Update on Texas SAFE Act and Dodd Frank Mortgage Reform Act Bryan Dunklin texaslaw@email

Owner Financing and Buying Owner Financing and Buying Subject to an Existing Loan,Subject to an Existing Loan,

Including Wraps, Land Trusts, and Including Wraps, Land Trusts, and Lease/OptionsLease/Options

Update on Texas SAFE Act andUpdate on Texas SAFE Act andDodd Frank Mortgage Reform ActDodd Frank Mortgage Reform Act

Bryan DunklinBryan [email protected]

www.texasrealestatlaw.net214-769-7377214-769-7377

DFW REI Club DFW REI Club Haltom City, TexasHaltom City, Texas

July 27, 2013July 27, 2013 11

mailto:[email protected]

http://www.texasrealestatlaw.net/

Bryan Bryan DunklinDunklin Best Speaker award - State Bar of Texas Advanced

Real Estate Law Course 2012 On the faculty of SMU from 1985 to 2008 Taught real estate law, real estate transactions,

business law, and real estate fundamentals Dallas Bar Association Real Property Section Dallas Bar Association Real Property Section

Chairman in 2004 (820 real estate lawyers)Chairman in 2004 (820 real estate lawyers) Former general counsel of a national bank Former president and general counsel of a real

estate brokerage/syndication/management firm Practicing law since 1980 Licensed real estate broker from 1982 - 2009

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Bryan Bryan DunklinDunklin

SMU undergraduate BA degree with honors SMU Masters of Business Administration

Degree - 1981 SMU Law Degree - 1981 Selected to the law review – top 10% of

class - Journal of Air Law and Commerce - 1977

Coached successful SMU teams in American Bar Association competitions

Selected as an honorary member of the SMU School of Law Board of Advocates – 1994-95

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Recent Recent speechesspeeches

State Bar of Texas webinarsState Bar of Texas webinars State Bar of Texas Advanced Real Estate Law and Real Estate State Bar of Texas Advanced Real Estate Law and Real Estate

Strategies coursesStrategies courses Mortgage Lending Institute – Session Moderator and Steering Mortgage Lending Institute – Session Moderator and Steering

Committee Committee Texas Land Title Institute and Texas Land Title Association Texas Land Title Institute and Texas Land Title Association

webinarwebinar Texas Mortgage Bankers AssociationTexas Mortgage Bankers Association North Texas Commercial Association of RealtorsNorth Texas Commercial Association of Realtors Dallas Bar Association Real Property SectionDallas Bar Association Real Property Section Denton County Real Estate, Trusts, and Probate SectionDenton County Real Estate, Trusts, and Probate Section Dallas Area Real Estate Lawyers Discussion GroupDallas Area Real Estate Lawyers Discussion Group Numerous real estate investors associations and brokerage Numerous real estate investors associations and brokerage

firmsfirms44

DisclaimerDisclaimer These materials are for general educational purposes These materials are for general educational purposes

only.only.

The law constantly changes by the passage of new The law constantly changes by the passage of new statutes, rules, regulations, and by decisions made by statutes, rules, regulations, and by decisions made by the courts. No representation or warranty is given that the courts. No representation or warranty is given that the general information provided is applicable to your the general information provided is applicable to your circumstances. No legal advice is being given. circumstances. No legal advice is being given. Information may not be current.Information may not be current.

No attorney-client relationship is established by the No attorney-client relationship is established by the presentation of these materials.presentation of these materials.

You are advised to consult an attorney with respect to You are advised to consult an attorney with respect to your specific circumstances.your specific circumstances.

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Q & AQ & A I encourage questions. Please write them down and I encourage questions. Please write them down and

wait until the Q&A period. I’ll be available at breaks wait until the Q&A period. I’ll be available at breaks and after the seminar.and after the seminar.– ““He who is afraid to ask is ashamed of learning.He who is afraid to ask is ashamed of learning.” – ” –

Danish proverbDanish proverb– ““He who asks a question is a fool for five minutes. He who asks a question is a fool for five minutes.

He who does not ask a question remains a fool He who does not ask a question remains a fool forever.forever.” – Chinese proverb” – Chinese proverb

Please be considerate of the speaker and other Please be considerate of the speaker and other seminar participants. Step outside to talk or phone.seminar participants. Step outside to talk or phone.– ““The simple act of paying attention can take you a The simple act of paying attention can take you a

long way.long way.” – Keanu Reeves” – Keanu Reeves

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My PowerPointMy PowerPointPresentationsPresentations

Sign my email list and I’ll send you my PowerPoint presentations and other articles

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Today’s Today’s topicstopics

Three seminars:Three seminars:– Update on Texas S.A.F.E. ActUpdate on Texas S.A.F.E. Act– Update on Dodd Frank ActUpdate on Dodd Frank Act– Texas law affecting Seller financing Texas law affecting Seller financing

techniquestechniques Buying subject to an existing loanBuying subject to an existing loan Wraparound / all-inclusive notesWraparound / all-inclusive notes Contracts for deedContracts for deed Lease with an optionLease with an option Land trustsLand trusts

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The problem when The problem when the investor is the investor is

buyingbuying Investors want to buy property without having to be personally Investors want to buy property without having to be personally

liable for repaying the debt.liable for repaying the debt.

Investors sometimes want to keep in place the existing Investors sometimes want to keep in place the existing financing (attractive rate or other terms).financing (attractive rate or other terms).

Investors may prefer to have the seller finance the purchase of Investors may prefer to have the seller finance the purchase of the property to avoid having to be personally liable on the debt the property to avoid having to be personally liable on the debt and to expedite the closing.and to expedite the closing.

Investors don’t want to pay high interest rates or high closing Investors don’t want to pay high interest rates or high closing costs.costs.

Investors don’t want to be sued if they don’t pay the loan.Investors don’t want to be sued if they don’t pay the loan.

Investors don’t want to be delayed by the approval process.Investors don’t want to be delayed by the approval process.

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The problem when The problem when the investor is a the investor is a

landlordlandlord Investors want to find good tenants who will be Investors want to find good tenants who will be

motivated to take good care of the property.motivated to take good care of the property.

Investors want to find good tenants who will pay more Investors want to find good tenants who will pay more money up front, and pay higher monthly payments, money up front, and pay higher monthly payments, for the right to buy the property in the future at a for the right to buy the property in the future at a fixed price.fixed price.

Investors want to find good tenants who will Investors want to find good tenants who will eventually want to buy the property at a premium eventually want to buy the property at a premium price.price.

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The problem when The problem when the investor is the investor is

sellingselling Investors want a buyer who will pay a premium price.Investors want a buyer who will pay a premium price.

Investors want a buyer who will pay cash, or who will lose Investors want a buyer who will pay cash, or who will lose significant earnest money if the buyer doesn’t close.significant earnest money if the buyer doesn’t close.

If the investor has to finance the buyer’s purchase of the If the investor has to finance the buyer’s purchase of the property, then the investor wants a buyer he knows has property, then the investor wants a buyer he knows has a track record of paying on time and taking care of the a track record of paying on time and taking care of the property.property.

If the buyer doesn’t pay on time or take good care of the If the buyer doesn’t pay on time or take good care of the property, the investor wants to be able to get back title property, the investor wants to be able to get back title and possession of the property easily, quickly, and and possession of the property easily, quickly, and inexpensively.inexpensively.

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OptionsOptions Conventional financingConventional financing

Lease with an optionLease with an option– The tenant has an option to purchase the propertyThe tenant has an option to purchase the property

Contract for deedContract for deed– The buyer doesn’t get a deed until the full purchase price is paidThe buyer doesn’t get a deed until the full purchase price is paid

Land trustLand trust– The buyer is assigned the beneficial interest in a trust and The buyer is assigned the beneficial interest in a trust and

eventually has the right to control the sale of the propertyeventually has the right to control the sale of the property

Seller financing with a note and deed of trustSeller financing with a note and deed of trust– The seller is given a note and a deed of trust and can foreclose if The seller is given a note and a deed of trust and can foreclose if

the buyer doesn’t pay the buyer doesn’t pay

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Two key Two key factorsfactors

Due on sale clauseDue on sale clause– Inflation and rising interest rates Inflation and rising interest rates – Enforceable? Garn - St. Germain Depository Enforceable? Garn - St. Germain Depository

Institutions Act of 1982Institutions Act of 1982 Stricter lending standardsStricter lending standards

– Record defaults and foreclosuresRecord defaults and foreclosures– Weaker secondary marketWeaker secondary market– Declining valuesDeclining values– Overhand on the market Overhand on the market – Dodd FrankDodd Frank

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Due-on-sale Due-on-sale clauseclause

Sometimes called a "due-on-Sometimes called a "due-on-transfer" clause, is a contractual transfer" clause, is a contractual provision in a mortgage or deed of provision in a mortgage or deed of trust that trust that gives the lender the option gives the lender the option to require the borrower to pay the to require the borrower to pay the full amount remaining on the loan full amount remaining on the loan when the borrower transfers any when the borrower transfers any interest in the property without first interest in the property without first obtaining the consent of the lenderobtaining the consent of the lender..

Due-on-sale Due-on-sale clauseclause

““In the event that the grantor In the event that the grantor [borrower] transfers any interest [borrower] transfers any interest in the property without the prior in the property without the prior written consent of the lender, the written consent of the lender, the lender may, at its option, declare lender may, at its option, declare the entire principal balance of the the entire principal balance of the loan immediately due and loan immediately due and payable.” payable.”

Texas Real Estate Forms Texas Real Estate Forms Manual due-on-sale Manual due-on-sale

clauseclause "If Grantor transfers any part of the Property without Lender’s prior "If Grantor transfers any part of the Property without Lender’s prior

written consent, Lender may declare the debt secured by this deed written consent, Lender may declare the debt secured by this deed of trust immediately payable and invoke any remedies provided in of trust immediately payable and invoke any remedies provided in this deed of trust for default. If the Property is residential real this deed of trust for default. If the Property is residential real property containing fewer than five dwelling units or a residential property containing fewer than five dwelling units or a residential manufactured home occupied by Grantor, exceptions to this manufactured home occupied by Grantor, exceptions to this provision are limited to (a) a subordinate lien or encumbrance that provision are limited to (a) a subordinate lien or encumbrance that does not transfer rights of occupancy of the Property; (b) creation does not transfer rights of occupancy of the Property; (b) creation of a purchase-money security interest for household appliances; (c) of a purchase-money security interest for household appliances; (c) transfer by devise, descent, or operation of law on the death of a transfer by devise, descent, or operation of law on the death of a co-Grantor; (d) grant of a leasehold interest of three years or less co-Grantor; (d) grant of a leasehold interest of three years or less without an option to purchase; (e) transfer to a spouse or children without an option to purchase; (e) transfer to a spouse or children of Grantor or between co-Grantors; (f) transfer to a relative of of Grantor or between co-Grantors; (f) transfer to a relative of Grantor on Grantor’s death; and (g) transfer to an inter vivos trust Grantor on Grantor’s death; and (g) transfer to an inter vivos trust in which Grantor is and remains a beneficiary and occupant of the in which Grantor is and remains a beneficiary and occupant of the Property."Property."

Due-on-sale litigationDue-on-sale litigation Before 1982, courts in different Before 1982, courts in different

jurisdictions interpreted due-on-jurisdictions interpreted due-on-sale provisions differentlysale provisions differently

Congress intervened to provide a Congress intervened to provide a consistent interpretationconsistent interpretation– Garn-St. Germain Depository Garn-St. Germain Depository

Institutions Act Institutions Act

Garn-St. Germain ActGarn-St. Germain Act Congress sought to clear up the Congress sought to clear up the

different interpretations of the different interpretations of the enforceability of due-on-sale enforceability of due-on-sale clauses by the state courts by clauses by the state courts by intervening in 1982 and preempted intervening in 1982 and preempted the issue by the passage of federal the issue by the passage of federal legislation known as the Garn-St. legislation known as the Garn-St. Germain Depository Institutions Act. Germain Depository Institutions Act. 12 U.S.C. § 1701j-3(d)(2000) 12 U.S.C. § 1701j-3(d)(2000)

Garn-St. Germain ActGarn-St. Germain Act Due-on-sale clauses are Due-on-sale clauses are

enforceableenforceable in in residentialresidential loan loan transactions transactions exceptexcept in the following in the following situations:situations:– 1. 1. DeathDeath of the borrower – of the borrower – transfer to the transfer to the

heirsheirs– 2. 2. DivorceDivorce of the borrowers – of the borrowers – transfer to transfer to

one spouse one spouse– 3. A 3. A leaselease, , notnot coupled with an option coupled with an option

to purchaseto purchase, of , of less than three yearsless than three years

Inter vivos trust Inter vivos trust exceptionexception

a a transfer into an inter vivos trusttransfer into an inter vivos trust in which in which the borrower is and the borrower is and remains a beneficiaryremains a beneficiary and which and which does not relate to a transfer of does not relate to a transfer of rights of occupancy in the rights of occupancy in the propertyproperty . . .”Transfer to a living . . .”Transfer to a living trust, that does not involve a transfer trust, that does not involve a transfer of the beneficial interest or a transfer of the beneficial interest or a transfer of the possession of the property”of the possession of the property”

Garn-St. Germain Act Garn-St. Germain Act regulationsregulations

§ 591.5(b)(1)(VI) § 591.5(b)(1)(VI) ““A A transfer into an inter vivos trusttransfer into an inter vivos trust in in which the borrower is and remains the which the borrower is and remains the beneficiary and occupant of the beneficiary and occupant of the propertyproperty, unless, as a condition precedent , unless, as a condition precedent to such transfer, the borrower refuses to to such transfer, the borrower refuses to provide the lender with reasonable means provide the lender with reasonable means acceptable to the lender by which the lender acceptable to the lender by which the lender will be assured of timely will be assured of timely notice of any notice of any subsequent transfer of the beneficial subsequent transfer of the beneficial interest or change in occupancyinterest or change in occupancy.” .”

Garn-St. Germain ActGarn-St. Germain Act §591.5(b) §591.5(b) Specific limitationsSpecific limitations.. With respect to any loan on the With respect to any loan on the

security of a security of a home occupied or to be occupied by the borrowerhome occupied or to be occupied by the borrower,,

(A)(A) A lender shall notA lender shall not (except with regard to a reverse (except with regard to a reverse mortgage) mortgage) exercise its option pursuant to a due-on-sale clause exercise its option pursuant to a due-on-sale clause uponupon: …: …

(iii)(iii) A transfer by devise, descent, or operation of law on A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;the death of a joint tenant or tenant by the entirety;

(iv)(iv) The granting of a leasehold interest which has The granting of a leasehold interest which has a term of three years or less and which does not contain an a term of three years or less and which does not contain an option to purchase (that is, either a lease of more than three option to purchase (that is, either a lease of more than three years or a lease with an option to purchase will allow the years or a lease with an option to purchase will allow the exercise of a due-on-sale clause);exercise of a due-on-sale clause);

Garn-St. Germain ActGarn-St. Germain Act (v)(v) A transfer, in which the transferee is A transfer, in which the transferee is

a person who occupies or will occupy the a person who occupies or will occupy the propertyproperty, which is:, which is:

(A)(A) A A transfer to a relative resulting transfer to a relative resulting from the death of the borrowerfrom the death of the borrower;;

(B)(B) A A transfer where the spouse or transfer where the spouse or child(ren) becomes an owner of the propertychild(ren) becomes an owner of the property; or; or

(C)(C) A transfer resulting from a decree of A transfer resulting from a decree of dissolution of marriage, legal separation dissolution of marriage, legal separation agreementagreement, or from an incidental property settlement , or from an incidental property settlement agreement by which the spouse becomes an owner of agreement by which the spouse becomes an owner of the property; orthe property; or

Garn-St. Germain ActGarn-St. Germain Act (vi)(vi) A transfer into an inter vivos trust in A transfer into an inter vivos trust in

which which the borrower is and remains the beneficiary and the borrower is and remains the beneficiary and occupant of the propertyoccupant of the property, , unless, as a condition unless, as a condition precedent to such transferprecedent to such transfer, , the borrower refuses to the borrower refuses to provide the lender with reasonable means acceptable to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial notice of any subsequent transfer of the beneficial interest or change in occupancyinterest or change in occupancy..

