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@email.com
www.texasrealestatlaw.net
214-769-7377
DFW REI Club
Haltom City, Texas
July 27, 2013
1
Bryan Dunklin
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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
2
Bryan Dunklin
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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
3
Recent speeches
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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 4
firms
Disclaimer
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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.
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No attorney-client relationship is established by the
presentation of these materials.
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You are advised to consult an attorney with respect to your
specific circumstances.
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Q&A
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I encourage questions. Please write them down and
wait until the Q&A period. I’ll 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
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My PowerPoint
Presentations
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Sign my email list and I’ll send
you my PowerPoint presentations
and other articles
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Today’s topics
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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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8
The problem when the
investor is buying
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Investors want to buy property without having to be
personally liable for repaying the debt.
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Investors sometimes want to keep in place the existing
financing (attractive rate or other terms).
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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.
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Investors don’t want to pay high interest rates or high closing
costs.
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Investors don’t want to be sued if they don’t pay the loan.
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Investors don’t want to be delayed by the approval process.
9
The problem when the
investor is a landlord
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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
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Investors want a buyer who will pay a premium price.
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Investors want a buyer who will pay cash, or who will lose
significant earnest money if the buyer doesn’t close.
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If the investor has to finance the buyer’s 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 doesn’t 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.
11
Options
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Conventional financing
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Lease with an option
– The tenant has an option to purchase the property
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Contract for deed
– The buyer doesn’t get a deed until the full purchase price
is paid
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Land trust
– The buyer is assigned the beneficial interest in a trust and
eventually has the right to control the sale of the property
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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 doesn’t pay
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Two key factors
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Due on sale clause
– Inflation and rising interest rates
– Enforceable? Garn - St. Germain Depository
Institutions Act of 1982
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Stricter lending standards
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Record defaults and foreclosures
Weaker secondary market
Declining values
Overhand on the market
Dodd Frank
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Due-on-sale clause
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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.
Due-on-sale clause
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“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.”
Texas Real Estate Forms
Manual due-on-sale clause
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"If Grantor transfers any part of the Property without Lender’s 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 coGrantor; (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 Grantor’s death; and (g) transfer to an inter vivos trust in which
Grantor is and remains a beneficiary and occupant of the Property."
Due-on-sale litigation
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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
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. § 1701j3(d)(2000)
Garn-St. Germain Act
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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
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”
Garn-St. Germain Act
regulations
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§ 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.”
Garn-St. Germain Act
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§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);
Garn-St. Germain Act
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(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
Garn-St. Germain Act
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(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.
Can the lender call the note due if there
is a due on sale clause and the property
is sold without the lender’s consent?
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Clearly the answer is “yes.”
So if a lender has this contractual right, why wouldn’t 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.
Will the lender exercise it’s
right to call the note due under
its due-on-sale clause?
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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 lender’s consent.
They can, and they might.
Case law on
due-on-sale clauses
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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.
Key statutes when
owner financing is involved
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Texas SAFE Act
– licensure required for Residential
Mortgage Loan Originator (RMLO)
– HB 10, HB 2774, HB 2779
81st Legislature – 2009
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Dodd Frank Mortgage Reform Act
– Lender must document borrower’s ability
to repay
Key statutes when
owner financing is involved
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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
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Texas SAFE Act
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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
Texas SAFE Act
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If you lend money, or arrange for the lending of
money, or if you advise someone about mortgages,
even if it’s 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
Texas SAFE Act
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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
Texas SAFE Act
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(19) "Residential mortgage loan originator":
– (A) means an individual who for compensation or
gain or in the expectation of compensation or gain:
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(i) takes a residential mortgage loan application; OR
(ii) offers or negotiates the terms of a residential mortgage
loan; and
– (B) does not include:
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(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;
Texas SAFE Act
– (B) does not include:
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(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;
Texas SAFE Act
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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
Texas SAFE Act
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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.
Texas SAFE Act
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
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:
Texas SAFE Act
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
(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.
Texas SAFE Act
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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.
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.
Texas SAFE Act
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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
41
RMLO
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INCLUDES
– An individual who for compensation
takes a residential mortgage loan
application OR
 offers or negotiates the terms of a
residential loan

