Owner Financing and Buying Subject to an Existing Loan, Including Wraps, Land Trusts, and Lease/Options

1
Owner Financing and Buying Subject to an Existing
Loan,Including Wraps, Land Trusts, and
Lease/Options

• Update on Texas SAFE Act and
• Dodd Frank Mortgage Reform Act
• Bryan Dunklin
• texaslaw_at_email.com
• www.texasrealestatlaw.net
• 214-769-7377
• DFW REI Club
• Haltom City, Texas
• July 27, 2013

2
Bryan Dunklin

• 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
  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

3
Bryan Dunklin

• 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

4
Recent speeches

• State Bar of Texas webinars
• State Bar of Texas Advanced Real Estate Law and
  Real Estate Strategies courses
• Mortgage Lending Institute Session Moderator
  and Steering Committee
• Texas Land Title Institute and Texas Land Title
  Association webinar
• Texas Mortgage Bankers Association
• North Texas Commercial Association of Realtors
• Dallas Bar Association Real Property Section
• Denton County Real Estate, Trusts, and Probate
  Section
• Dallas Area Real Estate Lawyers Discussion Group
• Numerous real estate investors associations and
  brokerage firms

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Disclaimer

• These materials are for general educational
  purposes only.
• The law constantly changes by the passage of new
  statutes, rules, regulations, and by decisions
  made by the courts. No representation or warranty
  is given that the general information provided is
  applicable to your circumstances. No legal advice
  is being given. Information may not be current.
• No attorney-client relationship is established by
  the presentation of these materials.
• You are advised to consult an attorney with
  respect to your specific circumstances.

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Q A

• I encourage questions. Please write them down and
  wait until the QA period. Ill be available at
  breaks and after the seminar.
• He who is afraid to ask is ashamed of learning.
  Danish proverb
• He who asks a question is a fool for five
  minutes. He who does not ask a question remains a
  fool forever. Chinese proverb
• Please be considerate of the speaker and other
  seminar participants. Step outside to talk or
  phone.
• The simple act of paying attention can take you
  a long way. Keanu Reeves

7
My PowerPointPresentations

• Sign my email list and Ill send you my
  PowerPoint presentations and other articles

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Todays topics

• Three seminars
• Update on Texas S.A.F.E. Act
• Update on Dodd Frank Act
• Texas law affecting Seller financing techniques
• Buying subject to an existing loan
• Wraparound / all-inclusive notes
• Contracts for deed
• Lease with an option
• Land trusts

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The problem when the investor is buying

• Investors want to buy property without having to
  be personally liable for repaying the debt.
• Investors sometimes want to keep in place the
  existing financing (attractive rate or other
  terms).
• Investors may prefer to have the seller finance
  the purchase of the property to avoid having to
  be personally liable on the debt and to expedite
  the closing.
• Investors dont want to pay high interest rates
  or high closing costs.
• Investors dont want to be sued if they dont pay
  the loan.
• Investors dont want to be delayed by the
  approval process.

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The problem when the investor is a landlord

• Investors want to find good tenants who will be
  motivated to take good care of the property.
• Investors want to find good tenants who will pay
  more money up front, and pay higher monthly
  payments, for the right to buy the property in
  the future at a fixed price.
• Investors want to find good tenants who will
  eventually want to buy the property at a premium
  price.

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The problem when the investor is selling

• Investors want a buyer who will pay a premium
  price.
• Investors want a buyer who will pay cash, or who
  will lose significant earnest money if the buyer
  doesnt close.
• If the investor has to finance the buyers
  purchase of the property, then the investor wants
  a buyer he knows has a track record of paying on
  time and taking care of the property.
• If the buyer doesnt pay on time or take good
  care of the property, the investor wants to be
  able to get back title and possession of the
  property easily, quickly, and inexpensively.

12
Options

• Conventional financing
• Lease with an option
• The tenant has an option to purchase the property
• Contract for deed
• The buyer doesnt get a deed until the full
  purchase price is paid
• Land trust
• The buyer is assigned the beneficial interest in
  a trust and eventually has the right to control
  the sale of the property
• Seller financing with a note and deed of trust
• The seller is given a note and a deed of trust
  and can foreclose if the buyer doesnt pay

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Two key factors

• Due on sale clause
• Inflation and rising interest rates
• Enforceable? Garn - St. Germain Depository
  Institutions Act of 1982
• Stricter lending standards
• Record defaults and foreclosures
• Weaker secondary market
• Declining values
• Overhand on the market
• Dodd Frank

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Due-on-sale clause

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

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Due-on-sale clause

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

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Texas Real Estate Forms Manual due-on-sale clause

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

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Due-on-sale litigation

• Before 1982, courts in different jurisdictions
  interpreted due-on-sale provisions differently
• Congress intervened to provide a consistent
  interpretation
• Garn-St. Germain Depository Institutions Act

