance, the zoning ordinance will govern the particular land use. Where the restrictive is more stringent than the zoning ordinance, the use must comply with restrictive covenant. For example, where an otherwise valid private restriction limits the use of property for residential purposes, but the property is thereafter zoned commercial, the restriction will be enforced limiting the use of the property for residential purposes. Zoning ordinances may not enlarge private restrictions.

For residential restrictions, there may be state statutes which govern the applicability, enforceability, and extension of the restrictions based upon the population of the County and/or the municipality in which the land is located. In the situations, care should be taken that the appropriate statutes are reviewed. Chapter 202 of the Texas Property Code governs the construction and enforcement of restrictive covenants. Chapter 209 of the Texas Property Code deals with residential restrictions which authorize a property owner’s association to collect assessments and impose liens against property within a subdivision. Section 5.006(a) of the Texas Property Code requires a court to award reasonable attorney’s fees to a prevailing Plaintiff for a breach of a restrictive covenant.

R. Scott Alagood is board certified in Commercial and Residential Real Estate Law by the Texas Board of Specialization and can be reached at alagood@dentonlaw.com or http://www.dentonlaw.com.

VeronaNJ_CourtsIn response to legislation adopted in 2011, the Supreme Court of Texas has issued new rules governing civil cases filed in justice courts.  These new rules go into effect on August 31, 2012, and will govern the filing, pre-trial procedures, trial, and appeal of all civil cases filed in a justice court.

Historically, cases in justice courts were divided into small claims and justice court cases.  Small claim cases typically involved civil disputes of $10,000.00 or less. However, these same cases could also be heard as a justice court case.  The Texas Rules of Evidence applied to justice court cases, but not to small claims cases.  Certain types of civil disputes can only be initiated in justice courts, such as evictions, tenant lockouts, and the disconnection of residential tenant’s utilities by a landlord.

To some extent, the new rules simplify practice in justice courts.  Under the current rules, multiple and seemingly conflicting statutes could apply, while certain procedural topics are loosely addressed.  Texas Rules of Civil Procedure 523-591 set forth the general rules 737-755 deal with particular cases such as evictions and enforcing a landlord’s duty to repair or remedy residential rental property.  Starting August 31st, these rules will be repealed and replaced with new rules 500-510 of the Texas Rules of Civil Procedure.

The new rules will divide justice court civil cases into four distinct categories (1) small claims cases (rules 500-507); (2) debt claim cases (rules 500-507 and 508); (3) repair and remedy cases (rules 500-507 and 509); and (4) eviction cases (rules 500-507 and 510).

The general rules governing all cases will be found in rules 500-507.  These rules will apply to all small claims cases, and any other case not covered by rules 508, 509, and 510 which may be filed in a justice court.  Small claims cases will continue to apply to any disputes over monetary sums of $10,000.00 or less.  In computing  the $10,000.00 amount, attorney’s fees incurred will continue to be included, while statutory interest and court costs will not.  To the extent the general rules are not in conflict with rules 508, 509, and 510, they will apply to debt claims, repair and remedy claims, and eviction claims.   To the extent that rules 508, 509, or 510 conflict with the general rules, the specific rules shall control.

Debt claims will be primarily governed by rule 508, and will apply to any lawsuits brought to recover a debt by an assignee of a claim, a debt collector or collection agency, a financial institution, or a person primarily engaged in the business of lending money at interest.  These cases will typically involve unpaid credit card claims involving not more than $10,000.00 (as calculated in small claims cases).

Repair and remedy cases will be primarily governed by rule 509, and will apply to lawsuits filed by a residential tenant under Subchapter b of Chapter 92 of the Texas Property Code to enforce a landlord’s duty to repair or emery a condition which materially affects the physical health and safety of an ordinary tenant.  An associated monetary claim will not be allowed to exceed $10,000.00 (as calculated in small claims cases).

Eviction cases will be primarily governed by rule 510, and will apply to any lawsuits brought to recover possession of real property under Chapter 24 of the Texas Property Code.  If not more than $10,000.00 in unpaid rentals (as calculated in small claims cases) is sought, then a rent claim may be joined in the eviction suit.

All other rules of civil procedure and rules of evidence not included in rules 500-510 will typically not apply in justice courts.  The  judge will continue to be able to develop the facts of the case, including questioning witnesses or parties and summoning witnesses to appear.  pretrial discovery may be allowed so long as the judge considers it reasonable and necessary, and only after written court approval is obtained.