(B)(B) A lender shall not impose a prepayment A lender shall not impose a prepayment penalty or equivalent fee when the lender or party acting on penalty or equivalent fee when the lender or party acting on behalf of the lenderbehalf of the lender

(i)(i) Declares by written notice that the loan is due Declares by written notice that the loan is due pursuant to a due-on-sale clause orpursuant to a due-on-sale clause or

(ii)(ii) Commences a judicial or nonjudicial foreclosure Commences a judicial or nonjudicial foreclosure proceeding to enforce a due-on-sale clause or to seek payment proceeding to enforce a due-on-sale clause or to seek payment in full as a result of invoking such clause.in full as a result of invoking such clause.

Can the lender call the note due if Can the lender call the note due if there is a due on sale clause and there is a due on sale clause and the property is sold without the the property is sold without the

lender’s consent?lender’s consent? Clearly the answer is “yes.”Clearly the answer is “yes.” So if a lender has this contractual right, why wouldn’t it So if a lender has this contractual right, why wouldn’t it

exercise its right to call the note due? When current exercise its right to call the note due? When current market interest rates are below the rate of interest market interest rates are below the rate of interest provided in the note secured by the real estate, or when provided in the note secured by the real estate, or when the real estate that secures the loan has a value that is the real estate that secures the loan has a value that is less than the amount owed on the note, many lenders less than the amount owed on the note, many lenders make a conscious decision to not accelerate the debt even make a conscious decision to not accelerate the debt even if they discover that the property has been transferred by if they discover that the property has been transferred by the borrower without the lender's consent. They reason the borrower without the lender's consent. They reason that to call the note immediately due and payable might that to call the note immediately due and payable might result in the lender taking back the property and result in the lender taking back the property and recognizing a loss on an otherwise performing loan.recognizing a loss on an otherwise performing loan.

Will the lender exercise it’s Will the lender exercise it’s right to call the note due right to call the note due

under its due-on-sale under its due-on-sale clause?clause?

As mortgage interest rates have fallen from the As mortgage interest rates have fallen from the high levels of the early 1980s, lenders have high levels of the early 1980s, lenders have frequently not been aggressive in exercising their frequently not been aggressive in exercising their rights under the due-on-sale clause. Instead rights under the due-on-sale clause. Instead many lenders have sometimes preferred to allow many lenders have sometimes preferred to allow the loan contract to remain in place so long as it the loan contract to remain in place so long as it is being timely paid. As current interest rates is being timely paid. As current interest rates rise, it can be expected that more lenders will rise, it can be expected that more lenders will elect to accelerate the debt when it is discovered elect to accelerate the debt when it is discovered that the borrower has transferred an interest in that the borrower has transferred an interest in the property without the lender’s consent.the property without the lender’s consent.

They can, and they might.They can, and they might.

Case law onCase law ondue-on-sale clausesdue-on-sale clauses

Courts in Texas routinely uphold the enforceability of due-Courts in Texas routinely uphold the enforceability of due-on-sale clauseson-sale clauses

In recent case law developments in Texas, the Dallas Court In recent case law developments in Texas, the Dallas Court of Appeals in 2005 refused to find in favor of the borrower of Appeals in 2005 refused to find in favor of the borrower asserting a cause of action for wrongful foreclosure of a asserting a cause of action for wrongful foreclosure of a commercial loan as a result of the borrower's transfer of the commercial loan as a result of the borrower's transfer of the mortgaged property to a corporation owned by the borrower mortgaged property to a corporation owned by the borrower under an unrecorded deed which the borrower claimed was under an unrecorded deed which the borrower claimed was never delivered. never delivered. Adams v. First National Bank of Adams v. First National Bank of Bells/SavoyBells/Savoy, 154 S.W.3d 859 (Tex.App.—Dallas 2005, no , 154 S.W.3d 859 (Tex.App.—Dallas 2005, no pet.). The court found that there was evidence in the pet.). The court found that there was evidence in the borrower's corporate financial statement and in the borrower's corporate financial statement and in the borrower's own comments to the lender that the property borrower's own comments to the lender that the property had been transferred. Even though the lender did not give had been transferred. Even though the lender did not give the borrower a notice of its intent to accelerate the debt, the the borrower a notice of its intent to accelerate the debt, the court found that the borrower had waived her right to notice court found that the borrower had waived her right to notice of intent to accelerate.of intent to accelerate.

Key statutes whenKey statutes whenowner financing is owner financing is

involvedinvolved Texas SAFE ActTexas SAFE Act

– licensure required for Residential licensure required for Residential Mortgage Loan Originator (Mortgage Loan Originator (RMLORMLO))

– HB 10, HB 2774, HB 2779HB 10, HB 2774, HB 27798181stst Legislature – 2009 Legislature – 2009

Dodd Frank Mortgage Reform ActDodd Frank Mortgage Reform Act– Lender must document borrower’s ability Lender must document borrower’s ability

to repayto repay

Key statutes whenKey statutes whenowner financing is owner financing is

involvedinvolved Texas Property Code § 5.016 Texas Property Code § 5.016

regarding sale of residential regarding sale of residential property where lien remains in property where lien remains in placeplace

Texas Property Code § 5.061 – Texas Property Code § 5.061 – 5.0855.085 regarding executory regarding executory contractscontracts

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Texas SAFE ActTexas SAFE Act Texas Secure and Fair Enforcement for Texas Secure and Fair Enforcement for

Mortgage Licensing Act of 2009Mortgage Licensing Act of 2009

Responds to the federal mandate that states Responds to the federal mandate that states adopt the Federal Secure and Fair adopt the Federal Secure and Fair Enforcement for Mortgage Licensing Act of Enforcement for Mortgage Licensing Act of 2008, or equivalent, to license, register, and 2008, or equivalent, to license, register, and regulate residential mortgage loan regulate residential mortgage loan originators.originators.

Effective April 1, 2010Effective April 1, 2010

Texas SAFE ActTexas SAFE Act If you lend money, or arrange for the lending If you lend money, or arrange for the lending

of money, or if you advise someone about of money, or if you advise someone about mortgages, even if it’s your own money, or if mortgages, even if it’s your own money, or if you touch a mortgage in any material way, you touch a mortgage in any material way, there are regulations affecting you, and there are regulations affecting you, and licensing will probably be required if a loan is licensing will probably be required if a loan is originated on residential property other than originated on residential property other than when selling your personal residence when selling your personal residence

Texas SAFE ActTexas SAFE Act Federal SAFE Act Establishes the Nationwide Federal SAFE Act Establishes the Nationwide

Mortgage Licensing System and Registry Mortgage Licensing System and Registry ((NMLSNMLS))

""Residential mortgage loanResidential mortgage loan" - a loan " - a loan primarily for personal, family, or household primarily for personal, family, or household use that is secured by a mortgage, deed of use that is secured by a mortgage, deed of trust, or other equivalent consensual security trust, or other equivalent consensual security interest on a dwelling or on residential real interest on a dwelling or on residential real estateestate

Texas SAFE ActTexas SAFE Act (19) "(19) "Residential mortgage loan originatorResidential mortgage loan originator":":

– (A) means (A) means an individual who for compensationan individual who for compensation or gain or gain or in the expectation of compensation or gain:or in the expectation of compensation or gain:

(i) (i) takes a residential mortgage loan applicationtakes a residential mortgage loan application; ; OROR (ii) (ii) offers or negotiates the terms of a residential mortgage offers or negotiates the terms of a residential mortgage

loanloan; and; and

– (B) does not include:(B) does not include: (i) an individual who (i) an individual who performs solely administrative or clerical performs solely administrative or clerical

taskstasks on behalf of an individual licensed as an RMLO or exempt from on behalf of an individual licensed as an RMLO or exempt from licensure under § 180.003, except as otherwise provided by § licensure under § 180.003, except as otherwise provided by § 180.051;180.051;

Texas SAFE ActTexas SAFE Act– (B) does not include:(B) does not include:

(ii) an individual who performs only real estate (ii) an individual who performs only real estate brokerage activities and is licensed or registered brokerage activities and is licensed or registered by the state as a real estate broker or by the state as a real estate broker or salesperson, unless the individual is salesperson, unless the individual is compensated by:compensated by:

– (a) a lender, mortgage broker, or other (a) a lender, mortgage broker, or other residential mortgage loan originator; orresidential mortgage loan originator; or

– (b) an agent of a lender, mortgage broker, or (b) an agent of a lender, mortgage broker, or

other residential mortgage loan originator;other residential mortgage loan originator;

Texas SAFE ActTexas SAFE Act EXEMPTIONEXEMPTION. The following persons are . The following persons are exemptexempt

from this chapter:from this chapter: (3) (3) a licensed attorneya licensed attorney who negotiates the terms of a residential who negotiates the terms of a residential

mortgage loan on behalf of a client as an mortgage loan on behalf of a client as an ancillary matter to the ancillary matter to the attorney's representation of the clientattorney's representation of the client, unless the attorney:, unless the attorney:

– (A) (A) takes a residential mortgage loan applicationtakes a residential mortgage loan application; ; andand– (B) (B) offers or negotiates the terms of a residential offers or negotiates the terms of a residential

mortgage loanmortgage loan;;

(5) an (5) an individual who offers or negotiates terms of a individual who offers or negotiates terms of a residential mortgage loan secured by a dwelling that residential mortgage loan secured by a dwelling that serves as the individual's residenceserves as the individual's residence

Texas SAFE ActTexas SAFE Act Sec. 180.051. STATE LICENSE REQUIRED; Sec. 180.051. STATE LICENSE REQUIRED;

RENEWAL.RENEWAL.

(a) Unless exempted by § 180.003, (a) Unless exempted by § 180.003, an individual an individual may not engage in business as a residential may not engage in business as a residential mortgage loan originator with respect to a mortgage loan originator with respect to a dwelling located in this state unless the dwelling located in this state unless the individualindividual: : – (1) (1) is licensed to engage in that businessis licensed to engage in that business under under

Chapter 156, 157, 342, 347, 348, or 351; andChapter 156, 157, 342, 347, 348, or 351; and – (2) complies with the requirements of this chapter.(2) complies with the requirements of this chapter.

Texas SAFE ActTexas SAFE Act A licensed residential mortgage loan originator A licensed residential mortgage loan originator

must enroll with and must enroll with and maintain a valid unique maintain a valid unique identifieridentifier issued by the Nationwide Mortgage issued by the Nationwide Mortgage Licensing System and Registry (NMLS).Licensing System and Registry (NMLS).

In connection with an application for a license In connection with an application for a license as a residential mortgage loan originator, the as a residential mortgage loan originator, the applicant shall, at a minimum, furnish in the applicant shall, at a minimum, furnish in the form and manner prescribed by the regulatory form and manner prescribed by the regulatory official and acceptable to the NMLS information official and acceptable to the NMLS information concerning the applicant's identity, including:concerning the applicant's identity, including:

Texas SAFE ActTexas SAFE Act (1) (1) fingerprintsfingerprints for submission to the Federal Bureau for submission to the Federal Bureau

of Investigation and any governmental agency or of Investigation and any governmental agency or entity authorized to receive the information to entity authorized to receive the information to conduct a state, national, and international criminal conduct a state, national, and international criminal background check; andbackground check; and

(2) (2) personal historypersonal history and experience information in a and experience information in a form prescribed by the NMLS, including the form prescribed by the NMLS, including the submission of authorization for the NMLS and the submission of authorization for the NMLS and the appropriate regulatory official to obtain: appropriate regulatory official to obtain: – (A) an (A) an independent credit reportindependent credit report obtained from a consumer obtained from a consumer

reporting agency described by § 603(p), Fair Credit Reporting reporting agency described by § 603(p), Fair Credit Reporting Act (15 U.S.C. § 1681a(p)); andAct (15 U.S.C. § 1681a(p)); and

– (B) information related to any administrative, civil, or (B) information related to any administrative, civil, or criminal criminal findingsfindings by a governmental jurisdiction. by a governmental jurisdiction.

Texas SAFE ActTexas SAFE Act The regulatory official may not issue a residential mortgage The regulatory official may not issue a residential mortgage

loan originator license to an individual unless the regulatory loan originator license to an individual unless the regulatory official determines, at a minimum, that the applicant:official determines, at a minimum, that the applicant:– Has Has not been convicted of a felony during the 7 year period not been convicted of a felony during the 7 year period

prior to the applicationprior to the application or or at any timeat any time preceding the date of preceding the date of application, application, if the felony involved an act of fraud, dishonesty, if the felony involved an act of fraud, dishonesty, breach of trust, or money launderingbreach of trust, or money laundering

– Demonstrates financial responsibilityDemonstrates financial responsibility, character, and general , character, and general fitness so as to command the confidence of the community and to fitness so as to command the confidence of the community and to warrant a determination that the individual will operate honestly, fairly, warrant a determination that the individual will operate honestly, fairly, and efficiently as a residential mortgage loan originator within the and efficiently as a residential mortgage loan originator within the purposes of this chapter and any other appropriate regulatory law of purposes of this chapter and any other appropriate regulatory law of this statethis state

– Provides satisfactory evidence that the applicant has completed Provides satisfactory evidence that the applicant has completed prelicensing education coursesprelicensing education courses and provides satisfactory evidence and provides satisfactory evidence of having passed a written test and has paid a recovery fund fee or of having passed a written test and has paid a recovery fund fee or obtained a surety bond as required under the appropriate state obtained a surety bond as required under the appropriate state regulatory law.regulatory law.

Texas SAFE ActTexas SAFE Act– A A determination that an individual has determination that an individual has

not shown financial responsibility may not shown financial responsibility may includeinclude: (1) an : (1) an outstanding judgmentoutstanding judgment against the individual, other than a against the individual, other than a judgment imposed solely as a result of judgment imposed solely as a result of medical expenses; (2) an medical expenses; (2) an outstanding tax outstanding tax lienlien or other governmental liens and filings; or other governmental liens and filings; (3) (3) a foreclosure during the three-year a foreclosure during the three-year periodperiod preceding the date of the license preceding the date of the license application; and (4) application; and (4) a pattern of seriously a pattern of seriously delinquent accountsdelinquent accounts during the three-year during the three-year period preceding the date of the application.period preceding the date of the application.