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Garn-St. Germain Act

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

19
Garn-St. Germain Act

• Due-on-sale clauses are enforceable in
  residential loan transactions except in the
  following situations
• 1. Death of the borrower transfer to the heirs
• 2. Divorce of the borrowers transfer to
  one spouse
• 3. A lease, not coupled with an option to
  purchase, of less than three years

20
Inter vivos trust exception

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

21
Garn-St. Germain Act regulations

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

22
Garn-St. Germain Act

• 591.5(b) Specific limitations. With respect to
  any loan on the security of a home occupied or to
  be occupied by the borrower,
• (A) A lender shall not (except with regard to a
  reverse mortgage) exercise its option pursuant to
  a due-on-sale clause upon
• (iii) A transfer by devise, descent, or
  operation of law on the death of a joint tenant
  or tenant by the entirety
• (iv) The granting of a leasehold interest which
  has 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 years or a
  lease with an option to purchase will allow the
  exercise of a due-on-sale clause)

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Garn-St. Germain Act

• (v) A transfer, in which the transferee is a
  person who occupies or will occupy the property,
  which is
• (A) A transfer to a relative resulting from the
  death of the borrower
• (B) A transfer where the spouse or child(ren)
  becomes an owner of the property or
• (C) A transfer resulting from a decree of
  dissolution of marriage, legal separation
  agreement, or from an incidental property
  settlement agreement by which the spouse becomes
  an owner of the property or

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Garn-St. Germain Act

• (vi) A transfer into an inter vivos trust in
  which the borrower is and remains the beneficiary
  and occupant of the property, unless, as a
  condition precedent to such transfer, the
  borrower refuses to provide the lender with
  reasonable means acceptable to the lender by
  which the lender will be assured of timely notice
  of any subsequent transfer of the beneficial
  interest or change in occupancy.
• (B) A lender shall not impose a prepayment
  penalty or equivalent fee when the lender or
  party acting on behalf of the lender
• (i) Declares by written notice that the loan is
  due pursuant to a due-on-sale clause or
• (ii) Commences a judicial or nonjudicial
  foreclosure proceeding to enforce a due-on-sale
  clause or to seek payment in full as a result of
  invoking such clause.

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

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

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Will the lender exercise its right to call the
note due under its due-on-sale clause?

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

27
Case law ondue-on-sale clauses

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

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Key statutes whenowner financing is involved

• Texas SAFE Act
• licensure required for Residential Mortgage Loan
  Originator (RMLO)
• HB 10, HB 2774, HB 277981st Legislature 2009
• Dodd Frank Mortgage Reform Act
• Lender must document borrowers ability to repay

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Key statutes whenowner financing is involved

• Texas Property Code 5.016 regarding sale of
  residential property where lien remains in place
• Texas Property Code 5.061 5.085 regarding
  executory contracts

30
Texas SAFE Act

• Texas Secure and Fair Enforcement for Mortgage
  Licensing Act of 2009
• Responds to the federal mandate that states adopt
  the Federal Secure and Fair Enforcement for
  Mortgage Licensing Act of 2008, or equivalent, to
  license, register, and regulate residential
  mortgage loan originators.
• Effective April 1, 2010

31
Texas SAFE Act

• If you lend money, or arrange for the lending of
  money, or if you advise someone about mortgages,
  even if its your own money, or if you touch a
  mortgage in any material way, there are
  regulations affecting you, and licensing will
  probably be required if a loan is originated on
  residential property other than when selling your
  personal residence 

32
Texas SAFE Act

• Federal SAFE Act Establishes the Nationwide
  Mortgage Licensing System and Registry (NMLS)
• "Residential mortgage loan" - a loan primarily
  for personal, family, or household use that is
  secured by a mortgage, deed of trust, or other
  equivalent consensual security interest on a
  dwelling or on residential real estate

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Texas SAFE Act

• (19) "Residential mortgage loan originator"
• (A) means an individual who for compensation or
  gain or in the expectation of compensation or
  gain 
• (i) takes a residential mortgage loan
  application OR
• (ii) offers or negotiates the terms of a
  residential mortgage loan and
• (B) does not include
• (i) an individual who performs solely
  administrative or clerical tasks on behalf of an
  individual licensed as an RMLO or exempt from
  licensure under 180.003, except as otherwise
  provided by 180.051
•  

34
Texas SAFE Act

• (B) does not include
• (ii) an individual who performs only real estate
  brokerage activities and is licensed or
  registered by the state as a real estate broker
  or salesperson, unless the individual is
  compensated by
• (a) a lender, mortgage broker, or other
  residential mortgage loan originator or
•  
• (b) an agent of a lender, mortgage broker, or
  other residential mortgage loan originator