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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
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RMLO
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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”
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License requirements
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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
44
Penalties

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
45
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
46
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
47
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 prelicensing education on Texas rules
48
Dodd Frank Update

Go to other PowerPoint presentation
49
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
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
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
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)
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)
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)
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)
Lease with
option of < 3 years

Only the following apply to a lease with
option of < 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)
§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.
§5.085 Maintenance
of 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.
§5.085 Maintenance of
Fee 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
§5.085 Maintenance of
Fee 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
§5.085 Maintenance of
Fee 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;
§5.085 Maintenance of
Fee 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;
63
§5.085 Maintenance of
Fee 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;
§5.085 Maintenance of
Fee 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
§5.085 Maintenance of
Fee 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);
§5.085 Maintenance of
Fee 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
§5.085 Maintenance of
Fee 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 doesn’t pay
landlord and then pays lender?
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
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
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.
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 30days;


(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)
Contract terms and
certain 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
Contract terms and
certain 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)
Contract terms and
certain 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.
Property Code § 5.016


Sec. 5.016. CONVEYANCE OF
RESIDENTIAL PROPERTY
ENCUMBERED BY LIEN.
Selling residential property
subject to existing liens when the liens
remain in place more than 30 days
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
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;
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;
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;
Property Code § 5.016

(6) states the amount of any
property taxes that are due on the
property; and
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.
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.
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;
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;
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;
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;
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.
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.
Property Code § 5.016

Problem areas:
– What is the buyer’s 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?
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.
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
92
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
93
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
94
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
95
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 doesn’t take risk that a lender
might call the existing note
immediately due and payable
96
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
97
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
98
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
99
Conventional assumption
of existing loan

Assume seller’s existing loan

Must qualify to assume the loan

Personal liability
100
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 today’s market to
find a motivated seller for whom the
traditional approach won’t work
101
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 today’s market to rent to a tenant
It may be easier in today’s market to
find a motivated buyer for whom the
traditional approach won’t work
More of a need to sell quickly
102
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
103
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
104
Why should an investor
consider using leverage now?


Likely higher interest rates in the
future due to inflationary expectations
Motivated sellers in today’s market
may be more inclined to offer nonrecourse, no personal liability financing
105
Risk factors of buying
subject 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
106
Judgment creditors
Risk factors of buying
subject 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
107
Risk factors of buying
subject 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
108
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
109
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
110
– Provide for notices to be sent to the investor

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 else’s 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.
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 else’s 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 investor’s
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.
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 allinclusive note (personal liability or no personal
liability)
Buy subject to the existing debt (no
personal liability)
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 seller’s loan
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 allinclusive note secured by a deed of
trust for all of the financed purchase
price
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
Keys to success
in owner financing



Don’t play if you can’t pay.
Don’t buy property if you can’t
afford to independently service
the debt for a reasonable period
of time.
The two primary reasons business fail
– Inadequate capital
– Lack of managerial experience
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.
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 don’t
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.
An example of an investor
purchasing property using a
wraparound loan




The investor’s 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 investor’s 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 isn’t 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.
An example of an investor
selling property using a
wraparound loan



Investor’s 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 can’t qualify by conventional
standards to obtain a new loan to pay off the
$128,500 that is still owed.
Investor’s 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.
An example of an investor
selling property using a
wraparound loan



Bill Blast gets a deed, and gives a wraparound note
to Investor’s LLC for $130K, with interest at 9% for
20 years. Bill’s payment is $1,169.64. He signs a
wraparound deed of trust, closes at a title
company, takes possession and starts making
payments.
Bill’s payments of $1,169.64 are made to Investor’s
LLC, which in turn pays Big Mortgage $975.79
monthly.
Investor’s LLC has ordinary income, and interest
income, on which it must pay taxes.
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.
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.
When buying, what are
the investor’s 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)
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 Legrand’s 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.
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
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 buyer doesn't
pay the seller's loan.
Consider negotiating for the right of the seller to execute and
deliver and file a deed of the property back into the name of
the seller.
Problem: The owner is
motivated to sell, and he:






Needs cash
Is in default of his mortgage
Can’t afford the mortgage payments
Needs to sell but he can’t afford to come
out of pocket to close the sale by paying all
the debts, commissions, and closing costs
Can’t afford to maintain or fix up the
property
Wants out for whatever reason
Opportunity: Get the owner to
carry part of all of the financing



If the property is free and clear, see how
much of the purchase price the owner will
finance in the form of a loan secured by the
property
If the property has some debt, see if the
loan is assumable, or if the owner will
finance some of the purchase price
Problem: What if the property has lots of
debt relative to the fair market value?
Opportunity: Get the owner
to carry all of the financing



The owner may be willing to leave his
existing loan in place, and finance your
purchase by taking back a loan from
you in an amount exactly equal to the
amount of the debt he owes.
You may be able to get the exact same
terms from him as he has on his
existing loan.
You will pay him, and he will then pay
his lender.
More reasons for the investor to
want to use owner financing to
buy?
You are more likely to:
• Qualify for the loan since the motivated seller
is the one making the loan
• Be able to buy and close quickly
• Not have to pay points
• Not have to pay appraisal fees
• Not have to pay origination and other fees
normally associated with an institutional loan
• Not have to pay other closing costs
associated with a new loan
Where do you find motivated
sellers that will do owner
financing?
Foreclosure lists – non-judicial and judicial foreclosures
IRS foreclosure records
Property tax foreclosure records
Sheriff or constable execution sales
Condo association and property owners association foreclosures
Court records of persons being sued (if they own property)
Divorce court records
Probate court records (frequently there is a great deal of equity in
the property, the heirs have smaller, divided interests, and 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)
Bankruptcy records – motions to lift the automatic stay
Criminal proceedings and criminal defense lawyers
Code violation records
Owner Financing When the
Investor is Buying
DO
– Use a separate legal entity to do your
buying and selling – i.e., a Texas LLC
– Use contractual provisions to limit your
liability (make it a non-recourse loan)
– Give the other party a clear remedy, but
one that is limited to foreclosure of the
lien securing his note
– Get and record the deed
When you’re buying
DO
– Reserve the option to pay the underlying
lender directly
– Provide that the payment of the
underlying loan will automatically release
the seller’s wraparound deed of trust lien
– Include a provision that gives the investor
the right to give the property back
When you’re buying
DO
– Get written authority to communicate
with the underlying lender
– Have the seller sign an affidavit to be
filed that will make it clear that he
understands the risks involved
– Have the seller sign a receipt
acknowledging that he has been given
copies of all the documents
When you’re buying
DO
– Obtain an endorsement to the insurance
policy indicating that the investor is the
new owner
– Include a provision that requires the
seller to give you a written notice of
default and an opportunity to cure
– Include an assignment of insurance
proceeds and monies held in escrow
When you’re buying
DO
– Try to get the underlying lender to waive
its due-on-sale clause
DON’T
– Include a due-on-sale clause in the
seller’s deed of trust
When you’re buying
DON’T
– Just get a deed subject to the debt
– Fail to fully disclose to the seller the loan
provision that gives his lender the right to
call the note due as a result of the sale to
you
– Buy properties where you have no
clear source of repayment or you
can’t afford to carry the debt service
for a reasonable length of time
Legal documents when
buying