Texas SAFE ActTexas SAFE Act H.B. 10, 2774, and 2779 passed H.B. 10, 2774, and 2779 passed

by Texas in 2009by Texas in 2009 Added Chapter 180 to the Texas Added Chapter 180 to the Texas

Finance Code – Texas SAFE ActFinance Code – Texas SAFE Act– Residential Mortgage Loan Residential Mortgage Loan

Originators must be licensedOriginators must be licensed

4141

RMLORMLO INCLUDESINCLUDES

– An individual who for compensation An individual who for compensation takes a residential mortgage loan applicationtakes a residential mortgage loan application

OROR offers or negotiates the terms of a residential offers or negotiates the terms of a residential

loanloan DOES NOT INCLUDE DOES NOT INCLUDE

– One who receives the same benefits from a One who receives the same benefits from a financed transaction as the individual would financed transaction as the individual would receive if the transaction were a cash receive if the transaction were a cash transactiontransaction

4242

RMLORMLO DOES NOT INCLUDE (the DOES NOT INCLUDE (the de de

minimisminimis exemption) exemption)– ““an owner of real property who in an owner of real property who in

any 12 month period makes no more any 12 month period makes no more than five mortgage loans to than five mortgage loans to purchasers of the property for all or purchasers of the property for all or part of the purchase price of the real part of the purchase price of the real estate against which the mortgage is estate against which the mortgage is secured”secured”

4343

License License requirementsrequirements

Criminal background check. All fingerprints will be submitted through NMLS for an FBI criminal background check

Education: Prior to taking the licensing test all applicants must take 20 hours of education and the courses must contain no less than 3 hours of Federal Law, 3 hour of ethics, 2 hours of nontraditional mortgage lending plus 12 hours of electives (which can include state required content)

Testing: Has components of all four of the areas listed above. Depending on which test is being taken (date specific) the test is approximately 190 minutes long and costs $110.00

Credit Report: NMLS conducts the credit check4444

PenaltiesPenalties First offense: Class B misdemeanor

All subsequent offenses: Class A misdemeanor

Liability: damages of not < the fee/profit received and not > 3 times the fee/profit received, determined by the Court

A cease and desist order: May assess an administrative penalty not > $1,000 per day for each violation and require a person to pay an applicant any compensation received

4545

Updates to Texas SAFE Updates to Texas SAFE ActAct

In 2013, changes made to Texas SAFE In 2013, changes made to Texas SAFE in SB in SB 1004, HB 1721, and SB 232

§157.0121 sets forth exemptions from RMLO requirements, including but not limited to the de miminis exemption

Moves and renumbers certain provisions

4646


Finance Code §180.056 gives the SML Commissioner the ability to add additional requirements

Commissioner Foster apparently intends to add a 3 hour requirement on specific Texas legal issues

4747


New test: 100 federal questions – NLMS will grade only 90

25 state questions which are not Texas specific

Texas mortgage loan originators must take an additional 3 hours of pre-licensing education on Texas rules

4848

Dodd Frank Dodd Frank UpdateUpdate

Go to other PowerPoint Go to other PowerPoint presentationpresentation

4949

Laws Affecting Laws Affecting Investor Exit Investor Exit StrategiesStrategies

HB 2783 – Mortgage broker/loan officer HB 2783 – Mortgage broker/loan officer licensure required for a seller of residential licensure required for a seller of residential properties carrying financing on more than properties carrying financing on more than five propertiesfive properties

HB 2207 – Notices required when selling HB 2207 – Notices required when selling residential properties if liens are to remain residential properties if liens are to remain in place more than 30 daysin place more than 30 days

Lease/option issues of the “executory Lease/option issues of the “executory contract” statutecontract” statute

Investor exit Investor exit strategiesstrategies

• Contract for deed - Property Code Contract for deed - Property Code changes in 2001 (changes in 2001 (§ 5.061 et seq.)§ 5.061 et seq.)

• Lease and give the tenant an option Lease and give the tenant an option to buy - Property Code changes in to buy - Property Code changes in 2005 - 2005 - §5.062 (a) (2)§5.062 (a) (2)• A lease for less than three years A lease for less than three years

combined with an option to purchase - combined with an option to purchase - §5.062 (f)§5.062 (f)

• A lease for more than three years A lease for more than three years combined with an option to purchasecombined with an option to purchase

The “executory The “executory contract” statutecontract” statute

This Texas statute affects a residential This Texas statute affects a residential contract for deed and a residential contract for deed and a residential lease with option to purchaselease with option to purchase

Texas Property Code § 5.061 – 5.085Texas Property Code § 5.061 – 5.085

Subchapter D. Executory Contract for Subchapter D. Executory Contract for ConveyanceConveyance


Applies onlyApplies only to a contract for the to a contract for the sale of real property sale of real property usedused or or to be to be usedused as the as the purchaser's residencepurchaser's residence

or as the residence of a person related or as the residence of a person related to the purchaser within the second to the purchaser within the second degree by consanguinity or affinity (a degree by consanguinity or affinity (a close relative of the purchaser)close relative of the purchaser)

§5.062 (a)§5.062 (a)


A lot measuring one acre or less is A lot measuring one acre or less is presumed to be residential property. presumed to be residential property. §5.062 (a)(1)§5.062 (a)(1)

An option to purchase real property An option to purchase real property that includes or is combined or that includes or is combined or executed concurrently with a executed concurrently with a residential lease agreement, together residential lease agreement, together with the lease, is considered an with the lease, is considered an executory contractexecutory contract

§5.062 (a)(2)§5.062 (a)(2)


Does Does notnot apply to a contract that apply to a contract that provides for the delivery of a deed provides for the delivery of a deed from the seller to the purchaser from the seller to the purchaser within 180 dayswithin 180 days of the date of the of the date of the final execution of the contractfinal execution of the contract

§5.062 (c)§5.062 (c)

Only the following Only the following sections apply to a sections apply to a lease lease

with optionwith option if if the term of the contract is the term of the contract is

three years or lessthree years or less and the and the purchaser and sellerpurchaser and seller, or the , or the purchaser's or seller's assignee, purchaser's or seller's assignee, agent, or affiliate, agent, or affiliate, have not been have not been parties to an executory contract parties to an executory contract to purchase the property covered to purchase the property covered by the executory contract for by the executory contract for longer than three years. longer than three years. §5.062 (f)§5.062 (f)

Lease withLease withoption of < 3 yearsoption of < 3 years

Only the following applyOnly the following apply to a lease with to a lease with option of < 3 years:option of < 3 years:– §§§§ 5.063-5.065 ( 5.063-5.065 (notice to be given if default by notice to be given if default by

tenant/optionee, and 30 day right to curetenant/optionee, and 30 day right to cure))– §§ 5.073, except for 5.073, except for §§ 5.073(a)(2) ( 5.073(a)(2) (certain contract certain contract

terms and waivers prohibitedterms and waivers prohibited); and); and– §§ 5.083 ( 5.083 (right to cancel for improper plattingright to cancel for improper platting))– § § 5.085 (5.085 (requirement that the property have requirement that the property have

no liens and that the property be owned in no liens and that the property be owned in fee simple throughout the entire term of the fee simple throughout the entire term of the contractcontract))

§§5.085 – Fee Simple 5.085 – Fee Simple Title RequiredTitle Required

This applies to a lease with an option of This applies to a lease with an option of less than 3 years:less than 3 years:

(a) (a) A potential seller may A potential seller may notnot execute an executory contract execute an executory contract with a potential purchaser with a potential purchaser if the if the seller does not own the property in seller does not own the property in fee simple free from any liensfee simple free from any liens or or other encumbrancesother encumbrances. .

§§5.085 Maintenance5.085 Maintenanceof Fee Simple Titleof Fee Simple Title

(b)(b) Except as provided by this Except as provided by this subsection, subsection, a sellera seller, or the seller's , or the seller's heirs or assigns, heirs or assigns, must maintain fee must maintain fee simple title free from any lienssimple title free from any liens or or other encumbrances to property other encumbrances to property covered by an executory contract covered by an executory contract for for the entire duration of the the entire duration of the contractcontract. .

§§5.085 Maintenance 5.085 Maintenance ofof

Fee Simple TitleFee Simple Title The The requirement to maintain fee requirement to maintain fee

simple titlesimple title does does notnot apply to a lien apply to a lien or or encumbrance encumbrance placed on the propertyplaced on the property that is:that is:

(1) (1) placed on the property placed on the property because of the conduct of the because of the conduct of the purchaserpurchaser;;

(2) (2) agreed to by the purchaser as a agreed to by the purchaser as a condition of a loan obtained to condition of a loan obtained to

place improvements on the place improvements on the property; property; oror


Fee Simple TitleFee Simple Title (3) (3) placed on the property by the placed on the property by the

seller prior to the execution of seller prior to the execution of the contract in exchange for a the contract in exchange for a loan used only to purchase the loan used only to purchase the propertyproperty

IFIF


Fee Simple TitleFee Simple Title (A)(A) the seller, not later than the the seller, not later than the

third day before the date the third day before the date the contract is executed, notifies the contract is executed, notifies the purchaserpurchaser in a separate written in a separate written disclosure:disclosure:– (i) of the (i) of the name, address, and phone number of name, address, and phone number of

the lienholderthe lienholder or, if applicable, servicer of the loan; or, if applicable, servicer of the loan;

– (ii) of (ii) of the loan numberthe loan number and and outstanding balanceoutstanding balance of the loan;of the loan;


Fee Simple TitleFee Simple Title– (iii) of the (iii) of the monthly paymentsmonthly payments due on the due on the

loan and the due date of those payments; loan and the due date of those payments; andand

– (iv) in 14-point type that, (iv) in 14-point type that, if the seller if the seller fails to make timely payments to the fails to make timely payments to the lienholder, the lienholder may lienholder, the lienholder may attempt to collect the debt by attempt to collect the debt by foreclosing on the lien and selling the foreclosing on the lien and selling the property at a foreclosure saleproperty at a foreclosure sale;;

6363


Fee Simple TitleFee Simple Title (B) (B) the lienthe lien::

– (i) (i) is attached only to the property sold is attached only to the property sold to the purchaser under the contract; andto the purchaser under the contract; and

– (ii) (ii) secures indebtedness that, secures indebtedness that, at no at no time, is or will be greater in amount time, is or will be greater in amount than the amount of the total than the amount of the total outstanding balance owed by the outstanding balance owed by the purchaserpurchaser under the executory contract; under the executory contract;


Fee Simple TitleFee Simple Title (C) (C) the the lienholderlienholder::

– (i) (i) does not prohibit the property from does not prohibit the property from being encumbered by an executory being encumbered by an executory contractcontract; and; and

– (ii) (ii) consents to verify the status of the consents to verify the status of the loan on request of the purchaser and loan on request of the purchaser and to accept payments directly from the to accept payments directly from the purchaserpurchaser if the seller defaults on the loan; if the seller defaults on the loan; andand


Fee Simple TitleFee Simple Title (D) (D) the following covenants are the following covenants are

placed in the executory contractplaced in the executory contract::

– (i) (i) a covenant that obligates the seller a covenant that obligates the seller to make timely payments on the loanto make timely payments on the loan and to and to give monthly statementsgive monthly statements to the to the purchaser reflecting the amount paid to the purchaser reflecting the amount paid to the lienholder, the date the lienholder receives lienholder, the date the lienholder receives the payment, and the information described the payment, and the information described by Paragraph (A); by Paragraph (A);


Fee Simple TitleFee Simple Title– (ii) (ii) a covenant that obligates the seller, a covenant that obligates the seller,

not later than the third day [after] the not later than the third day [after] the seller receives or has actual knowledge of seller receives or has actual knowledge of a document or an event described by this a document or an event described by this subparagraph, to notify the purchasersubparagraph, to notify the purchaser in in writing in 14-point type writing in 14-point type that the seller has that the seller has been sent a notice of defaultbeen sent a notice of default, notice of , notice of acceleration, or notice of foreclosure or has acceleration, or notice of foreclosure or has been sued in connection with a lien on the been sued in connection with a lien on the property and to property and to attach a copy of all related attach a copy of all related documents receiveddocuments received to the written notice; to the written notice; and and


Fee Simple TitleFee Simple Title– (iii) a covenant that warrants that (iii) a covenant that warrants that if the seller if the seller

does not make timely paymentsdoes not make timely payments on the on the loan or any other indebtedness secured by the loan or any other indebtedness secured by the property, the property, the purchaser maypurchaser may, without notice, , without notice, cure any deficiencycure any deficiency with a lienholder directly with a lienholder directly and deductand deduct from the total outstanding from the total outstanding balance owed by the purchaser under the balance owed by the purchaser under the executory contract, without the necessity of executory contract, without the necessity of judicial action, judicial action, 150 percent of any amount 150 percent of any amount paidpaid to the lienholder. *What if tenant doesn’t to the lienholder. *What if tenant doesn’t pay landlord and then pays lender? pay landlord and then pays lender?

Violation - remediesViolation - remedies (c) (c) A violationA violation of this section: of this section:

– (1) (1) is a false, misleading, or is a false, misleading, or deceptive act or practicedeceptive act or practice within within the meaning of § 17.46, Business & the meaning of § 17.46, Business & Commerce Code, and Commerce Code, and is actionable is actionable in a public or private suitin a public or private suit brought brought under Subchapter E, Chapter 17, under Subchapter E, Chapter 17, Business & Commerce Code; and Business & Commerce Code; and

Violation - remediesViolation - remedies

– (2) in addition to other rights or (2) in addition to other rights or remedies provided by law, remedies provided by law, entitles the entitles the purchaser to cancel and rescind the purchaser to cancel and rescind the executory contract and receive executory contract and receive from the sellerfrom the seller::

(A) (A) the return of all payments of any the return of all payments of any kind made to the seller under the kind made to the seller under the contractcontract; and; and

Violation - remediesViolation - remedies

(B) (B) reimbursement forreimbursement for::

– (i) (i) any payments the purchaser any payments the purchaser made to a taxing authoritymade to a taxing authority for the for the property; andproperty; and

– (ii) (ii) the value of any improvements the value of any improvements made to the property by the made to the property by the purchaserpurchaser..