35
Texas SAFE Act

• EXEMPTION. The following persons are exempt from
  this chapter
• (3) a licensed attorney who negotiates the terms
  of a residential mortgage loan on behalf of a
  client as an ancillary matter to the attorney's
  representation of the client, unless the
  attorney
•  
• (A) takes a residential mortgage loan
  application and
• (B) offers or negotiates the terms of a
  residential mortgage loan
• (5) an individual who offers or negotiates terms
  of a residential mortgage loan secured by a
  dwelling that serves as the individual's residence

36
Texas SAFE Act

• Sec. 180.051. STATE LICENSE REQUIRED RENEWAL.
• (a) Unless exempted by 180.003, an individual
  may not engage in business as a residential
  mortgage loan originator with respect to a
  dwelling located in this state unless the
  individual 
• (1) is licensed to engage in that business under
  Chapter 156, 157, 342, 347, 348, or 351 and 
• (2) complies with the requirements of this
  chapter.
•  

37
Texas SAFE Act

• A licensed residential mortgage loan originator
  must enroll with and maintain a valid unique
  identifier issued by the Nationwide Mortgage
  Licensing System and Registry (NMLS).
• In connection with an application for a license
  as a residential mortgage loan originator, the
  applicant shall, at a minimum, furnish in the
  form and manner prescribed by the regulatory
  official and acceptable to the NMLS information
  concerning the applicant's identity, including

38
Texas SAFE Act

• (1) fingerprints for submission to the Federal
  Bureau of Investigation and any governmental
  agency or entity authorized to receive the
  information to conduct a state, national, and
  international criminal background check and
• (2) personal history and experience information
  in a form prescribed by the NMLS, including the
  submission of authorization for the NMLS and the
  appropriate regulatory official to obtain 
• (A) an independent credit report obtained from a
  consumer reporting agency described by 603(p),
  Fair Credit Reporting Act (15 U.S.C. 1681a(p))
  and
• (B) information related to any administrative,
  civil, or criminal findings by a governmental
  jurisdiction.

39
Texas SAFE Act

• The regulatory official may not issue a
  residential mortgage loan originator license to
  an individual unless the regulatory official
  determines, at a minimum, that the applicant
• Has not been convicted of a felony during the 7
  year period prior to the application or at any
  time preceding the date of application, if the
  felony involved an act of fraud, dishonesty,
  breach of trust, or money laundering
• Demonstrates financial responsibility, character,
  and general fitness so as to command the
  confidence of the community and to warrant a
  determination that the individual will operate
  honestly, fairly, and efficiently as a
  residential mortgage loan originator within the
  purposes of this chapter and any other
  appropriate regulatory law of this state
• Provides satisfactory evidence that the applicant
  has completed prelicensing education courses and
  provides satisfactory evidence of having passed a
  written test and has paid a recovery fund fee or
  obtained a surety bond as required under the
  appropriate state regulatory law.

40
Texas SAFE Act

• A determination that an individual has not shown
  financial responsibility may include (1) an
  outstanding judgment against the individual,
  other than a judgment imposed solely as a result
  of medical expenses (2) an outstanding tax lien
  or other governmental liens and filings (3) a
  foreclosure during the three-year period
  preceding the date of the license application
  and (4) a pattern of seriously delinquent
  accounts during the three-year period preceding
  the date of the application.

41
Texas SAFE Act

• H.B. 10, 2774, and 2779 passed by Texas in 2009
• Added Chapter 180 to the Texas Finance Code
  Texas SAFE Act
• Residential Mortgage Loan Originators must be
  licensed

42
RMLO

• INCLUDES
• An individual who for compensation
• takes a residential mortgage loan application OR
• offers or negotiates the terms of a residential
  loan
• DOES NOT INCLUDE
• One who receives the same benefits from a
  financed transaction as the individual would
  receive if the transaction were a cash transaction

43
RMLO

• DOES NOT INCLUDE (the de minimis exemption)
• an owner of real property who in any 12 month
  period makes no more than five mortgage loans to
  purchasers of the property for all or part of the
  purchase price of the real estate against which
  the mortgage is secured

44
License requirements

• 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 check

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Penalties

• First offense Class B misdemeanor
• All subsequent offenses Class A misdemeanor
• Liability damages of not lt the fee/profit
  received and not gt 3 times the fee/profit
  received, determined by the Court
• A cease and desist order May assess an
  administrative penalty not gt 1,000 per day for
  each violation and require a person to pay an
  applicant any compensation received

46
Updates to Texas SAFE Act

• In 2013, changes made to Texas SAFE 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