What you should have when buying and the seller is financing
part or all of the purchase price
– Deed with vendor’s lien – to be signed by the seller to the
investor – with legal description and notary
acknowledgement – to be recorded with the County Clerk
– The note (first, second, or wrap) – (negotiate for it to be
non-recourse) - to be signed by the investor in favor of
the seller
– The deed of trust (first, second or wrap), to be signed by
the investor in favor of the seller, with an
acknowledgement, to be recorded with the County Clerk
– Affidavit to be signed by the seller in the presence of a
notary to be recorded with the County Clerk
– Receipt of documents to be signed by the seller
– Amortization schedule to reflect the payments to be made
What an affidavit from the
seller should include




A statement that the seller is aware of the fact that the
underlying lender has (not just may have) the right to call the
underlying note immediately due and payable as a result of
the transfer of title from the seller to the investor
A statement that the seller understands that he remains liable
for the payment of the underlying debt and the performance
of the provisions of the deed of trust securing it
A statement that the seller is aware that if the lender calls the
underlying note immediately due and payable, 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
foreclosure of the property by the underlying lender
A statement that the seller understands that the investor
intends to lease or resell the property and may carry owner
financing to facilitate the resale
Owner Financing When the
Investor is Seller
Legal Issues
DO
– Use a separate legal entity to do your
buying and selling – i.e., a Texas LLC
– Make the note being carried full recourse
with personal liability to the buyer
– Provide for a late payment charge
– Give the buyer an amortization schedule
– Execute and record the deed to the buyer
Owner Financing When the
Investor is Seller
Legal Issues
DO
– Include a provision that will require the
buyer to pay attorney’s fees and costs in
the event of a default
– Include a provision that will require the
buyer to pay the underlying debt if it is
called
– Have the seller sign an affidavit to be
filed that will make it clear that he
understands the risks involved
Owner Financing When the
Investor is Seller
Legal Issues
DO
– Have the seller sign a receipt
acknowledging that he has been given
copies of all the documents
– Close through a title company, or provide
the written disclosure that is required by
§5.016 of the Texas Property Code.
– Obtain an endorsement to the insurance
policy reflecting the change in ownership
Owner Financing When the
Investor is Seller
Legal Issues
DO
– Include a provision in your note that
payments must be paid directly to the
investor seller, but that provides a credit
to the buyer if the underlying lien is not
paid and the buyer has to do so
– Include a due-on-sale clause in favor of
the seller in the deed of trust
– Include a clear reference to the existence
of all underlying loans and any liens
securing such underlying loans
Owner Financing When the
Investor is Seller
Legal Issues
DO
– Include a provision that your buyer will
be in default if he contacts the underlying
lender
– Include a provision that gives the seller
the right to require the buyer to pay tax
and insurance escrows to the seller
– Your due diligence on the buyer/borrower
– Disclose, disclose, disclose
Owner Financing When the
Investor is Seller
Legal Issues
DON’T
– Have the same person close the sale of more
than five transactions within a twelve month
period unless that person is licensed as a
mortgage broker
– Sell to someone who has no demonstrable ability
to pay the loan back
– Have a deed in lieu of foreclosure signed in
advance of a default
– Delay in exercising your remedy of foreclosure or
to lift the automatic stay if the buyer files
bankruptcy
The documents when seller
financing

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 than thirty
days
– 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, with
legal description and notary acknowledgement, to be filed with the
County Clerk
– The note (first, second, or wrap) should be full-recourse and with
personal liability, to be signed by the buyer in favor of the investor
– The deed of trust (first, second or wrap), to be signed by the buyer in
favor of the investor, with acknowledgement, to be filed with the County
Clerk
– Affidavit to be signed by the buyer in the presence of a notary, to be filed
with the County Clerk
– Receipt of documents to be signed by the buyer
– Amortization schedule
What an affidavit from the
buyer should include


A statement that the buyer is aware of the fact that the
underlying lender has (not just may have) the right to call the
underlying note immediately due and payable as a result of
the transfer of title from the investor to the buyer
A statement that the buyer understands that if the underlying
lender calls its note immediately due and payable, that the
wrap loan to the investor will become immediately due and
payable to the extent of such accelerated debt and that the
buyer may not be able to timely sell or refinance the property
and could lose their equity
The Documents
The 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 Documents
The 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 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
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 note






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 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 note
How payments will be applied
 Late payment provisions


Usury savings clauses
What should be in the deed of
trust/security agreement?