What if the What if the tenant/optionee/buyer tenant/optionee/buyer defaults? Sec. 5.064defaults? Sec. 5.064

A seller may enforce the remedy of rescission or of A seller may enforce the remedy of rescission or of forfeitureforfeiture and acceleration against a purchaser and acceleration against a purchaser only ifonly if::

(1) the (1) the seller notifies the purchaser ofseller notifies the purchaser of::

– (A) the (A) the seller's intent to enforce a remedyseller's intent to enforce a remedy; and; and

– (B) the (B) the purchaser's right to cure the default within 30-dayspurchaser's right to cure the default within 30-days ;;

(2) (2) the purchaser fails to cure the default within the 30-the purchaser fails to cure the default within the 30-daysdays; and; and

(3) (3) § 5.066 does not apply§ 5.066 does not apply (5.066 addresses a situation (5.066 addresses a situation where the purchaser defaults after having paid where the purchaser defaults after having paid 40% or more40% or more of the amount due or the equivalent of of the amount due or the equivalent of 48 monthly 48 monthly paymentspayments))

Contract terms andContract terms andcertain waivers certain waivers

prohibitedprohibitedA seller may A seller may notnot include as a term of the include as a term of the executory contract a provision thatexecutory contract a provision that::

imposes an additional late-payment fee imposes an additional late-payment fee that exceeds that exceeds the lesser ofthe lesser of::

eight percent of the monthly paymenteight percent of the monthly payment under the contract; or under the contract; or

the actual administrative costthe actual administrative cost of processing the late of processing the late payment;payment;

imposes a prepayment penalty or any similar imposes a prepayment penalty or any similar fee fee if the purchaser elects to pay if the purchaser elects to pay the entire the entire amount due under the contract before the amount due under the contract before the scheduled payment date under the contractscheduled payment date under the contract


prohibitedprohibitedA A seller may seller may notnot include as a term of the include as a term of the executory contract a provision thatexecutory contract a provision that::

forfeits an option feeforfeits an option fee or other option or other option payment paid under the contract for a payment paid under the contract for a late payment; orlate payment; or

increases the purchase price, imposes a increases the purchase price, imposes a fee or charge of any type, or otherwise fee or charge of any type, or otherwise penalizes a purchaser leasing property penalizes a purchaser leasing property with an option to buy the property for with an option to buy the property for requesting repairs or exercising any requesting repairs or exercising any other right under Chapter 92.(b)other right under Chapter 92.(b)


prohibitedprohibited– A provision of the executory contract A provision of the executory contract

that purports to waive a right or that purports to waive a right or exempt a party from a liability or duty exempt a party from a liability or duty under this subchapter is voidunder this subchapter is void..

– Amended by Acts 2005, 79th Leg., ch. Amended by Acts 2005, 79th Leg., ch. 978, § 4, eff. Sept. 1, 2005. 978, § 4, eff. Sept. 1, 2005.

Property Code Property Code §§ 5.0165.016

Sec. 5.016. CONVEYANCE OF Sec. 5.016. CONVEYANCE OF RESIDENTIAL PROPERTY RESIDENTIAL PROPERTY ENCUMBERED BY LIEN.ENCUMBERED BY LIEN.

Selling residential propertySelling residential propertysubject to existing liens when the subject to existing liens when the liens remain in place more than liens remain in place more than 30 days30 days


A person A person may notmay not convey an interest in or convey an interest in or enter into a contractenter into a contract to convey an interest to convey an interest in residential real property in residential real property that will be that will be encumbered by a recorded lienencumbered by a recorded lien at the time at the time the interest is conveyed the interest is conveyed unlessunless, on or before , on or before the the seventh day before the earlier of the seventh day before the earlier of the effective dateeffective date of the conveyance or the of the conveyance or the execution of an executory contract binding the execution of an executory contract binding the purchaser to purchase the property, an option purchaser to purchase the property, an option contract, or other contract, contract, or other contract, the personthe person provides the purchaser and each provides the purchaser and each lienholder a separate written disclosure lienholder a separate written disclosure statement in at least 12-point typestatement in at least 12-point type


The disclosure statement must include The disclosure statement must include information that:information that:

(1) identifies the property and (1) identifies the property and includes the name, address, and includes the name, address, and phone number of each lienholder;phone number of each lienholder;

(2) states (2) states the amount of the debtthe amount of the debt that is secured by each lien;that is secured by each lien;


(3) (3) specifies the termsspecifies the terms of any of any contract or law under which the contract or law under which the debt that is secured by the lien was debt that is secured by the lien was incurred, including, as applicable:incurred, including, as applicable:– (A) the (A) the rate of interestrate of interest;;– (B) the periodic (B) the periodic installmentsinstallments

required to be paid; andrequired to be paid; and– (C) the (C) the account numberaccount number;;


(4) indicates (4) indicates whether the lienholder whether the lienholder has consentedhas consented to the transfer of the to the transfer of the property to the purchaser;property to the purchaser;

(5) specifies the (5) specifies the details of any details of any insuranceinsurance policy relating to the policy relating to the property, including:property, including:– (A) the (A) the name of the insurer and insuredname of the insurer and insured;;– (B) the (B) the amountamount for which the property is for which the property is

insured; andinsured; and– (C) the (C) the propertyproperty that is insured; that is insured;


(6) states the amount of any (6) states the amount of any property taxesproperty taxes that are due on that are due on the property; andthe property; and


(7) (7) includes a statementincludes a statement at the top of the disclosure at the top of the disclosure in a form substantially similar to the following:in a form substantially similar to the following:

WARNING: ONE OR MORE RECORDED LIENS WARNING: ONE OR MORE RECORDED LIENS HAVE BEEN FILED THAT MAKE A CLAIM AGAINST HAVE BEEN FILED THAT MAKE A CLAIM AGAINST THIS PROPERTY AS LISTED BELOW. IF A LIEN IS THIS PROPERTY AS LISTED BELOW. IF A LIEN IS NOT RELEASED AND THE PROPERTY IS NOT RELEASED AND THE PROPERTY IS CONVEYED WITHOUT THE CONSENT OF THE CONVEYED WITHOUT THE CONSENT OF THE LIENHOLDER, IT IS POSSIBLE THE LIENHOLDER LIENHOLDER, IT IS POSSIBLE THE LIENHOLDER COULD DEMAND FULL PAYMENT OF THE COULD DEMAND FULL PAYMENT OF THE OUTSTANDING BALANCE OF THE LIEN OUTSTANDING BALANCE OF THE LIEN IMMEDIATELY. YOU MAY WISH TO CONTACT IMMEDIATELY. YOU MAY WISH TO CONTACT EACH LIENHOLDER FOR FURTHER INFORMATION EACH LIENHOLDER FOR FURTHER INFORMATION AND DISCUSS THIS MATTER WITH AN ATTORNEY.AND DISCUSS THIS MATTER WITH AN ATTORNEY.


A A violation of the new act does not violation of the new act does not invalidate a conveyanceinvalidate a conveyance..

... If a contract is entered into without the ... If a contract is entered into without the seller providing the notice required by this seller providing the notice required by this section, the section, the purchaser may terminate purchaser may terminate the contract for any reason on or the contract for any reason on or before the seventh day after the date before the seventh day after the date the purchaser receives the noticethe purchaser receives the notice in in addition to other remedies provided by this addition to other remedies provided by this section or other law.section or other law.


The statute does not apply to a transfer:The statute does not apply to a transfer: (1) under a court order or foreclosure (1) under a court order or foreclosure

sale;sale; (2) by a trustee in bankruptcy;(2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or (3) to a mortgagee by a mortgagor or

successor in interest or to a beneficiary successor in interest or to a beneficiary of a deed of trust by a trustor or of a deed of trust by a trustor or successor in interest;successor in interest;


(4) by a mortgagee or a beneficiary (4) by a mortgagee or a beneficiary under a deed of trust who has under a deed of trust who has acquired the real property at a sale acquired the real property at a sale conducted under a power of sale conducted under a power of sale under a deed of trust or a sale under a deed of trust or a sale under a court-ordered foreclosure under a court-ordered foreclosure or has acquired the real property by or has acquired the real property by a deed in lieu of foreclosure;a deed in lieu of foreclosure;


(5) by a fiduciary in the course of the (5) by a fiduciary in the course of the administration of a decedent's estate, administration of a decedent's estate, guardianship, conservatorship, or trust;guardianship, conservatorship, or trust;

(6) (6) from one co-owner to one or from one co-owner to one or more other co-ownersmore other co-owners;;

(7) (7) to a spouseto a spouse or to a person or or to a person or persons in the lineal line of consanguinity persons in the lineal line of consanguinity of one or more of the transferors;of one or more of the transferors;


(8) (8) between spousesbetween spouses resulting from resulting from a decree of dissolution of marriage or a decree of dissolution of marriage or a decree of legal separation or from a a decree of legal separation or from a property settlement agreement property settlement agreement incidental to one of those decrees;incidental to one of those decrees;

(9) to or from a governmental entity;(9) to or from a governmental entity;


(10) (10) where the purchaser obtains where the purchaser obtains a title insurance policy insuring a title insurance policy insuring the transfer of titlethe transfer of title to the real to the real property; orproperty; or

(11) to a person who has purchased, (11) to a person who has purchased, conveyed, or entered into contracts to conveyed, or entered into contracts to purchase or convey an interest in real purchase or convey an interest in real property four or more times in the property four or more times in the preceding 12 months.preceding 12 months.


A violation of this section is not A violation of this section is not actionable if the person required to actionable if the person required to give notice reasonably believes and give notice reasonably believes and takes any necessary action to ensure takes any necessary action to ensure that each lien for which notice was that each lien for which notice was not provided will be released on or not provided will be released on or before the 30th day after the date on before the 30th day after the date on which title to the property is which title to the property is transferred. transferred.


Problem areas:Problem areas:

– What is the buyer’s remedy if there is no What is the buyer’s remedy if there is no contract, or the transaction has closed and contract, or the transaction has closed and the seller has already executed and the seller has already executed and delivered a deed to the buyer without delivered a deed to the buyer without giving the required notices? Can the giving the required notices? Can the buyer get his money back and undo the buyer get his money back and undo the transaction?transaction?


Failure to provide does not void any conveyance, but a buyer may terminate the purchase within seven days after receipt of the notice.

Alternatives to the Alternatives to the conventional when conventional when

buyingbuying Contract for deedContract for deed Subject to existing loanSubject to existing loan Lease or subleaseLease or sublease Lease with an optionLease with an option Acquire the beneficial interest in a Acquire the beneficial interest in a

trusttrust Sign a contract and then assign the Sign a contract and then assign the

contractcontract *Wrap the existing lien - recommended*Wrap the existing lien - recommended9292

Alternatives to the Alternatives to the conventional when conventional when

sellingselling Contract for deedContract for deed Subject to existing loanSubject to existing loan Lease or subleaseLease or sublease Lease with an optionLease with an option Sell the beneficial interest in a trustSell the beneficial interest in a trust Sell the interest in a legal entitySell the interest in a legal entity Contract and assign the contractContract and assign the contract *Wrap the existing lien - recommended*Wrap the existing lien - recommended

9393

Benefits of owning real Benefits of owning real estate?estate?

Use of the propertyUse of the property– Includes income from the use of the Includes income from the use of the

property (rent)property (rent)

Profit from the sale of the propertyProfit from the sale of the property

Tax benefits Tax benefits 9494

How do you make How do you make money investing in money investing in

real estate?real estate? 1. 1. Buy low and sell highBuy low and sell high

2. 2. Buy, hold, and generate incomeBuy, hold, and generate income

3. 3. Contract to acquire an interest, Contract to acquire an interest, and then sell or assign your and then sell or assign your

contractcontract9595

Traditional approachTraditional approach

Investor enters into a contract, Investor enters into a contract, buys with a new loan, rents to a buys with a new loan, rents to a tenant, sells to a buyer who gets a tenant, sells to a buyer who gets a new loannew loan

Investor doesn’t take risk that a Investor doesn’t take risk that a lender might call the existing note lender might call the existing note immediately due and payableimmediately due and payable 9696

Conventional Conventional contractingcontracting

Use a real estate professionalUse a real estate professional Use standard contract formsUse standard contract forms

– TREC - Texas Real Estate CommissionTREC - Texas Real Estate Commission– TAR - Texas Association of RealtorsTAR - Texas Association of Realtors– NTCAR - North Texas Commercial NTCAR - North Texas Commercial

Association of RealtorsAssociation of Realtors Close through a title companyClose through a title company Get and record a deed at closingGet and record a deed at closing

9797

Conventional financing Conventional financing when buyingwhen buying

Use your own cash (limited Use your own cash (limited capability for most)capability for most)

Get a new loan or assume an Get a new loan or assume an existing loanexisting loan

Receive and record a deed from Receive and record a deed from the sellerthe seller

Close through a title companyClose through a title company9898

Conventional financingConventional financing Conventional financingConventional financing

– Must qualify but best interest rates Must qualify but best interest rates – Personal liability and Personal liability and loan is loan is due on saledue on sale

Private conventional financingPrivate conventional financing– Higher interestHigher interest– More flexible in qualifying, but still must More flexible in qualifying, but still must

qualify, and loan is due on salequalify, and loan is due on sale– Personal liabilityPersonal liability

Hard money lenderHard money lender IRA lenderIRA lender Family lenderFamily lender

9999

Conventional Conventional assumption of existing assumption of existing

loanloan Assume seller’s existing loan Assume seller’s existing loan

Must qualify to assume the loanMust qualify to assume the loan

Personal liabilityPersonal liability

100100

Why not buy using Why not buy using conventional approach conventional approach

today?today? More difficult for the buyer to qualify More difficult for the buyer to qualify

for a new loanfor a new loan Personal liability and due on salePersonal liability and due on sale Market uncertainty Market uncertainty Cash is limited and is at riskCash is limited and is at risk It may be easier in today’s market to It may be easier in today’s market to

find a motivated seller for whom the find a motivated seller for whom the traditional approach won’t worktraditional approach won’t work

101101

Why not sell using Why not sell using conventional approach conventional approach

today?today? More difficult for a buyer to qualify More difficult for a buyer to qualify

for a new loanfor a new loan It may be easier and more profitable It may be easier and more profitable

in today’s market to rent to a tenantin today’s market to rent to a tenant It may be easier in today’s market to It may be easier in today’s market to

find a motivated buyer for whom the find a motivated buyer for whom the traditional approach won’t worktraditional approach won’t work

More of a need to sell quicklyMore of a need to sell quickly102102

Downward pressure on Downward pressure on property valuesproperty values

Fewer buyers who are qualified to get a Fewer buyers who are qualified to get a new loannew loan

Lots of foreclosed properties held by Lots of foreclosed properties held by lenderslenders

Lots of people out of workLots of people out of work More people may lose their jobsMore people may lose their jobs More sellers who need to sellMore sellers who need to sell Government is currently laying off Government is currently laying off

workersworkers Government is increasing taxesGovernment is increasing taxes

103103

Why continue to invest Why continue to invest in real estate today?in real estate today?

Government spending without Government spending without taxing will likely lead to inflation of taxing will likely lead to inflation of capital assets such as real estatecapital assets such as real estate

Growth in population in certain Growth in population in certain geographic marketsgeographic markets

Better opportunities to rentBetter opportunities to rent Pent up demand may cause a spike Pent up demand may cause a spike

in pricesin prices Tax advantagesTax advantages

104104

Why should an investorWhy should an investorconsider using leverage consider using leverage

now?now?

Likely higher interest rates in the Likely higher interest rates in the future due to inflationary expectationsfuture due to inflationary expectations

Motivated sellers in today’s market Motivated sellers in today’s market may be more inclined to offer non-may be more inclined to offer non-recourse, no personal liability recourse, no personal liability financingfinancing

105105

Risk factors of buyingRisk factors of buyingsubject to an existing subject to an existing

loanloan Due on sale risk – too much attention paid to this?Due on sale risk – too much attention paid to this?