47
Updates to Texas SAFE Act

• 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

48
Updates to Texas SAFE Act

• 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

49
Dodd Frank Update

• Go to other PowerPoint presentation

50
Laws Affecting Investor Exit Strategies

• HB 2783 Mortgage broker/loan officer licensure
  required for a seller of residential properties
  carrying financing on more than five properties
• HB 2207 Notices required when selling
  residential properties if liens are to remain in
  place more than 30 days
• Lease/option issues of the executory contract
  statute

51
Investor exit strategies

• Contract for deed - Property Code changes in 2001
  ( 5.061 et seq.)
• Lease and give the tenant an option to buy -
  Property Code changes in 2005 - 5.062 (a) (2)
• A lease for less than three years combined with
  an option to purchase - 5.062 (f)
• A lease for more than three years combined with
  an option to purchase

52
The executory contract statute

• This Texas statute affects a residential contract
  for deed and a residential lease with option to
  purchase
• Texas Property Code 5.061 5.085
• Subchapter D. Executory Contract for Conveyance

53
The executory contract statute

• Applies only to a contract for the sale of real
  property used or to be used as the purchaser's
  residence
• or as the residence of a person related to the
  purchaser within the second degree by
  consanguinity or affinity (a close relative of
  the purchaser)
• 5.062 (a)

54
The executory contract statute

• A lot measuring one acre or less is presumed to
  be residential property. 5.062 (a)(1)
• An option to purchase real property that includes
  or is combined or executed concurrently with a
  residential lease agreement, together with the
  lease, is considered an executory contract
• 5.062 (a)(2)

55
The executory contract statute

• Does not apply to a contract that provides for
  the delivery of a deed from the seller to the
  purchaser within 180 days of the date of the
  final execution of the contract
• 5.062 (c)

56
Only the following sections apply to a lease with
option

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

57
Lease withoption of lt 3 years

• Only the following apply to a lease with option
  of lt 3 years
• 5.063-5.065 (notice to be given if default by
  tenant/optionee, and 30 day right to cure)
• 5.073, except for 5.073(a)(2) (certain
  contract terms and waivers prohibited) and
• 5.083 (right to cancel for improper platting)
• 5.085 (requirement that the property have no
  liens and that the property be owned in fee
  simple throughout the entire term of the contract)

58
5.085 Fee Simple Title Required

• This applies to a lease with an option of less
  than 3 years
• (a) A potential seller may not execute an
  executory contract with a potential purchaser if
  the seller does not own the property in fee
  simple free from any liens or other encumbrances.

59
5.085 Maintenanceof Fee Simple Title

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

60
5.085 Maintenance ofFee Simple Title

• The requirement to maintain fee simple title does
  not apply to a lien or encumbrance placed on the
  property that is
• (1) placed on the property because of the
  conduct of the purchaser
• (2) agreed to by the purchaser as a
  condition of a loan obtained to place
  improvements on the property or

61
5.085 Maintenance ofFee Simple Title

• (3) placed on the property by the seller prior to
  the execution of the contract in exchange for a
  loan used only to purchase the property
• IF

62
5.085 Maintenance ofFee Simple Title

• (A) the seller, not later than the third day
  before the date the contract is executed,
  notifies the purchaser in a separate written
  disclosure
• (i) of the name, address, and phone number of the
  lienholder or, if applicable, servicer of the
  loan
• (ii) of the loan number and outstanding balance
  of the loan

63
5.085 Maintenance ofFee Simple Title

• (iii) of the monthly payments due on the loan and
  the due date of those payments and
• (iv) in 14-point type that, if the seller fails
  to make timely payments to the lienholder, the
  lienholder may attempt to collect the debt by
  foreclosing on the lien and selling the property
  at a foreclosure sale

64
5.085 Maintenance ofFee Simple Title

• (B) the lien
• (i) is attached only to the property sold to
  the purchaser under the contract and
• (ii) secures indebtedness that, at no time, is
  or will be greater in amount than the amount of
  the total outstanding balance owed by the
  purchaser under the executory contract

65
5.085 Maintenance ofFee Simple Title

• (C) the lienholder
• (i) does not prohibit the property from being
  encumbered by an executory contract and
• (ii) consents to verify the status of the loan on
  request of the purchaser and to accept payments
  directly from the purchaser if the seller
  defaults on the loan and

66
5.085 Maintenance ofFee Simple Title

• (D) the following covenants are placed in the
  executory contract
• (i) a covenant that obligates the seller to make
  timely payments on the loan and to give monthly
  statements to the purchaser reflecting the amount
  paid to the lienholder, the date the lienholder
  receives the payment, and the information
  described by Paragraph (A)

67
5.085 Maintenance ofFee Simple Title

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

68
5.085 Maintenance ofFee Simple Title

• (iii) a covenant that warrants that if the seller
  does not make timely payments on the loan or any
  other indebtedness secured by the property, the
  purchaser may, without notice, cure any
  deficiency with a lienholder directly and deduct
  from the total outstanding balance owed by the
  purchaser under the executory contract, without
  the necessity of judicial action, 150 percent of
  any amount paid to the lienholder. What if
  tenant doesnt pay landlord and then pays lender?