For all cases filed in justice court on or after August 31, 2013, the new rules will apply.  For cases which were filed prior to August 31, 2013, and not concluded by that date, the Supreme Court has authorized the justice courts to continue using the old rules where the use of the new rules would not be feasible or would work injustice.  Hopefully, the transaction will be smooth, and practice in the justice courts will continue to be affordable and efficient way to resolve smaller disputes.

Scott Alagood is Board Certified by the Texas Board of Legal Specialization in both Commercial and Residential Real Estate Law and may be reached at alagood@dentonlaw.com and www.dentonlaw.com.

 

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May 2013 Newsletter Page 1

Foreclosure Rates

Buying Property at Foreclosure Sales: a Deal or a Dud?

If you ever watch late night television, then you have seen those infomercials touting the ability to make you an overnight millionaire by purchasing financially distressed real estate.  There are many individuals and companies who have built successful lives and businesses through the acquisition of financially distressed real estate.  However, unless the process is fully understood and the risks are knowingly accepted, the purchase of financially distressed property at a foreclosure sale is not necessarily for the cash rich novice.  The following legal and practical issues should be considered prior to acquiring property at a non-judicial foreclosure sale held under a Texas deed of trust.[1]

A deed of trust is the document that a borrower gives to a lender to secure the repayment of a loan with real estate.  In a typical Texas mortgage, the parties involved are the borrower, the lender, the trustee, and the owner of the real estate pledged as collateral (“mortgagor”).  The borrower is the party responsible for the repayment of the loan.  The lender is the party who funded the loan and is the beneficiary of the pledged real estate.  In Texas, a trustee performs the duties and responsibilities contained in the deed of trust when the borrower defaults on the loan.  The mortgagor is the party pledging the property as collateral for the loan.[2]

It should be noted that non-judicial foreclosures in Texas are generally governed by (i) Chapter 51 of the Texas Property Code, and (ii) the documented agreements between the lender and borrower [3] contained within the loan documents.  Certain publicly filed documents which should be reviewed are the deed of trust, renewals/ extensions of the deed of trust, Notice of Trustee’s/Substitute Trustee’s Sale, and any other document affecting title to a mortgaged property (such as easements, leases, liens, restrictions, covenants, estates, and mineral interests, just to mention a few).  Unless a purchaser is adept at researching property titles, it is advisable to purchase an abstractor’s certificate from a title company.

There may be other issues which will affect title to the property being foreclosed which do not appear in the public real property records.  Some of these issues include encroachments, protrusions, overlapping improvements, set-backs, zoning, platting, building ordinances, flood zones, drainage, utilities, bankruptcy filings, lawsuits, and probate records.  Issues which are located on the ground can be addressed by ordering a current survey of the property.  However, permission from the current owner must be obtained before legally entering the property to conduct a survey.  This can be very difficult, if not impossible.  Other issues may be addressed through inquiries of public officials and employees.   While information obtained through governmental offices can be valuable, such information may not be completely reliable, and the persons supplying it are typically not liable for inaccuracies.

Except for warranties of title contained in the foreclosure Deed (from the mortgagor not the Trustee/Substitute Trustee), property purchased at a foreclosure sale is sold “AS IS” without any other warranties and at the purchaser’s own risk.  The purchaser will acquire the property subject to all physical and title conditions which exist on the date of the foreclosure.  Any tenants or occupants of the property on the date of the foreclosure sale may also have rights as parties in possession of the property.  Even if the purchaser acquires a meaningful warranty in the foreclosure Deed, enforcing such warranty may be impractical since the mortgagor is usually in dire financial straits.

A foreclosure sale may be set aside for various reasons within four years of the date of the sale under state law and within two years under federal bankruptcy law.  Any title insurance policy acquired by the purchaser will usually exclude any defects associated with the foreclosure process and any liens or encumbrances which were not removed by the foreclosure sale.  A purchaser at a foreclosure sale is also not a “consumer” relating to the protections afforded by the Texas Deceptive Trade Practices – Consumer Protection Act.

A purchaser should identify these issues, determine acceptability or cost to resolve, and calculate a  purchase price accordingly.  Resolving an unidentified issue post-purchase may cost tens of thousands of dollars.[4]

Purchasing distressed property at foreclosure typically requires a high degree of risk tolerance.  Anyone willing to accept those risks may also want to consider going to Vegas.  At least in Vegas, the drinks are free.


[1] As opposed to foreclosure sales by Court order or for unpaid ad valorem taxes which may have different considerations.