– Risk of shark attacks and airplane travel vs. Risk of shark attacks and airplane travel vs. taking a showertaking a shower

Title and survey risks – Cash at risk? Equity at risk?Title and survey risks – Cash at risk? Equity at risk?– Title insurance and new survey – costs vs. protectionTitle insurance and new survey – costs vs. protection– Previous title insurance for owner and conventional lenderPrevious title insurance for owner and conventional lender– Wrong seller or missing link in chain of titleWrong seller or missing link in chain of title– LiensLiens– DeathDeath– BankruptcyBankruptcy– IRSIRS– Judgment creditorsJudgment creditors

106106


loanloan What if underlying loan is calledWhat if underlying loan is called

– No equity / some equity / lots of equityNo equity / some equity / lots of equity– Inflationary expectations / higher market interest ratesInflationary expectations / higher market interest rates

How do you limit/prevent lawsuits by sellers and How do you limit/prevent lawsuits by sellers and buyersbuyers– Comply with the lawComply with the law– Disclose risks in writing and have it signedDisclose risks in writing and have it signed– Record documents?Record documents?– Get evidence of delivering documentsGet evidence of delivering documents

What about possible lawsuits by underlying lendersWhat about possible lawsuits by underlying lenders Insurance issuesInsurance issues

– Show ownership and obtain proper endorsementsShow ownership and obtain proper endorsements107107


loanloan Compare these risks with the risk Compare these risks with the risk

of of personal liabilitypersonal liability Compare these risks with the risk Compare these risks with the risk

of of cashcash invested invested Compare these risks with the Compare these risks with the costscosts

of conventional financingof conventional financing– Interest rates may be lowerInterest rates may be lower– Insurance costs may be lower Insurance costs may be lower

108108

Benefits to the investor Benefits to the investor of having the seller of having the seller

finance your purchasefinance your purchase Lower the financial riskLower the financial risk

– Ability to negotiate terms that are not typically Ability to negotiate terms that are not typically available from institutional lendersavailable from institutional lenders

No or low interestNo or low interest No prepayment penalty – maybe even a discount to pay earlyNo prepayment penalty – maybe even a discount to pay early No points up frontNo points up front No required survey or title insurance policy costsNo required survey or title insurance policy costs No requirement to have to escrow taxes or insuranceNo requirement to have to escrow taxes or insurance No qualifying ratiosNo qualifying ratios No loan processing costsNo loan processing costs No limit to the number of loans you can have or properties you No limit to the number of loans you can have or properties you

can owncan own

109109


finance your purchasefinance your purchase Lower the legal riskLower the legal risk

No personal liability -No personal liability -– The sole recourse of the owner/seller/lender is to foreclose The sole recourse of the owner/seller/lender is to foreclose

on the property - no deficiency judgment on the property - no deficiency judgment – Provide that the seller/lender will accept a deed in lieu of Provide that the seller/lender will accept a deed in lieu of

foreclosure from the borrowerforeclosure from the borrower Ability to control the payment processAbility to control the payment process

– Provide for the option to pay the underlying lender directlyProvide for the option to pay the underlying lender directly Ability to control the communication processAbility to control the communication process

– Obtain the right to communicate with the Obtain the right to communicate with the underlying lenderunderlying lender

(a power of attorney implies fiduciary duties, so a (a power of attorney implies fiduciary duties, so a simple authorization directing the underlying lender to simple authorization directing the underlying lender to communicate with the investor should sufficecommunicate with the investor should suffice

– Provide for notices to be sent to the investorProvide for notices to be sent to the investor110110

Residential investor Residential investor strategiesstrategies

Buy a house and rent itBuy a house and rent it• Pay as low a price as can be negotiatedPay as low a price as can be negotiated• Use as little cash as possibleUse as little cash as possible• Use somebody else’s money to finance the Use somebody else’s money to finance the

purchase/fix-uppurchase/fix-up• Try to find a tenant to rent itTry to find a tenant to rent it• Hope that the net rent after debt service, taxes, Hope that the net rent after debt service, taxes,

insurance, repairs, and costs of leasing/managing insurance, repairs, and costs of leasing/managing the property will generate a positive cash flow, will the property will generate a positive cash flow, will provide an appropriate rate of return given the risk provide an appropriate rate of return given the risk and the management intensive nature of the and the management intensive nature of the investment, and will eventually retire the debt.investment, and will eventually retire the debt.

• Hopefully the investor will be able to take Hopefully the investor will be able to take depreciation deductions that will reduce the amount depreciation deductions that will reduce the amount of income taxes to be paid.of income taxes to be paid.

Residential investor Residential investor strategiesstrategies

Buy a house, fix it up, and resell itBuy a house, fix it up, and resell it• Pay as low a price as can be negotiatedPay as low a price as can be negotiated• Use as little cash as possibleUse as little cash as possible• Use somebody else’s money to finance the Use somebody else’s money to finance the

purchase and fix-uppurchase and fix-up• Try to find a buyer who will pay cash or get a new Try to find a buyer who will pay cash or get a new

loan to pay the purchase price, and hope that the loan to pay the purchase price, and hope that the net sale proceeds will be higher than the net sale proceeds will be higher than the investor’s cost basis in the property, and provide investor’s cost basis in the property, and provide an appropriate rate of return given the risk and an appropriate rate of return given the risk and the management intensive nature of the the management intensive nature of the investmentinvestment

• Hopefully the investor will be entitled to long term Hopefully the investor will be entitled to long term capital gain treatment that will reduce the amount capital gain treatment that will reduce the amount of income taxes to be paid.of income taxes to be paid.

Purchase financing Purchase financing optionsoptions

• Pay cashPay cash• Assume an existing loan Assume an existing loan (personal (personal

liability)liability)• Get a new loan Get a new loan (personal liability)(personal liability)• Get the owner to finance all or some of Get the owner to finance all or some of

the purchase pricethe purchase price• Give the seller a first (if no other loans), or a Give the seller a first (if no other loans), or a

second second (personal liability or no personal liability)(personal liability or no personal liability)• Give the seller a wraparound or all-inclusive Give the seller a wraparound or all-inclusive

note note (personal liability or no personal liability)(personal liability or no personal liability)• Buy subject to the existing debt Buy subject to the existing debt (no (no

personal liability)personal liability)


• Rent and pay off debtRent and pay off debt

• Resell and give the buyer a deedResell and give the buyer a deed• Get cash from buyerGet cash from buyer• Buyer gets a new loanBuyer gets a new loan• Buyer assumes the seller’s loanBuyer assumes the seller’s loan


• Resell and give the buyer a deedResell and give the buyer a deed

• Seller carries a note secured by a deed of Seller carries a note secured by a deed of trust for some or all of the financed trust for some or all of the financed purchase pricepurchase price

• Seller carries a wraparound or all-Seller carries a wraparound or all-inclusive note secured by a deed of inclusive note secured by a deed of trust for all of the financed purchase trust for all of the financed purchase priceprice


• Contract for deed - Property Code Contract for deed - Property Code changes in 2001 (changes in 2001 (§ 5.061 et seq.)§ 5.061 et seq.)

• Lease and give the tenant an option Lease and give the tenant an option to buy - Property Code changes in to buy - Property Code changes in 2005 - 2005 - §5.062 (a) (2)§5.062 (a) (2)• A lease for less than three years A lease for less than three years

combined with an option to purchase - combined with an option to purchase - §5.062 (f)§5.062 (f)

• A lease for more than three years A lease for more than three years combined with an option to purchasecombined with an option to purchase

Keys to successKeys to successin owner financingin owner financing

Don’t play if you can’t pay.Don’t play if you can’t pay. Don’t buy property if you can’t Don’t buy property if you can’t

afford to independently service afford to independently service the debt for a reasonable period the debt for a reasonable period of time.of time.

The two primary reasons business failThe two primary reasons business fail– Inadequate capitalInadequate capital– Lack of managerial experience Lack of managerial experience

An example of an An example of an investor purchasing investor purchasing

property using a property using a wraparound loanwraparound loan

Mr. and Ms. Stone bought a house in 2006.Mr. and Ms. Stone bought a house in 2006. They paid $150K, put down $15K, and borrowed They paid $150K, put down $15K, and borrowed

$135K from Big Mortgage.$135K from Big Mortgage. The interest rate on the loan was 7.25%, and their The interest rate on the loan was 7.25%, and their

monthly payment, amortized over 25 years, was monthly payment, amortized over 25 years, was $975.79.$975.79.

After paying for three years, their principal balance After paying for three years, their principal balance was $128,580.was $128,580.

Then Ms. Stone got hurt, and Mr. Stone lost his job.Then Ms. Stone got hurt, and Mr. Stone lost his job. Unfortunately, the house is now only worth $140K.Unfortunately, the house is now only worth $140K.


property using a property using a wraparound loanwraparound loan

They need to sell, list the property, but realize that They need to sell, list the property, but realize that would have to come out of pocket cash they don’t would have to come out of pocket cash they don’t have if they have to pay their commission and have if they have to pay their commission and closing costs. The listing expires. They are now closing costs. The listing expires. They are now three payments in arrears, totaling more than $3K.three payments in arrears, totaling more than $3K.

An investor approaches them to see if they are An investor approaches them to see if they are willing to sell for the amount of their debt.willing to sell for the amount of their debt.

The lender is asked if it will waive the due on sale The lender is asked if it will waive the due on sale clause if the loan is brought current. The lender clause if the loan is brought current. The lender declines or does not respond to the request declines or does not respond to the request (typical)(typical)

The Stones decide to sell to Investor using a wrap.The Stones decide to sell to Investor using a wrap.


property using a property using a wraparound loanwraparound loan The investor’s LLC gives a non-recourse, no The investor’s LLC gives a non-recourse, no

personal liability note to the Jones, in an amount personal liability note to the Jones, in an amount exactly equal to their principal balance when the exactly equal to their principal balance when the loan is brought current.loan is brought current.

The investor’s LLC gets a deed from the Stones, The investor’s LLC gets a deed from the Stones, and then gives the Stones a deed of trust that and then gives the Stones a deed of trust that will give them the right to foreclose if the will give them the right to foreclose if the wraparound loan isn’t paid.wraparound loan isn’t paid.

The Jones sign an affidavit, stating that they The Jones sign an affidavit, stating that they understand that understand that Big Mortgage might call Big Mortgage might call their note duetheir note due, and that they still owe the debt., and that they still owe the debt.

The investor and the Stones decide to take that The investor and the Stones decide to take that risk.risk.

An example of an An example of an investor selling property investor selling property using a wraparound loanusing a wraparound loan

Investor’s LLC, having a recorded deed from Investor’s LLC, having a recorded deed from the Jones, advertises the property for sale with the Jones, advertises the property for sale with owner financing as a possibility.owner financing as a possibility.

Bill Blast, who has $12K in cash, wants to buy Bill Blast, who has $12K in cash, wants to buy the house, but he can’t qualify by the house, but he can’t qualify by conventional standards to obtain a new loan conventional standards to obtain a new loan to pay off the $128,500 that is still owed.to pay off the $128,500 that is still owed.

Investor’s LLC decides to sell the property to Investor’s LLC decides to sell the property to Bill Blast for $140K, with $10 down, and with Bill Blast for $140K, with $10 down, and with the balance of the purchase price carried by the balance of the purchase price carried by the investor in the form of a wraparound note.the investor in the form of a wraparound note.

An example of an An example of an investor selling property investor selling property using a wraparound loanusing a wraparound loan

Bill Blast gets a deed, and gives a wraparound Bill Blast gets a deed, and gives a wraparound note to Investor’s LLC for $130K, with interest note to Investor’s LLC for $130K, with interest at 9% for 20 years. Bill’s payment is at 9% for 20 years. Bill’s payment is $1,169.64. He signs a wraparound deed of $1,169.64. He signs a wraparound deed of trust, closes at a title company, takes trust, closes at a title company, takes possession and starts making payments.possession and starts making payments.

Bill’s payments of $1,169.64 are made to Bill’s payments of $1,169.64 are made to Investor’s LLC, which in turn pays Big Investor’s LLC, which in turn pays Big Mortgage $975.79 monthly.Mortgage $975.79 monthly.

Investor’s LLC has ordinary income, and Investor’s LLC has ordinary income, and interest income, on which it must pay taxes.interest income, on which it must pay taxes.

Risks of using wraparound Risks of using wraparound notes and deeds of trust to notes and deeds of trust to

buy property in Texasbuy property in Texas The underlying lender might exercise its The underlying lender might exercise its

rights under the "due on sale" or "due on rights under the "due on sale" or "due on transfer" clause and require the underlying transfer" clause and require the underlying loan to be paid immediately.loan to be paid immediately.

Both the buyer and the seller must Both the buyer and the seller must clearly be made aware of this risk and clearly be made aware of this risk and be willing to take the riskbe willing to take the risk, having been , having been fully apprised of the possible consequences.fully apprised of the possible consequences.

It might be more difficult to convince the It might be more difficult to convince the IRS as to which party should be entitled to IRS as to which party should be entitled to certain tax benefits.certain tax benefits.

Risks of using wraparound Risks of using wraparound notes and deeds of trust to notes and deeds of trust to

buy property in Texasbuy property in Texas The underlying lender might exercise its The underlying lender might exercise its

rights under the "due on sale" or "due rights under the "due on sale" or "due on transfer" clause and require the on transfer" clause and require the underlying loan to be paid immediately.underlying loan to be paid immediately.

Both the buyer and the seller must clearly be Both the buyer and the seller must clearly be made aware of this risk and be willing to take made aware of this risk and be willing to take the risk, having been fully apprised of the the risk, having been fully apprised of the possible consequences.possible consequences.

It might be more difficult to convince the IRS It might be more difficult to convince the IRS as to which party should be entitled to certain as to which party should be entitled to certain tax benefits.tax benefits.

When buying, what are When buying, what are the investor’s optionsthe investor’s options

Pay cashPay cash Get a new loan (full recourse, personal Get a new loan (full recourse, personal

liability, substantial closing costs)liability, substantial closing costs) Assume an existing loan (full recourse, Assume an existing loan (full recourse,

personal liability, closing costs)personal liability, closing costs) Get a deed from the seller subject to the Get a deed from the seller subject to the

existing debt (sometimes includes express existing debt (sometimes includes express language that the buyer is not personally language that the buyer is not personally liable for paying the seller's existing debt, liable for paying the seller's existing debt, and is not assuming the debt)and is not assuming the debt)

Why not borrow the Why not borrow the money?money?

““Of the five borrowers who qualified for a Of the five borrowers who qualified for a given loan one year ago, only one qualifies given loan one year ago, only one qualifies todaytoday.” – Dan Duran, Ron Legrand’s .” – Dan Duran, Ron Legrand’s Workshop – 11/8/2009Workshop – 11/8/2009

““A bank is a place that will lend you A bank is a place that will lend you money if you can prove that you don't money if you can prove that you don't need it.need it.” – Bob Hope” – Bob Hope

““Remember that Remember that credit is moneycredit is money..” – ” – Benjamin FranklinBenjamin Franklin

““Rather go to bed with out dinner than to rise Rather go to bed with out dinner than to rise in debt.in debt.” – Benjamin Franklin ” – Benjamin Franklin

Institutional lenders take no prisoners.Institutional lenders take no prisoners.