69
Violation - remedies

• (c) A violation of this section
• (1) is a false, misleading, or deceptive act or
  practice within the meaning of 17.46, Business
  Commerce Code, and is actionable in a public or
  private suit brought under Subchapter E, Chapter
  17, Business Commerce Code and

70
Violation - remedies

• (2) in addition to other rights or remedies
  provided by law, entitles the purchaser to cancel
  and rescind the executory contract and receive
  from the seller
• (A) the return of all payments of any kind made
  to the seller under the contract and

71
Violation - remedies

• (B) reimbursement for
• (i) any payments the purchaser made to a taxing
  authority for the property and
• (ii) the value of any improvements made to the
  property by the purchaser.

72
What if the tenant/optionee/buyer defaults? Sec.
5.064

• A seller may enforce the remedy of rescission or
  of forfeiture and acceleration against a
  purchaser only if
• (1) the seller notifies the purchaser of
• (A) the seller's intent to enforce a remedy and
• (B) the purchaser's right to cure the default
  within 30-days
• (2) the purchaser fails to cure the default
  within the 30-days and
• (3) 5.066 does not apply (5.066 addresses a
  situation where the purchaser defaults after
  having paid 40 or more of the amount due or the
  equivalent of 48 monthly payments)

73
Contract terms andcertain waivers prohibited

• A seller may not include as a term of the
  executory contract a provision that
• imposes an additional late-payment fee that
  exceeds the lesser of
• eight percent of the monthly payment under the
  contract or
• the actual administrative cost of processing the
  late payment
• imposes a prepayment penalty or any similar
  fee if the purchaser elects to pay the entire
  amount due under the contract before the
  scheduled payment date under the contract

74
Contract terms andcertain waivers prohibited

• A seller may not include as a term of the
  executory contract a provision that
• forfeits an option fee or other option payment
  paid under the contract for a late payment or
• increases the purchase price, imposes a fee or
  charge of any type, or otherwise penalizes a
  purchaser leasing property with an option to buy
  the property for requesting repairs or exercising
  any other right under Chapter 92.(b)

75
Contract terms andcertain waivers prohibited

• A provision of the executory contract that
  purports to waive a right or exempt a party from
  a liability or duty under this subchapter is
  void.
• Amended by Acts 2005, 79th Leg., ch. 978, 4,
  eff. Sept. 1, 2005.

76
Property Code 5.016

• Sec. 5.016.  CONVEYANCE OF RESIDENTIAL PROPERTY
  ENCUMBERED BY LIEN.
• Selling residential propertysubject to existing
  liens when the liens remain in place more than 30
  days

77
Property Code 5.016

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

78
Property Code 5.016

• The disclosure statement must include information
  that
• (1)  identifies the property and includes the
  name, address, and phone number of each
  lienholder
• (2)  states the amount of the debt that is
  secured by each lien

79
Property Code 5.016

• (3)  specifies the terms of any contract or law
  under which the debt that is secured by the lien
  was incurred, including, as applicable
• (A)  the rate of interest
• (B)  the periodic installments required to be
  paid and
• (C)  the account number

80
Property Code 5.016

• (4)  indicates whether the lienholder has
  consented to the transfer of the property to the
  purchaser
• (5)  specifies the details of any insurance
  policy relating to the property, including
• (A)  the name of the insurer and insured
• (B)  the amount for which the property is
  insured and
• (C)  the property that is insured

81
Property Code 5.016

• (6)  states the amount of any property taxes that
  are due on the property and

82
Property Code 5.016

• (7)  includes a statement at the top of the
  disclosure in a form substantially similar to the
  following
• WARNING ONE OR MORE RECORDED LIENS HAVE BEEN
  FILED THAT MAKE A CLAIM AGAINST THIS PROPERTY AS
  LISTED BELOW. IF A LIEN IS NOT RELEASED AND THE
  PROPERTY IS CONVEYED WITHOUT THE CONSENT OF THE
  LIENHOLDER, IT IS POSSIBLE THE LIENHOLDER COULD
  DEMAND FULL PAYMENT OF THE OUTSTANDING BALANCE OF
  THE LIEN IMMEDIATELY. YOU MAY WISH TO CONTACT
  EACH LIENHOLDER FOR FURTHER INFORMATION AND
  DISCUSS THIS MATTER WITH AN ATTORNEY.