[2] While the borrower and the mortgagor are typically the same party, it is not necessary that they are the same.

[3] The third-party mortgagor’s agreements should also be considered, where the borrower and mortgagor are not the same.

[4] Legal fees necessary to clear up a contested title matter can sometimes exceed $100,000.00.

Scott Alagood is Board Certified in Commercial and Residential Real Estate Law by the Texas Board of Legal Specialization and may be reached at alagood@dentonlaw.com or www.dentonlaw.com
 

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photoOwner financing in Texas has historically been a valued tool to sell real estate to parties who for various reasons couldn’t qualify to borrow from institutional lenders.  However, in 2008 and 2009, owner financing was directly affected by federal and state regulatory changes.  In 2009, Texas was directed by federal law to adopt Chapter 180 of the Texas Finance Code, now better known as the Texas SAFE Act.  The acronym “SAFE” stems from the Secure and Fair Enforcement for Mortgage Licensing Act which was part of the federal Wall Street Reform Act of 2008.  These Acts were spurred by the belief that the liquidity crisis in the financial markets was caused in part by mortgage fraud and subprime mortgage loans.

One of the objectives of the federal SAFE Act was to provide uninform requirements for State licensed loan originators, or what we in Texas formerly referred to as mortgage brokers.  The Texas SAFE Act renamed the mortgage broker as a “residential mortgage loan originator” or “RMLO” and broadened the State licensing requirements necessary to perform certain functions associated with the issuance of a residential mortgage loan.  This is where the problem arose for Owner financed transactions.

The Texas SAFE Act defines a RMLO as any individual who for compensation or gain, or the expectation thereof, either takes a residential mortgage loan application or offers or negotiates the terms of a residential mortgage.  Certain exclusions and exemptions from licensing are provided in the statute, including licensed real estate brokers and salespersons, licensed manufactured housing brokers, no interest/fee loans, loans to an immediate family member, and loans involving the sale of the Owner’s homestead.  Even licensed attorneys may be subject to further licensure where the negotiation of a mortgage loan is not an ancillary matter to the attorney’s representation or the attorney takes an application and offers or negotiates the mortgage terms.  Any Owner financing transaction which does not otherwise fall under one of the exempted categories will clearly meet the definition of an RMLO and require licensure by the party offering or negotiating the mortgage loan.

The Texas agency responsible for enforcing the SAFE Act is the Texas Department of Savings and Mortgage Lending.  Violations of the SAFE Act include license suspension, a fine of up to $25,000.00, and restitution to the Buyer.  At this point, it is unclear what “restitution” means.

Fortunately, the Commissioner of the Department of Savings and Mortgage Lending issued a notice in August of 2010, setting forth a seller financing “de minimus” exception to the Texas SAFE Act.  Before the federal and Texas SAFE Acts, Section 156.202(a)(3) of the Texas Finance Code exempted from licensing “an owner of real property who in any 12 consecutive month period makes not more than five mortgage loans to purchasers of property for all or part of the purchase price of the real estate against which the mortgage is secured. “  The Commissioner pointed out that in adopting Chapter 180 of the Texas Finance Code, the legislature had amended Section 156.202, but left Section 156.202(a)(3) intact.  Since the amendments to Section 156.202 were passed after Chapter 180, the Commissioner determined that the legislature intended that the de minimus exception remain.  Unless there is a subsequent statutory amendment  or rule, or the U.S. Department of Housing and Urban Development issues a conflicting ruling, the Commissioner has stated that the de minimus exception will continue to be allowed by the Department of Savings and Mortgage Lending.

In considering whether or not a transaction falls within the de minimus exemption, the 12 month period is a rolling period, and not determined on the basis of a calendar year.  Also, for business organizations, the term “owner” will in all probability be viewed at the ultimate ownership or control level.  This means that a person will not be allowed to transfer ownership into separate business entities (i.e. corporation, partnership, LP, LLC, etc….) for purposes of eluding the 5 transaction limit in any 12 month period.

Clearly, financing the sale of your own property is now more tricky than it used to be.  For situations where a transaction clearly falls within the licensing requirements of the SAFE Act, you are advised to seek the services of a licensed RMLO and/or an experienced attorney.  With some careful planning and consideration of the transaction, the regulatory pitfalls of the SAFE Act may be avoided.

Scott Alagood is Board Certified by the Texas Board of Legal Specialization in both Commercial and Residential Real Estate Law and may be reached at alagood@dentonlaw.com and www.dentonlaw.com.
 

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