Another optionAnother option

Seller financing where the seller Seller financing where the seller carries back a note for part of the carries back a note for part of the purchase price, the buyer pays purchase price, the buyer pays the seller, and the seller pays his the seller, and the seller pays his underlying note – “wraparound” underlying note – “wraparound” or “all-inclusive” seller financingor “all-inclusive” seller financing

Owner financing with a wrap Owner financing with a wrap instead of buying subject to instead of buying subject to

existing debtexisting debt Problem: Most lay buyers and sellers, as well as lawyers, Problem: Most lay buyers and sellers, as well as lawyers,

judges, and real estate brokers, have problems understanding judges, and real estate brokers, have problems understanding buying subject to an existing debt.buying subject to an existing debt.

Because the seller does not have a contractual remedy (can't Because the seller does not have a contractual remedy (can't sell the property or refinance the debt) in the event that the sell the property or refinance the debt) in the event that the seller's loan is not paid by the buyer, sellers will often sue the seller's loan is not paid by the buyer, sellers will often sue the buyer and allege fraud or misrepresentation against the buyer and allege fraud or misrepresentation against the buyer.buyer.

Solution: Give the seller the sole remedy of foreclosure (with Solution: Give the seller the sole remedy of foreclosure (with no personal liability against the buyer) if the buyer doesn't no personal liability against the buyer) if the buyer doesn't pay the seller's loan.pay the seller's loan.

Consider negotiating for the right of the seller to execute and Consider negotiating for the right of the seller to execute and deliver and file a deed of the property back into the name of deliver and file a deed of the property back into the name of the seller. the seller.

Problem: The owner is Problem: The owner is motivated to sell, and motivated to sell, and

he:he: Needs cashNeeds cash Is in default of his mortgageIs in default of his mortgage Can’t afford the mortgage paymentsCan’t afford the mortgage payments Needs to sell but he can’t afford to come Needs to sell but he can’t afford to come

out of pocket to close the sale by paying out of pocket to close the sale by paying all the debts, commissions, and closing all the debts, commissions, and closing costscosts

Can’t afford to maintain or fix up the Can’t afford to maintain or fix up the propertyproperty

Wants out for whatever reasonWants out for whatever reason

Opportunity: Get the owner Opportunity: Get the owner to carry part of all of the to carry part of all of the

financingfinancing If the property is free and clear, see how If the property is free and clear, see how

much of the purchase price the owner much of the purchase price the owner will finance in the form of a loan secured will finance in the form of a loan secured by the propertyby the property

If the property has some debt, see if the If the property has some debt, see if the loan is assumable, or if the owner will loan is assumable, or if the owner will finance some of the purchase pricefinance some of the purchase price

Problem: What if the property has lots of Problem: What if the property has lots of debt relative to the fair market value?debt relative to the fair market value?

Opportunity: Get the Opportunity: Get the owner to carry all of the owner to carry all of the

financingfinancing The owner may be willing to leave his The owner may be willing to leave his

existing loan in place, and finance existing loan in place, and finance your purchase by taking back a loan your purchase by taking back a loan from you in an amount exactly equal from you in an amount exactly equal to the amount of the debt he owes.to the amount of the debt he owes.

You may be able to get the exact You may be able to get the exact same terms from him as he has on same terms from him as he has on his existing loan.his existing loan.

You will pay him, and he will then pay You will pay him, and he will then pay his lender.his lender.

More reasons for the investor More reasons for the investor to want to use owner financing to want to use owner financing

to buy?to buy?You are more likely to:You are more likely to:• Qualify for the loan since the motivated Qualify for the loan since the motivated

seller is the one making the loanseller is the one making the loan• Be able to buy and close quicklyBe able to buy and close quickly• Not have to pay pointsNot have to pay points• Not have to pay appraisal feesNot have to pay appraisal fees• Not have to pay origination and other fees Not have to pay origination and other fees

normally associated with an institutional normally associated with an institutional loan loan

• Not have to pay other closing costs Not have to pay other closing costs associated with a new loanassociated with a new loan

Where do you find motivated Where do you find motivated sellers that will do owner sellers that will do owner

financing?financing?Foreclosure lists – non-judicial and judicial foreclosuresForeclosure lists – non-judicial and judicial foreclosuresIRS foreclosure recordsIRS foreclosure recordsProperty tax foreclosure recordsProperty tax foreclosure recordsSheriff or constable execution salesSheriff or constable execution salesCondo association and property owners association foreclosuresCondo association and property owners association foreclosuresCourt records of persons being sued (if they own property)Court records of persons being sued (if they own property)Divorce court recordsDivorce court recordsProbate court records (frequently there is a great deal of equity Probate court records (frequently there is a great deal of equity

in the property, the heirs have smaller, divided interests, and in the property, the heirs have smaller, divided interests, and the executor just wants to sell it to wind up the estate and he the executor just wants to sell it to wind up the estate and he can’t get the heirs to contribute money needed to fix it up)can’t get the heirs to contribute money needed to fix it up)

Bankruptcy records – motions to lift the automatic stayBankruptcy records – motions to lift the automatic stayCriminal proceedings and criminal defense lawyersCriminal proceedings and criminal defense lawyersCode violation recordsCode violation records

Owner Financing When the Owner Financing When the Investor is BuyingInvestor is Buying

DODO– Use a separate legal entity to do your Use a separate legal entity to do your

buying and selling – i.e., a Texas LLCbuying and selling – i.e., a Texas LLC– Use contractual provisions to limit your Use contractual provisions to limit your

liability (make it a non-recourse loan)liability (make it a non-recourse loan)– Give the other party a clear remedy, Give the other party a clear remedy,

but one that is limited to foreclosure of but one that is limited to foreclosure of the lien securing his notethe lien securing his note

– Get and record the deedGet and record the deed

When you’re buyingWhen you’re buying

DODO– Reserve the option to pay the underlying Reserve the option to pay the underlying

lender directlylender directly– Provide that the payment of the Provide that the payment of the

underlying loan will automatically release underlying loan will automatically release the seller’s wraparound deed of trust lienthe seller’s wraparound deed of trust lien

– Include a provision that gives the Include a provision that gives the investor the right to give the property investor the right to give the property backback


DODO– Get written authority to communicate Get written authority to communicate

with the underlying lenderwith the underlying lender– Have the seller sign an affidavit to be Have the seller sign an affidavit to be

filed that will make it clear that he filed that will make it clear that he understands the risks involvedunderstands the risks involved

– Have the seller sign a receipt Have the seller sign a receipt acknowledging that he has been acknowledging that he has been given copies of all the documentsgiven copies of all the documents


DODO– Obtain an endorsement to the Obtain an endorsement to the

insurance policy indicating that the insurance policy indicating that the investor is the new ownerinvestor is the new owner

– Include a provision that requires the Include a provision that requires the seller to give you a written notice of seller to give you a written notice of default and an opportunity to curedefault and an opportunity to cure

– Include an assignment of insurance Include an assignment of insurance proceeds and monies held in escrowproceeds and monies held in escrow


DODO

– Try to get the underlying lender to Try to get the underlying lender to waive its due-on-sale clausewaive its due-on-sale clause

DON’TDON’T– Include a due-on-sale clause in the Include a due-on-sale clause in the

seller’s deed of trustseller’s deed of trust


DON’TDON’T– Just get a deed subject to the debtJust get a deed subject to the debt– Fail to fully disclose to the seller the loan Fail to fully disclose to the seller the loan

provision that gives his lender the right to provision that gives his lender the right to call the note due as a result of the sale to call the note due as a result of the sale to youyou

– Buy properties where you have no Buy properties where you have no clear source of repayment or you clear source of repayment or you can’t afford to carry the debt service can’t afford to carry the debt service for a reasonable length of timefor a reasonable length of time

Legal documents when Legal documents when buying buying

What you should have when buying and the seller is What you should have when buying and the seller is financing part or all of the purchase pricefinancing part or all of the purchase price– Deed with vendor’s lien – to be signed by the seller to the Deed with vendor’s lien – to be signed by the seller to the

investor – with legal description and notary investor – with legal description and notary acknowledgement – to be recorded with the County Clerkacknowledgement – to be recorded with the County Clerk

– The note (first, second, or wrap) – (negotiate for it to be The note (first, second, or wrap) – (negotiate for it to be non-recourse) - to be signed by the investor in favor of the non-recourse) - to be signed by the investor in favor of the sellerseller

– The deed of trust (first, second or wrap), to be signed by The deed of trust (first, second or wrap), to be signed by the investor in favor of the seller, with an the investor in favor of the seller, with an acknowledgement, to be recorded with the County Clerk acknowledgement, to be recorded with the County Clerk

– Affidavit to be signed by the seller in the presence of a Affidavit to be signed by the seller in the presence of a notary to be recorded with the County Clerknotary to be recorded with the County Clerk

– Receipt of documents to be signed by the sellerReceipt of documents to be signed by the seller– Amortization schedule to reflect the payments to be madeAmortization schedule to reflect the payments to be made

What an affidavit from What an affidavit from the seller should includethe seller should include

A statement that the seller is aware of the fact that the A statement that the seller is aware of the fact that the underlying lender underlying lender hashas (not just may have) the right to call (not just may have) the right to call the underlying note immediately due and payable as a the underlying note immediately due and payable as a result of the transfer of title from the seller to the investorresult of the transfer of title from the seller to the investor

A statement that the seller understands that he remains A statement that the seller understands that he remains liable for the payment of the underlying debt and the liable for the payment of the underlying debt and the performance of the provisions of the deed of trust securing performance of the provisions of the deed of trust securing itit

A statement that the seller is aware that if the lender calls A statement that the seller is aware that if the lender calls the underlying note immediately due and payable, that the the underlying note immediately due and payable, that the investor may not be able to sell or refinance and that the investor may not be able to sell or refinance and that the seller may have problems with his credit report or with a seller may have problems with his credit report or with a foreclosure of the property by the underlying lenderforeclosure of the property by the underlying lender

A statement that the seller understands that the investor A statement that the seller understands that the investor intends to lease or resell the property and may carry intends to lease or resell the property and may carry owner financing to facilitate the resaleowner financing to facilitate the resale

Owner Financing When the Owner Financing When the Investor is SellerInvestor is Seller

Legal IssuesLegal IssuesDODO– Use a separate legal entity to do your Use a separate legal entity to do your

buying and selling – i.e., a Texas LLCbuying and selling – i.e., a Texas LLC– Make the note being carried full recourse Make the note being carried full recourse

with personal liability to the buyerwith personal liability to the buyer– Provide for a late payment chargeProvide for a late payment charge– Give the buyer an amortization scheduleGive the buyer an amortization schedule– Execute and record the deed to the buyerExecute and record the deed to the buyer


Legal IssuesLegal IssuesDODO– Include a provision that will require the Include a provision that will require the

buyer to pay attorney’s fees and costs in buyer to pay attorney’s fees and costs in the event of a defaultthe event of a default

– Include a provision that will require the Include a provision that will require the buyer to pay the underlying debt if it is buyer to pay the underlying debt if it is calledcalled

– Have the seller sign an affidavit to be filed Have the seller sign an affidavit to be filed that will make it clear that he understands that will make it clear that he understands the risks involvedthe risks involved


Legal IssuesLegal IssuesDODO– Have the seller sign a receipt Have the seller sign a receipt

acknowledging that he has been given acknowledging that he has been given copies of all the documentscopies of all the documents

– Close through a title company, or provide Close through a title company, or provide the written disclosure that is required by the written disclosure that is required by §5.016 of the Texas Property Code.§5.016 of the Texas Property Code.

– Obtain an endorsement to the insurance Obtain an endorsement to the insurance policy reflecting the change in ownershippolicy reflecting the change in ownership


Legal IssuesLegal IssuesDODO– Include a provision in your note that payments Include a provision in your note that payments

must be paid directly to the investor seller, but must be paid directly to the investor seller, but that provides a credit to the buyer if the underlying that provides a credit to the buyer if the underlying lien is not paid and the buyer has to do solien is not paid and the buyer has to do so

– Include a due-on-sale clause in favor of the seller in Include a due-on-sale clause in favor of the seller in the deed of trustthe deed of trust

– Include a clear reference to the existence of all Include a clear reference to the existence of all underlying loans and any liens securing such underlying loans and any liens securing such underlying loansunderlying loans

The right to require the payment of tax and The right to require the payment of tax and insurance escrows to the seller investorinsurance escrows to the seller investor


Legal IssuesLegal IssuesDODO– Include a provision that your buyer will Include a provision that your buyer will

be in default if he contacts the be in default if he contacts the underlying lenderunderlying lender

– Include a provision that gives the seller Include a provision that gives the seller the right to require the buyer to pay tax the right to require the buyer to pay tax and insurance escrows to the sellerand insurance escrows to the seller

– Your due diligence on the buyer/borrowerYour due diligence on the buyer/borrower– Disclose, disclose, discloseDisclose, disclose, disclose


Legal IssuesLegal IssuesDON’TDON’T– Have the same person close the sale of Have the same person close the sale of

more than five transactions within a twelve more than five transactions within a twelve month period unless that person is licensed month period unless that person is licensed as a mortgage brokeras a mortgage broker

– Sell to someone who has no demonstrable Sell to someone who has no demonstrable ability to pay the loan backability to pay the loan back

– Have a deed in lieu of foreclosure Have a deed in lieu of foreclosure signed in advance of a defaultsigned in advance of a default

– Delay in exercising your remedy of Delay in exercising your remedy of foreclosure or to lift the automatic stay if foreclosure or to lift the automatic stay if the buyer files bankruptcythe buyer files bankruptcy

The documents when The documents when seller financingseller financing

What you should have when selling and you are financing part or all of What you should have when selling and you are financing part or all of the purchase price and an existing lien is on the property for more the purchase price and an existing lien is on the property for more than thirty daysthan thirty days– A title policy for the buyer (to avoid the new statute)A title policy for the buyer (to avoid the new statute)– Deed with vendor’s lien, to be signed by the seller to the buyer, Deed with vendor’s lien, to be signed by the seller to the buyer,

with legal description and notary acknowledgement, to be filed with legal description and notary acknowledgement, to be filed with the County Clerkwith the County Clerk

– The note (first, second, or wrap) should be full-recourse and with The note (first, second, or wrap) should be full-recourse and with personal liability, to be signed by the buyer in favor of the personal liability, to be signed by the buyer in favor of the investorinvestor

– The deed of trust (first, second or wrap), to be signed by the The deed of trust (first, second or wrap), to be signed by the buyer in favor of the investor, with acknowledgement, to be filed buyer in favor of the investor, with acknowledgement, to be filed with the County Clerkwith the County Clerk

– Affidavit to be signed by the buyer in the presence of a notary, to Affidavit to be signed by the buyer in the presence of a notary, to be filed with the County Clerkbe filed with the County Clerk

– Receipt of documents to be signed by the buyerReceipt of documents to be signed by the buyer– Amortization scheduleAmortization schedule

What an affidavit from What an affidavit from the buyer should includethe buyer should include

A statement that the buyer is aware of the fact that A statement that the buyer is aware of the fact that the underlying lender the underlying lender hashas (not just may have) the (not just may have) the right to call the underlying note immediately due and right to call the underlying note immediately due and payable as a result of the transfer of title from the payable as a result of the transfer of title from the investor to the buyerinvestor to the buyer

A statement that the buyer understands that if the A statement that the buyer understands that if the underlying lender calls its note immediately due and underlying lender calls its note immediately due and payable, that the wrap loan to the investor will payable, that the wrap loan to the investor will become immediately due and payable to the extent of become immediately due and payable to the extent of such accelerated debt and that the buyer may not be such accelerated debt and that the buyer may not be able to timely sell or refinance the property and could able to timely sell or refinance the property and could lose their equitylose their equity

The DocumentsThe DocumentsThe NoteThe Note

The promissory note – an I.O.U.– Evidence of the debt– Only one original – like a check– A negotiable instrument under

certain circumstances– States the amount loaned, the

interest rate, and the terms of payment

The DocumentsThe DocumentsThe MortgageThe Mortgage

The security instrument– It pledges the collateral– Called by different names

Mortgage Deed of trust Trust deed Security agreement

– It should be filed in the public records to put the world on notice of the security interest in the collateral

The TerminologyThe Terminology• The borrower – sometimes called the

• Maker• Mortgagor• Debtor• Obligor• Grantor (as the transferor of the collateral)

• The lender – sometimes called the• Payee• Mortgagee• Beneficiary• Creditor• Obligee• Endorser (if the instrument has been assigned with

recourse)

What should be in the What should be in the note?note?