83
Property Code 5.016

• A violation of the new act does not invalidate a
  conveyance.
• ... If a contract is entered into without the
  seller providing the notice required by this
  section, the purchaser may terminate the contract
  for any reason on or before the seventh day after
  the date the purchaser receives the notice in
  addition to other remedies provided by this
  section or other law.

84
Property Code 5.016

• The statute does not apply to a transfer
• (1)  under a court order or foreclosure sale
• (2)  by a trustee in bankruptcy
• (3)  to a mortgagee by a mortgagor or successor
  in interest or to a beneficiary of a deed of
  trust by a trustor or successor in interest

85
Property Code 5.016

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

86
Property Code 5.016

• (5)  by a fiduciary in the course of the
  administration of a decedent's estate,
  guardianship, conservatorship, or trust
• (6)  from one co-owner to one or more other
  co-owners
• (7)  to a spouse or to a person or persons in the
  lineal line of consanguinity of one or more of
  the transferors

87
Property Code 5.016

• (8)  between spouses resulting from a decree of
  dissolution of marriage or a decree of legal
  separation or from a property settlement
  agreement incidental to one of those decrees
• (9)  to or from a governmental entity

88
Property Code 5.016

• (10)  where the purchaser obtains a title
  insurance policy insuring the transfer of title
  to the real property or
• (11)  to a person who has purchased, conveyed, or
  entered into contracts to purchase or convey an
  interest in real property four or more times in
  the preceding 12 months.

89
Property Code 5.016

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

90
Property Code 5.016

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

91
Property Code 5.016

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

92
Alternatives to the conventional when buying

• Contract for deed
• Subject to existing loan
• Lease or sublease
• Lease with an option
• Acquire the beneficial interest in a trust
• Sign a contract and then assign the contract
• Wrap the existing lien - recommended

93
Alternatives to the conventional when selling

• Contract for deed
• Subject to existing loan
• Lease or sublease
• Lease with an option
• Sell the beneficial interest in a trust
• Sell the interest in a legal entity
• Contract and assign the contract
• Wrap the existing lien - recommended

94
Benefits of owning real estate?

• Use of the property
• Includes income from the use of the property
  (rent)
• Profit from the sale of the property
• Tax benefits

95
How do you make money investing in real estate?

• 1. Buy low and sell high
• 2. Buy, hold, and generate income
• 3. Contract to acquire an interest, and then
  sell or assign your contract

96
Traditional approach

• Investor enters into a contract, buys with a new
  loan, rents to a tenant, sells to a buyer who
  gets a new loan
• Investor doesnt take risk that a lender might
  call the existing note immediately due and payable

97
Conventional contracting

• Use a real estate professional
• Use standard contract forms
• TREC - Texas Real Estate Commission
• TAR - Texas Association of Realtors
• NTCAR - North Texas Commercial Association of
  Realtors
• Close through a title company
• Get and record a deed at closing

98
Conventional financing when buying

• Use your own cash (limited capability for most)
• Get a new loan or assume an existing loan
• Receive and record a deed from the seller
• Close through a title company

99
Conventional financing

• Conventional financing
• Must qualify but best interest rates
• Personal liability and loan is due on sale
• Private conventional financing
• Higher interest
• More flexible in qualifying, but still must
  qualify, and loan is due on sale
• Personal liability
• Hard money lender
• IRA lender
• Family lender

100
Conventional assumption of existing loan

• Assume sellers existing loan
• Must qualify to assume the loan
• Personal liability

101
Why not buy using conventional approach today?

• More difficult for the buyer to qualify for a new
  loan
• Personal liability and due on sale
• Market uncertainty
• Cash is limited and is at risk
• It may be easier in todays market to find a
  motivated seller for whom the traditional
  approach wont work

102
Why not sell using conventional approach today?

• More difficult for a buyer to qualify for a new
  loan
• It may be easier and more profitable in todays
  market to rent to a tenant
• It may be easier in todays market to find a
  motivated buyer for whom the traditional approach
  wont work
• More of a need to sell quickly

103
Downward pressure on property values

• Fewer buyers who are qualified to get a new loan
• Lots of foreclosed properties held by lenders
• Lots of people out of work
• More people may lose their jobs
• More sellers who need to sell
• Government is currently laying off workers
• Government is increasing taxes

104
Why continue to invest in real estate today?

• Government spending without taxing will likely
  lead to inflation of capital assets such as real
  estate
• Growth in population in certain geographic
  markets
• Better opportunities to rent
• Pent up demand may cause a spike in prices
• Tax advantages

105
Why should an investorconsider using leverage
now?

• Likely higher interest rates in the future due to
  inflationary expectations
• Motivated sellers in todays market may be more
  inclined to offer non-recourse, no personal
  liability financing