Signature of the debtor
Acknowledgment before a notary public (this is
usually required to record the document)
Description of the collateral pledged
Reference in some detail to the indebtedness that is
secured by the collateral (borrower, lender,
amount, date of loan)
Power of sale – for states that allow non-judicial
foreclosure of the collateral
What should be in the deed of
trust/security agreement?





Due on sale clause – the right of the lender to
call the note due if any interest in the collateral
is transferred
Warranties from the party hypothecating the
collateral that it has legal title to such property
Provisions for payment of property taxes and
insurance on the collateral with the lender
named as an additional insured (right of lender
to require payments of T&I into escrow
controlled by the lender
Late charge provisions
Foreclosure procedures detailed
What should be in the deed of
trust/security 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
Collecting the owner
financed note - 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
Collecting the owner
financed note - 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
Foreclosing on the collateral
Non-judicial foreclosure sales


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
Foreclosing on the collateral
Non-judicial foreclosure sales

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
Foreclosing on the collateral
Non-judicial foreclosure 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
Foreclosing on the collateral
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
Foreclosing on the collateral
Non-judicial foreclosure sales



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
Foreclosing on the collateral
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
Foreclosing on the collateral
Non-judicial foreclosure sales

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.
Foreclosing on the collateral
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
when the investor is selling



In the present market, it’s hard to find
buyers who will qualify for a loan to pay
you for your property
Because you can provide the buyer with
a loan he couldn’t otherwise get, buyer
will buy your house rather than some
other property, and pay you a higher
price.
You can get more down payment
Opportunity
You could buy a house and owner
finance it for someone who wants to
buy but who cannot qualify for a
conventional loan
What keeps us from doing a
transaction in this market?
FEAR



Fear of buying something that will go
down in value or that won’t cash flow
Fear of incurring debt we can’t repay
Fear of doing something that might be
“illegal” or risky
Why use owner financing?
What are we really talking about
today?
FEAR vs. GREED
“There are two levers to set a man in
motion, fear and self-interest.”
Napolean Bonaparte
The greed part is obvious. We want to
make money by buying low and selling
high.
Risks vs. benefits
We all take risks.


We sign up for a year’s contract on our cell phone.
We drive a car. We could kill someone. We could
get a ticket. We could be sued.

Some of us borrow money.

We make promises we are expected to keep.
Risks vs. benefits



“Let our ‘yes’ be our ‘yes,’ and our ‘no’
be our ‘no’.”
Keep your word.
Do what you say you’re going to do
when you say you’re going to do it.
Risks in purchasing property
Options when you buy



Pay cash – risk that market declines and our cash
equity is lost
Borrow some or all of the purchase price
– From institutional lenders – risk that market
declines, and/or income from the property won’t
pay the debt service, that the property is
foreclosed, that we have personal liability for
a deficiency, and that our other assets are
available to satisfy the deficiency judgment
Borrow from the seller – personal liability
Personal liability risk


Personal liability – risk that market declines,
and/or income from the property won’t pay the
debt service, that the property is foreclosed, that
we are personally liable for a deficiency, and that
our other assets are available to satisfy the
deficiency judgment
No personal liability – not much risk – legally or
financially
Due on sale risk

Risk that the underlying lender calls the note
due
– 1. Lots of equity in the property – equity
could be lost, but probably lots of equity means
we can sell and pay off the debt, and recoup
some of our equity, or refinance
– 2. Not much equity in the property – equity
could be lost, but not enough to be able to sell
and recoup equity or to refinance (problem area)
– 3. No equity or negative equity – not much
to lose
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
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
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 prociess
– 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

What is a land trust?