The borrower’s signature The borrower’s name and address The lender’s name and address The amount borrowed The promise to pay The interest rate before default or

maturity The interest rate after default or

maturity

What should be in the What should be in the notenote

The amount of the periodic payment A reference to the collateral that is

being pledged – complete legal description

A final maturity date Default provisions Prepayment provisions Attorney’s fees provisions

What should be in the What should be in the note note

Waiver provisions– Notice of any kind– Demand for payment– Presentation for payment– Notice of intent to accelerate– Notice of acceleration– Maturity– Protest and notice of protest– Foreclosure notices that can be

waived by law– Anti-Deficiency statutes

What should be in the What should be in the notenote

How payments will be applied Late payment provisions Usury savings clauses

What should be in the deed What should be in the deed of trust/security of trust/security

agreement?agreement? Signature of the debtorSignature of the debtor Acknowledgment before a notary public (this Acknowledgment before a notary public (this

is usually required to record the document)is usually required to record the document) Description of the collateral pledgedDescription of the collateral pledged Reference in some detail to the indebtedness Reference in some detail to the indebtedness

that is secured by the collateral (borrower, that is secured by the collateral (borrower, lender, amount, date of loan)lender, amount, date of loan)

Power of sale – for states that allow non-Power of sale – for states that allow non-judicial foreclosure of the collateral judicial foreclosure of the collateral


agreement?agreement? Due on sale clause – the right of the lender to Due on sale clause – the right of the lender to

call the note due if any interest in the collateral call the note due if any interest in the collateral is transferredis transferred

Warranties from the party hypothecating the Warranties from the party hypothecating the collateral that it has legal title to such property collateral that it has legal title to such property

Provisions for payment of property taxes and Provisions for payment of property taxes and insurance on the collateral with the lender insurance on the collateral with the lender named as an additional insured (right of lender named as an additional insured (right of lender to require payments of T&I into escrow to require payments of T&I into escrow controlled by the lendercontrolled by the lender

Late charge provisionsLate charge provisions Foreclosure procedures detailedForeclosure procedures detailed


agreement?agreement? In states that provide for a trustee to hold title

to the property to secure payment of the debt:– Enumeration of the powers of the trustee to

foreclose the property at public auction– The rights of the lender to appoint substitute

trustees– The compensation to be paid to the trustee– Release provisions when the debt is paid– Partial release provisions when some portion

of the collateral is sold

Collecting the owner financed note

Communicate with all parties liable on the debt (including guarantors and sureties)

Do not disclose information about the debtor’s financial situation to any third party

Attempt to get information regarding the party’s ability to pay the debt

Consider revising the loan terms to motivate those liable to resume paying the loan

Collecting the owner financed note

If those liable won’t provide financial information, or fail or refuse to communicate, proceed to either file suit to collect, or to foreclose on the collateral

If a judicial foreclosure of the collateral is required, a lawsuit will be necessary in any event

Filing a lawsuit will generally put the creditor in a position to compel those liable on the debt to produce documents that would evidence their ability to pay, and to determine what other obligations are outstanding

Winning a lawsuit results in a judicial declaration (a judgment) that enables the creditor to pursue certain remedies in addition to foreclosing on the collateral

Collecting the owner financed note -

workouts If credible information (an affidavit, tax

returns, financial statements) provided by those liable on the debt indicate their inability to pay the debt even if the loan terms are revised (principal forgiven, interest rate lowered, payments deferred or term of payment extended), recognize that a judgment will likely be uncollectable, and a lawsuit for a substantial sum will motivate those liable to file bankruptcy


foreclosing Foreclosing the collateral Two methods

– Non-judicial foreclosure (almost always available in Texas if there is a deed of trust)

Real property Personal property

– UCC Article 9– Self help remedies that do not involve a

breach of the peace– Judicial foreclosure


foreclosing Foreclosure procedures are governed by the

law of the state where the property is located The creditor must comply with the terms of

the note, the deed of trust/security agreement, and the requirements of state law (statutory and common law requirements)

If the debtor or guarantor have not waived certain common law rights (i.e., notice of intent to accelerate), it may be necessary to jump through those hoops

It is important to read the note, deed of trust, and the security agreement

Foreclosing on the collateral

Non-judicial foreclosure sales

Non-judicial foreclosure is typically faster and less expensive than judicial foreclosure

Steps that are typically required of a non-judicial foreclosure– Notice given in writing to all parties liable on the debt by

certified mail of the specific default, and the opportunity to cure the default within a stated period of time (20 days in Texas if property is residential)

Notwithstanding state law requirements, “debt collectors” are required to give the party liable on the debt a 30 day opportunity to “dispute” the debt

– Following the period to cure, notice must be given in writing by certified mail of the acceleration of the debt



Notice given in writing to all persons liable on the debt by certified mail of the foreclosure sale (in Texas, at least 21 days prior to the first Tuesday of the month in which the foreclosure sale will be conducted)– In Texas, the deed of trust confers a power of sale on the

trustee named in the instrument, but the holder of the note has the right to appoint a substitute trustee or trustees, any of whom can conduct the foreclosure sale

Notice given to the public of the foreclosure sale– Posting notice of the foreclosure sale of the property at a

public place in accordance with state law and the terms of the security agreement (in Texas, at least 21 days prior to the first Tuesday of the month in which the foreclosure sale will be conducted)

– Filing notice of the foreclosure sale with the County Clerk of the county where the property being foreclosed is located



Compliance with other provisions of state law– In Texas, all sales must be held on the first

Tuesday of the month, not less than 21 days after the notice of trustee’s or substitute trustee’s sale has been posted on the county bulletin board, filed with the county clerk, and deposited into the mail to all parties liable on the debt

– The sale must be conducted between the hours of 10 a.m. and 4 p.m., at the place designated by the county commissioners for the holding of such sales



The foreclosure is a public auction, and the trustee/substitute trustee conducts the auction

The notice of the foreclosure sale must state a starting time and the sale must be commenced within three hours after the stated starting time

All parties must pay cash, at the time of the sale, except for the foreclosing lender, who is entitled to credit bid up to the amount of the debt

A new statute allows the foreclosing trustee to announce conditions for the sale, and permits an agreement to provide for payment other than in cash immediately


Non-judicial foreclosure sales All buyers take the property as is, and

subject to any and all prior liens, without any warranties regarding title from the trustee/substitute trustee

The warranties in the security agreement provided by the party pledging the collateral are binding on such party

The trustee may announce conditions for the sale, and all bidders are subject to such reasonable conditions



The highest bidder (who as a practical matter is most often the holder of the note), receives a trustee’s deed

Third party bidders pay with cashier’s checks in various denominations made payable to themselves, and then endorse the checks to the trustee

The trustee “makes change” by sending the high bidder a check along with the trustee’s deed


Non-judicial foreclosure sales A debtor facing a non-judicial foreclosure

sale may seek to have a court intervene to stop the non-judicial foreclosure sale.

The debtor will file a suit against the lender, typically alleging some irregularity in the manner in which the debt has been handled, either in the initial loan agreements, or in the collection of the debt

The debtor will then seek to obtain a temporary restraining order that will prevent the holder of the note from proceeding with the scheduled non-judicial foreclosure sale



Because real estate is unique and the loss of the debtor’s title would constitute an “irreparable loss”, most courts routinely grant a TRO, but immediately schedule a hearing for a temporary injunction to be held within a short period of time (14 days in Texas), to determine whether the foreclosure sale authorized by the mortgage should be enjoined going forward.


Judicial foreclosure sales If the loan documents or state law do not

permit non-judicial foreclosure sales, recourse to the judicial system is necessary to obtain a judgment against those liable on the debt, and for a court order that provides for the foreclosure of the property (sometimes by a public official) in accordance with state law

Due process, which affords the debtor notice, an opportunity to be heard, and an impartial fact finder, is required when the state is involved in the utilization of this remedy

Deed in lieu of foreclosure

Because of the expense and time involved in conducting a non-judicial or judicial foreclosure sale, the note holder should consider the benefits of accepting a deed from the borrower, in lieu of foreclosing

Typically the consideration for the debtor transferring title of the property to the lender is that the lender forgives the debt

Deed in lieu of foreclosure

The lender’s acceptance of a deed in lieu of foreclosure transfers title from the borrower to the lender, but it does not remove title issues that have been filed of record or of which the lender has knowledge that have arisen since the filing of the lender’s security instrument

Therefore, it is necessary to either obtain title insurance in connection with the deed in lieu, or to otherwise be satisfied that there are no intervening liens or clouds on title that could have been extinguished by a foreclosure of the lender’s lien

Why use owner financing Why use owner financing when the investor is sellingwhen the investor is selling

In the present market, it’s hard to In the present market, it’s hard to find buyers who will qualify for a find buyers who will qualify for a loan to pay you for your propertyloan to pay you for your property

Because you can provide the buyer Because you can provide the buyer with a loan he couldn’t otherwise with a loan he couldn’t otherwise get, buyer will buy your house get, buyer will buy your house rather than some other property, rather than some other property, and pay you a higher price.and pay you a higher price.

You can get more down paymentYou can get more down payment

OpportunityOpportunity

You could buy a house and owner You could buy a house and owner finance it for someone who wants finance it for someone who wants to buy but who cannot qualify for to buy but who cannot qualify for a conventional loana conventional loan

What keeps us from doing a What keeps us from doing a transaction in this market?transaction in this market?

FEARFEAR

Fear of buying something that will go Fear of buying something that will go down in value or that won’t cash flowdown in value or that won’t cash flow

Fear of incurring debt we can’t repayFear of incurring debt we can’t repay Fear of doing something that might Fear of doing something that might

be “illegal” or riskybe “illegal” or risky

Why use owner Why use owner financing?financing?

What are we really talking about What are we really talking about today?today?

FEARFEAR vs. vs. GREEDGREED““There are two levers to set a man in There are two levers to set a man in

motion, fear and self-interest.” Napolean motion, fear and self-interest.” Napolean BonaparteBonaparte

The greed part is obvious. We want to The greed part is obvious. We want to make money by buying low and selling make money by buying low and selling high.high.

Risks vs. Risks vs. benefitsbenefits

We all take risks.We all take risks.

We sign up for a year’s contract on our cell We sign up for a year’s contract on our cell phone.phone.

We drive a car. We could kill someone. We We drive a car. We could kill someone. We could get a ticket. We could be sued. could get a ticket. We could be sued.

Some of us borrow money.Some of us borrow money.

We make promises we are expected to keep.We make promises we are expected to keep.

Risks vs. Risks vs. benefitsbenefits

““Let our ‘yes’ be our ‘yes,’ and our Let our ‘yes’ be our ‘yes,’ and our ‘no’ be our ‘no’.”‘no’ be our ‘no’.”

Keep your word.Keep your word. Do what you say you’re going to Do what you say you’re going to

do when you say you’re going to do when you say you’re going to do it.do it.

Risks in purchasing Risks in purchasing propertyproperty

Options when you buyOptions when you buy Pay cashPay cash – – risk that market declines and our risk that market declines and our

cash equity is lostcash equity is lost Borrow some or all of the purchase priceBorrow some or all of the purchase price

– From institutional lendersFrom institutional lenders – – risk that risk that market declines, and/or income from the market declines, and/or income from the property won’t pay the debt service, that the property won’t pay the debt service, that the property is foreclosed, that we have property is foreclosed, that we have personal liabilitypersonal liability for a deficiency, and that for a deficiency, and that our other assets are available to satisfy the our other assets are available to satisfy the deficiency judgmentdeficiency judgment

Borrow from the sellerBorrow from the seller – – personal liabilitypersonal liability

Personal liability Personal liability riskrisk

Personal liabilityPersonal liability – risk that market – risk that market declines, and/or income from the property declines, and/or income from the property won’t pay the debt service, that the property won’t pay the debt service, that the property is foreclosed, that we are personally liable for is foreclosed, that we are personally liable for a deficiency, and that our other assets are a deficiency, and that our other assets are available to satisfy the deficiency judgmentavailable to satisfy the deficiency judgment

No personal liabilityNo personal liability – not much risk – – not much risk – legally or financiallylegally or financially

Due on sale Due on sale riskrisk

Risk that the underlying lender calls the note Risk that the underlying lender calls the note duedue

– 1. Lots of equity in the property1. Lots of equity in the property – equity – equity could be lost, but probably lots of equity means could be lost, but probably lots of equity means we can sell and pay off the debt, and recoup we can sell and pay off the debt, and recoup some of our equity, or refinance some of our equity, or refinance

– 2. Not much equity in the property2. Not much equity in the property – equity – equity could be lost, but not enough to be able to sell could be lost, but not enough to be able to sell and recoup equity or to refinance (problem area)and recoup equity or to refinance (problem area)

– 3. No equity or negative equity3. No equity or negative equity – not much – not much to loseto lose


finance your purchasefinance your purchase Lower the financial riskLower the financial risk

– Ability to negotiate terms that are not typically Ability to negotiate terms that are not typically available from institutional lendersavailable from institutional lenders

No or low interestNo or low interest No prepayment penaltyNo prepayment penalty No points up frontNo points up front No required survey or title insurance policy costsNo required survey or title insurance policy costs No requirement to have to escrow taxes or insuranceNo requirement to have to escrow taxes or insurance No qualifying ratiosNo qualifying ratios No loan processing costsNo loan processing costs No limit to the number of loans you can have or properties No limit to the number of loans you can have or properties

you can ownyou can own


finance your purchasefinance your purchase Lower the legal riskLower the legal risk

No personal liability -No personal liability -– The sole recourse of the owner/seller/lender is to foreclose The sole recourse of the owner/seller/lender is to foreclose

on the property - no deficiency judgment on the property - no deficiency judgment – Provide that the seller/lender will accept a deed in lieu of Provide that the seller/lender will accept a deed in lieu of

foreclosure from the borrowerforeclosure from the borrower Ability to control the payment processAbility to control the payment process

– Provide for the option to pay the underlying lender directlyProvide for the option to pay the underlying lender directly Ability to control the communication prociessAbility to control the communication prociess

– Obtain the right to communicate with the Obtain the right to communicate with the underlying lenderunderlying lender

(a power of attorney implies fiduciary duties, so a (a power of attorney implies fiduciary duties, so a simple authorization directing the underlying lender to simple authorization directing the underlying lender to communicate with the investor should sufficecommunicate with the investor should suffice

– Provide for notices to be sent to the investorProvide for notices to be sent to the investor

What is a land trust?What is a land trust?