106
Risk factors of buyingsubject to an existing loan

• Due on sale risk too much attention paid to
  this?
• Risk of shark attacks and airplane travel vs.
  taking a shower
• Title and survey risks Cash at risk? Equity at
  risk?
• Title insurance and new survey costs vs.
  protection
• Previous title insurance for owner and
  conventional lender
• Wrong seller or missing link in chain of title
• Liens
• Death
• Bankruptcy
• IRS
• Judgment creditors

107
Risk factors of buyingsubject to an existing loan

• What if underlying loan is called
• No equity / some equity / lots of equity
• Inflationary expectations / higher market
  interest rates
• How do you limit/prevent lawsuits by sellers and
  buyers
• Comply with the law
• Disclose risks in writing and have it signed
• Record documents?
• Get evidence of delivering documents
• What about possible lawsuits by underlying
  lenders
• Insurance issues
• Show ownership and obtain proper endorsements

108
Risk factors of buyingsubject to an existing loan

• Compare these risks with the risk of personal
  liability
• Compare these risks with the risk of cash
  invested
• Compare these risks with the costs of
  conventional financing
• Interest rates may be lower
• Insurance costs may be lower

109
Benefits to the investor of having the seller
finance your purchase

• Lower the financial risk
• Ability to negotiate terms that are not typically
  available from institutional lenders
• No or low interest
• No prepayment penalty maybe even a discount to
  pay early
• No points up front
• No required survey or title insurance policy
  costs
• No requirement to have to escrow taxes or
  insurance
• No qualifying ratios
• No loan processing costs
• No limit to the number of loans you can have or
  properties you can own

110
Benefits to the investor of having the seller
finance your purchase

• Lower the legal risk
• No personal liability -
• The sole recourse of the owner/seller/lender is
  to foreclose on the property - no deficiency
  judgment
• Provide that the seller/lender will accept a deed
  in lieu of foreclosure from the borrower
• Ability to control the payment process
• Provide for the option to pay the underlying
  lender directly
• Ability to control the communication process
• Obtain the right to communicate with the
  underlying lender
• (a power of attorney implies fiduciary duties, so
  a simple authorization directing the underlying
  lender to communicate with the investor should
  suffice
• Provide for notices to be sent to the investor

111
Residential investor strategies

• Buy a house and rent it
• Pay as low a price as can be negotiated
• Use as little cash as possible
• Use somebody elses money to finance the
  purchase/fix-up
• Try to find a tenant to rent it
• Hope that the net rent after debt service, taxes,
  insurance, repairs, and costs of leasing/managing
  the property will generate a positive cash flow,
  will provide an appropriate rate of return given
  the risk and the management intensive nature of
  the investment, and will eventually retire the
  debt.
• Hopefully the investor will be able to take
  depreciation deductions that will reduce the
  amount of income taxes to be paid.

112
Residential investor strategies

• Buy a house, fix it up, and resell it
• Pay as low a price as can be negotiated
• Use as little cash as possible
• Use somebody elses money to finance the purchase
  and fix-up
• Try to find a buyer who will pay cash or get a
  new loan to pay the purchase price, and hope that
  the net sale proceeds will be higher than the
  investors cost basis in the property, and
  provide an appropriate rate of return given the
  risk and the management intensive nature of the
  investment
• Hopefully the investor will be entitled to long
  term capital gain treatment that will reduce the
  amount of income taxes to be paid.

113
Purchase financing options

• Pay cash
• Assume an existing loan (personal liability)
• Get a new loan (personal liability)
• Get the owner to finance all or some of the
  purchase price
• Give the seller a first (if no other loans), or a
  second (personal liability or no personal
  liability)
• Give the seller a wraparound or all-inclusive
  note (personal liability or no personal
  liability)
• Buy subject to the existing debt (no personal
  liability)

114
Investor exit strategies

• Rent and pay off debt
• Resell and give the buyer a deed
• Get cash from buyer
• Buyer gets a new loan
• Buyer assumes the sellers loan

115
Investor exit strategies

• Resell and give the buyer a deed
• Seller carries a note secured by a deed of trust
  for some or all of the financed purchase price
• Seller carries a wraparound or all-inclusive note
  secured by a deed of trust for all of the
  financed purchase price

116
Investor exit strategies

• Contract for deed - Property Code changes in 2001
  ( 5.061 et seq.)
• Lease and give the tenant an option to buy -
  Property Code changes in 2005 - 5.062 (a) (2)
• A lease for less than three years combined with
  an option to purchase - 5.062 (f)
• A lease for more than three years combined with
  an option to purchase

117
Keys to successin owner financing

• Dont play if you cant pay.
• Dont buy property if you cant afford to
  independently service the debt for a reasonable
  period of time.
• The two primary reasons business fail
• Inadequate capital
• Lack of managerial experience

118
An example of an investor purchasing property
using a wraparound loan

• Mr. and Ms. Stone bought a house in 2006.
• They paid 150K, put down 15K, and borrowed
  135K from Big Mortgage.
• The interest rate on the loan was 7.25, and
  their monthly payment, amortized over 25 years,
  was 975.79.
• After paying for three years, their principal
  balance was 128,580.
• Then Ms. Stone got hurt, and Mr. Stone lost his
  job.
• Unfortunately, the house is now only worth 140K.