A device by which real estate is A device by which real estate is conveyed to a trustee under an conveyed to a trustee under an agreement reserving to the agreement reserving to the beneficiaries the full management beneficiaries the full management and control of the propertyand control of the property

Trusts in TexasTrusts in Texas A fiduciary relationship in which A fiduciary relationship in which

one person holds a property one person holds a property interest subject to the equitable interest subject to the equitable obligation to keep or use that obligation to keep or use that interest for the benefit of another interest for the benefit of another

A three party contractA three party contract

A trustA trust

Is Is notnot a separate legal entity a separate legal entity

– Cannot be sued Cannot be sued

– Cannot sueCannot sue

The three party The three party contractcontract

1.1. The settlor/grantor/trustorThe settlor/grantor/trustor

2.2. The trusteeThe trustee

3.3. The beneficiaryThe beneficiary

The deed to the The deed to the trusteetrustee

Settlor transfers record or legal Settlor transfers record or legal title to the trusteetitle to the trustee

It’s recorded in deed recordsIt’s recorded in deed records

The trust agreementThe trust agreement

Is usually between just the settlor Is usually between just the settlor and the trusteeand the trustee

Defines the rights and obligations Defines the rights and obligations of the trustee, settlor and of the trustee, settlor and beneficiarybeneficiary

The “bet”The “bet” Two betters each give a bartender Two betters each give a bartender

their $20 to hold, with the agreement their $20 to hold, with the agreement that the bartender will pay the $40 to that the bartender will pay the $40 to the party that wins the betthe party that wins the bet

The betters are the settlors of the trustThe betters are the settlors of the trust The bartender is the trusteeThe bartender is the trustee The betters are also the beneficiaries The betters are also the beneficiaries

of the trust of the trust

What about creditors What about creditors of the bartender?of the bartender?

The bartender doesn’t own the $40 – he The bartender doesn’t own the $40 – he holds the $40 for the benefit of the bettersholds the $40 for the benefit of the betters

The bartender merely holds the $40 until The bartender merely holds the $40 until the game is over, and then gives the $40 the game is over, and then gives the $40 to the winnerto the winner

Is the $40 like your suit at the dry Is the $40 like your suit at the dry cleaners?cleaners?

Is the $40 like your watch at the repair Is the $40 like your watch at the repair shop? shop?

Can the IRS take the $40 from the Can the IRS take the $40 from the bartender if he doesn’t pay his taxes?bartender if he doesn’t pay his taxes?

TrustsTrusts Inter vivosInter vivos

TestamentaryTestamentary

RevocableRevocable

IrrevocableIrrevocable

Texas authorityTexas authorityon land trustson land trusts

Texas statutesTexas statutes– The Texas Trust CodeThe Texas Trust Code

Case lawCase law– None*None*

TreatisesTreatises– One law review article from 1973 by Richard One law review article from 1973 by Richard

A. SaylesA. Sayles

Land trusts in Texas-Land trusts in Texas-lack of authoritylack of authority

Potential problemsPotential problems

Potential opportunitiesPotential opportunities

Transactional lawyers typically avoid Transactional lawyers typically avoid uncertainty (LLCs)uncertainty (LLCs)

Uncertainty is the grist of the litigator’s Uncertainty is the grist of the litigator’s millmill

Two instruments Two instruments create a land trustcreate a land trust

A deed of the property to the A deed of the property to the trusteetrustee– It’s It’s recordedrecorded

A trust agreement between the A trust agreement between the trustee and the beneficiariestrustee and the beneficiaries– It’s It’s notnot recordedrecorded

DeedDeed Trustee has full authority to sell, Trustee has full authority to sell,

mortgage, or lease the propertymortgage, or lease the property Third parties are fully protected in Third parties are fully protected in

dealing with the trusteedealing with the trustee Third parties are not required to Third parties are not required to

investigate the trustee’s authorityinvestigate the trustee’s authority Trustee is not personally liableTrustee is not personally liable

Deed (cont’d)Deed (cont’d) Trust is usually given a nameTrust is usually given a name Beneficiary’s interest is personalty, Beneficiary’s interest is personalty,

not realtynot realty Beneficiary’s interest is limited to Beneficiary’s interest is limited to

the avails and proceeds of the the avails and proceeds of the corpuscorpus

Beneficiary has no interest in the Beneficiary has no interest in the real estatereal estate

Land trust agreementLand trust agreement

Trustee may not disclose the identity of the Trustee may not disclose the identity of the beneficiary without court order or permission of all beneficiary without court order or permission of all beneficiaries beneficiaries

Trust agreement may not be recordedTrust agreement may not be recorded Trustee may not sell or mortgage property without Trustee may not sell or mortgage property without

written direction from the majority of beneficiarieswritten direction from the majority of beneficiaries If not disposed of earlier, the trustee will sell the If not disposed of earlier, the trustee will sell the

property after 20 years and distribute the proceedsproperty after 20 years and distribute the proceeds The interest of the beneficiary is personalty, not The interest of the beneficiary is personalty, not

realtyrealty

Land trust agreementLand trust agreement Beneficiary has the right to possession Beneficiary has the right to possession

of the propertyof the property Beneficiary has right to manage and Beneficiary has right to manage and

control the propertycontrol the property Beneficiary has the exclusive right to Beneficiary has the exclusive right to

receive the avails and proceeds of the receive the avails and proceeds of the propertyproperty

Beneficiary is responsible for paying all Beneficiary is responsible for paying all debtsdebts

Land trust agreementLand trust agreement Trust is usually a living, revocable Trust is usually a living, revocable

trusttrust Settlor/beneficiaries retain right Settlor/beneficiaries retain right

to remove the trustee and name to remove the trustee and name substitutesubstitute

Beneficiary agrees to defend, Beneficiary agrees to defend, indemnify and hold harmless indemnify and hold harmless the trusteethe trustee

The settlor = The settlor = beneficiarybeneficiary

Sometimes the beneficiary creates Sometimes the beneficiary creates the trust and is both the settlor and the trust and is both the settlor and the beneficiarythe beneficiary

Sometimes the property is Sometimes the property is purchased by the beneficiary from purchased by the beneficiary from the settlor, who transfers the the settlor, who transfers the property to the trustee in compliance property to the trustee in compliance with the terms of the contract to sellwith the terms of the contract to sell

Statute of Statute of UsesUses

Outlawed the use of trustsOutlawed the use of trusts

Courts modified the rule by stating Courts modified the rule by stating that a trust was valid so long as the that a trust was valid so long as the trustee had some duties and was trustee had some duties and was not a mere nominee title-holdernot a mere nominee title-holder

Is a land trustIs a land trustreally a trust?really a trust?

It’s not clear and is yet to be determined It’s not clear and is yet to be determined (very little Texas case law)(very little Texas case law)

It looks like a trust – it involvesIt looks like a trust – it involves– a transfer of property to a trustee by a a transfer of property to a trustee by a

settlorsettlor– a beneficiarya beneficiary– a trust agreement between the settlor (the a trust agreement between the settlor (the

beneficiaries) and the trustee that defines beneficiaries) and the trustee that defines the duties of the trustee and the interests of the duties of the trustee and the interests of the beneficiarythe beneficiary

States validatingStates validatingland trustsland trusts

Alabama*Alabama*FloridaFloridaGeorgia*Georgia*HawaiiHawaiiIndianaIndianaNorth DakotaNorth DakotaOhio*Ohio*VirginiaVirginia

BenefitsBenefits Privacy for the beneficiariesPrivacy for the beneficiaries Asset protection by discouraging Asset protection by discouraging

lawsuitslawsuits Ease of transfer of the beneficial Ease of transfer of the beneficial

interests without affecting title to interests without affecting title to the real estatethe real estate

Convenience of multiple ownershipConvenience of multiple ownership

BenefitsBenefits Avoidance of probateAvoidance of probate

Ease of establishment and Ease of establishment and dissolution of the trustdissolution of the trust

Minimal tax reporting Minimal tax reporting requirementsrequirements

What if the settlorWhat if the settloris also the beneficiary?is also the beneficiary?

Known as a self-settled trustKnown as a self-settled trust

Creditors of the beneficiary can Creditors of the beneficiary can reach the assets of the trust in reach the assets of the trust in the hands of the trusteethe hands of the trustee

Federal income Federal income taxationtaxation

If the trustee has no real duties If the trustee has no real duties (an empty trust), the taxable (an empty trust), the taxable income is taxed to the beneficiaryincome is taxed to the beneficiary

The beneficiary reports the The beneficiary reports the income on the beneficiary’s own income on the beneficiary’s own tax returntax return

ConfidentialitConfidentialityy

The trust agreement provides thatThe trust agreement provides that

– The trustee may not disclose the name of The trustee may not disclose the name of the beneficiary without the express the beneficiary without the express written permission of the beneficiary or a written permission of the beneficiary or a court order directing the trustee to do socourt order directing the trustee to do so

– The public record merely reflects the The public record merely reflects the interest of the trustee, as a trusteeinterest of the trustee, as a trustee

IssuesIssues Duty to defend, indemnify, and hold Duty to defend, indemnify, and hold

harmless the trusteeharmless the trustee Title transfer questionsTitle transfer questions

– Title insurance issuesTitle insurance issues Property and casualty insurance Property and casualty insurance

issuesissues Homestead issuesHomestead issues Income tax issuesIncome tax issues

It’s magic!It’s magic!

But is it?But is it?

No true protection of the assets in No true protection of the assets in the hands of the trusteethe hands of the trustee

Why it worksWhy it works Creditors don’t see the assets in Creditors don’t see the assets in

the hands of the trusteethe hands of the trustee Creditors don’t see the interest of Creditors don’t see the interest of

the beneficiarythe beneficiary Creditors are less likely to sueCreditors are less likely to sue Creditors are more likely to settleCreditors are more likely to settle

Title problemsTitle problems

The mystery of the self-settled The mystery of the self-settled trusttrust

Will a title insurer require the Will a title insurer require the joinder of the original owner, the joinder of the original owner, the trustee, and the beneficiary?trustee, and the beneficiary?

Why Texas lawyers Why Texas lawyers don’t currently use don’t currently use

land trusts land trusts UncertaintyUncertainty

UncertaintyUncertainty

UncertaintyUncertainty

Sources ofSources ofStatutory AuthorityStatutory Authority

Real Estate Legislative Affairs Committee, Real Estate, Probate And Trust Law Section, State Bar Of Texas (google State Bar of Texas)

Google: Texas statutes (beware of new statutes that aren’t updated immediately after the Texas State Legislature has adjourned)

You must ACT!You must ACT!Follow through! Follow through!

Execute!Execute! ““Things may come to those who wait, but Things may come to those who wait, but

only the things left by those who hustle.”only the things left by those who hustle.” -- Abraham Lincoln-- Abraham Lincoln

““Being very rich, as far as I am Being very rich, as far as I am concerned, is having a margin. The concerned, is having a margin. The margin is being able to give.” - margin is being able to give.” - UnknownUnknown


Execute!Execute! ““The most successful businessman is the The most successful businessman is the

man who holds onto the old just as long man who holds onto the old just as long as it is good, and grabs the new just as as it is good, and grabs the new just as soon as it is better.”soon as it is better.” -- -- UnknownUnknown

““Even if you're on the right track, you'll Even if you're on the right track, you'll get run over if you just sit there.get run over if you just sit there.”” -- -- UnknownUnknown


Execute!Execute! ““The aim of education is action.” The aim of education is action.” – –

UnknownUnknown

““An ounce of action is worth a ton of An ounce of action is worth a ton of theory.”theory.” – – UnknownUnknown

““Action is eloquence.”Action is eloquence.” -- Shakespeare -- Shakespeare

Keys to Keys to successsuccess

Use what you learn:Use what you learn:

– ““Failures are divided into two Failures are divided into two classes -- those who thought and classes -- those who thought and never did and those who did and never did and those who did and never thought.” never thought.” -- Unknown-- Unknown

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Don’t play if you can’t pay.Don’t play if you can’t pay.

Don’t buy property if you can’t afford to Don’t buy property if you can’t afford to independently service the debt for a independently service the debt for a reasonable period of time.reasonable period of time.

The two primary reasons business failThe two primary reasons business fail– Inadequate capitalInadequate capital– Lack of managerial experience Lack of managerial experience

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Perform your due diligencePerform your due diligence– Know the market – get a good real estate broker on Know the market – get a good real estate broker on

boardboard For rental ratesFor rental rates For sale pricesFor sale prices Number of properties on the market? Going up, Number of properties on the market? Going up,

or down?or down? Average number of days on the market? Going Average number of days on the market? Going

up or down?up or down?– Condition of the propertyCondition of the property

Use a third party inspectorUse a third party inspector Inspect it yourselfInspect it yourself Get contractor bidsGet contractor bids 224224


Perform your due diligencePerform your due diligence

– Title insuranceTitle insurance

– Survey Survey

– Property insuranceProperty insurance

– Liability insuranceLiability insurance

– Use an experienced lawyer, CPA, mortgage broker, and real Use an experienced lawyer, CPA, mortgage broker, and real estate broker that understands creative real estate estate broker that understands creative real estate techniquestechniques

225225


Reduce your risksReduce your risks

– Don’t deal with “bad” peopleDon’t deal with “bad” people – check them out – – check them out – publicdata.com. If they’re a pain in the ass when publicdata.com. If they’re a pain in the ass when you’re first dealing with them, what should you you’re first dealing with them, what should you expect down the road when there’s a problem?expect down the road when there’s a problem?

– Use a separate legal entity (Series LLC, LLC, or Use a separate legal entity (Series LLC, LLC, or corporation) to do your buying and sellingcorporation) to do your buying and selling

““Corporation, noun, An ingenious device for Corporation, noun, An ingenious device for obtaining profit without individual responsibilityobtaining profit without individual responsibility” – ” – Ambrose BierceAmbrose Bierce

– Use contractual provisions to limit your liabilityUse contractual provisions to limit your liability– Give the other party a clear remedy, but one that is Give the other party a clear remedy, but one that is

limitedlimited 226226

Thank you for your attention.Thank you for your attention.

Bryan DunklinBryan DunklinTexasrealestatelaw.netTexasrealestatelaw.nettexaslaw@email.com

214-769-7377214-769-7377

mailto:[email protected]