119
An example of an investor purchasing property
using a wraparound loan

• They need to sell, list the property, but realize
  that would have to come out of pocket cash they
  dont have if they have to pay their commission
  and closing costs. The listing expires. They
  are now three payments in arrears, totaling more
  than 3K.
• An investor approaches them to see if they are
  willing to sell for the amount of their debt.
• The lender is asked if it will waive the due on
  sale clause if the loan is brought current. The
  lender declines or does not respond to the
  request (typical)
• The Stones decide to sell to Investor using a
  wrap.

120
An example of an investor purchasing property
using a wraparound loan

• The investors LLC gives a non-recourse, no
  personal liability note to the Jones, in an
  amount exactly equal to their principal balance
  when the loan is brought current.
• The investors LLC gets a deed from the Stones,
  and then gives the Stones a deed of trust that
  will give them the right to foreclose if the
  wraparound loan isnt paid.
• The Jones sign an affidavit, stating that they
  understand that Big Mortgage might call their
  note due, and that they still owe the debt.
• The investor and the Stones decide to take that
  risk.

121
An example of an investor selling property using
a wraparound loan

• Investors LLC, having a recorded deed from the
  Jones, advertises the property for sale with
  owner financing as a possibility.
• Bill Blast, who has 12K in cash, wants to buy
  the house, but he cant qualify by conventional
  standards to obtain a new loan to pay off the
  128,500 that is still owed.
• Investors LLC decides to sell the property to
  Bill Blast for 140K, with 10 down, and with the
  balance of the purchase price carried by the
  investor in the form of a wraparound note.

122
An example of an investor selling property using
a wraparound loan

• Bill Blast gets a deed, and gives a wraparound
  note to Investors LLC for 130K, with interest
  at 9 for 20 years. Bills payment is 1,169.64.
  He signs a wraparound deed of trust, closes at a
  title company, takes possession and starts making
  payments.
• Bills payments of 1,169.64 are made to
  Investors LLC, which in turn pays Big Mortgage
  975.79 monthly.
• Investors LLC has ordinary income, and interest
  income, on which it must pay taxes.

123
Risks of using wraparound notes and deeds of
trust to buy property in Texas

• The underlying lender might exercise its rights
  under the "due on sale" or "due on transfer"
  clause and require the underlying loan to be paid
  immediately.
• Both the buyer and the seller must clearly be
  made aware of this risk and be willing to take
  the risk, having been fully apprised of the
  possible consequences.
• It might be more difficult to convince the IRS as
  to which party should be entitled to certain tax
  benefits.

124
Risks of using wraparound notes and deeds of
trust to buy property in Texas

• The underlying lender might exercise its rights
  under the "due on sale" or "due on transfer"
  clause and require the underlying loan to be paid
  immediately.
• Both the buyer and the seller must clearly be
  made aware of this risk and be willing to take
  the risk, having been fully apprised of the
  possible consequences.
• It might be more difficult to convince the IRS as
  to which party should be entitled to certain tax
  benefits.

125
When buying, what are the investors options

• Pay cash
• Get a new loan (full recourse, personal
  liability, substantial closing costs)
• Assume an existing loan (full recourse, personal
  liability, closing costs)
• Get a deed from the seller subject to the
  existing debt (sometimes includes express
  language that the buyer is not personally liable
  for paying the seller's existing debt, and is not
  assuming the debt)

126
Why not borrow the money?

• Of the five borrowers who qualified for a given
  loan one year ago, only one qualifies today.
  Dan Duran, Ron Legrands Workshop 11/8/2009
• A bank is a place that will lend you money if
  you can prove that you don't need it. Bob Hope
• Remember that credit is money. Benjamin
  Franklin
• Rather go to bed with out dinner than to rise in
  debt. Benjamin Franklin
• Institutional lenders take no prisoners.

127
Another option

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

128
Owner financing with a wrap instead of buying
subject to existing debt

• Problem Most lay buyers and sellers, as well as
  lawyers, judges, and real estate brokers, have
  problems understanding buying subject to an
  existing debt.
• Because the seller does not have a contractual
  remedy (can't 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
  buyer and allege fraud or misrepresentation
  against the buyer.
• Solution Give the seller the sole remedy of
  foreclosure (with no personal liability against
  the buyer) if the