A device by which real estate is
conveyed to a trustee under an
agreement reserving to the
beneficiaries the full management and
control of the property
Trusts in Texas


A fiduciary relationship in which one
person holds a property interest
subject to the equitable obligation to
keep or use that interest for the
benefit of another
A three party contract
A trust

Is not a separate legal entity
– Cannot be sued
– Cannot sue
The three party contract
1. The settlor/grantor/trustor
2. The trustee
3. The beneficiary
The deed to the trustee


Settlor transfers record or legal title to
the trustee
It’s recorded in deed records
The trust agreement


Is usually between just the settlor and
the trustee
Defines the rights and obligations of
the trustee, settlor and beneficiary
The “bet”




Two betters each give a bartender their $20
to hold, with the agreement that the
bartender will pay the $40 to the party that
wins the bet
The betters are the settlors of the trust
The bartender is the trustee
The betters are also the beneficiaries of the
trust
What about creditors of
the bartender?





The bartender doesn’t own the $40 – he
holds the $40 for the benefit of the betters
The bartender merely holds the $40 until
the game is over, and then gives the $40 to
the winner
Is the $40 like your suit at the dry cleaners?
Is the $40 like your watch at the repair
shop?
Can the IRS take the $40 from the
bartender if he doesn’t pay his taxes?
Trusts

Inter vivos

Testamentary

Revocable

Irrevocable
Texas authority
on land trusts

Texas statutes
– The Texas Trust Code

Case law
– None*

Treatises
– One law review article from 1973 by
Richard A. Sayles
Land trusts in Texaslack of authority

Potential problems

Potential opportunities


Transactional lawyers typically avoid
uncertainty (LLCs)
Uncertainty is the grist of the litigator’s mill
Two instruments create a
land trust

A deed of the property to the trustee
– It’s recorded

A trust agreement between the trustee
and the beneficiaries
– It’s not recorded
Deed




Trustee has full authority to sell,
mortgage, or lease the property
Third parties are fully protected in
dealing with the trustee
Third parties are not required to
investigate the trustee’s authority
Trustee is not personally liable
Deed (cont’d)




Trust is usually given a name
Beneficiary’s interest is personalty, not
realty
Beneficiary’s interest is limited to the
avails and proceeds of the corpus
Beneficiary has no interest in the real
estate
Land trust agreement





Trustee may not disclose the identity of the
beneficiary without court order or permission of all
beneficiaries
Trust agreement may not be recorded
Trustee may not sell or mortgage property without
written direction from the majority of beneficiaries
If not disposed of earlier, the trustee will sell the
property after 20 years and distribute the proceeds
The interest of the beneficiary is personalty, not
realty
Land trust agreement




Beneficiary has the right to possession of
the property
Beneficiary has right to manage and control
the property
Beneficiary has the exclusive right to receive
the avails and proceeds of the property
Beneficiary is responsible for paying all
debts
Land trust agreement



Trust is usually a living, revocable
trust
Settlor/beneficiaries retain right to
remove the trustee and name
substitute
Beneficiary agrees to defend,
indemnify and hold harmless the
trustee
The settlor = beneficiary


Sometimes the beneficiary creates the
trust and is both the settlor and the
beneficiary
Sometimes the property is purchased
by the beneficiary from the settlor,
who transfers the property to the
trustee in compliance with the terms
of the contract to sell
Statute of Uses


Outlawed the use of trusts
Courts modified the rule by stating
that a trust was valid so long as the
trustee had some duties and was not a
mere nominee title-holder
Is a land trust
really a trust?


It’s not clear and is yet to be determined
(very little Texas case law)
It looks like a trust – it involves
– a transfer of property to a trustee by a settlor
– a beneficiary
– a trust agreement between the settlor (the
beneficiaries) and the trustee that defines the
duties of the trustee and the interests of the
beneficiary
States validating
land trusts
Alabama*
Florida
Georgia*
Hawaii
Indiana
North Dakota
Ohio*
Virginia
Benefits




Privacy for the beneficiaries
Asset protection by discouraging
lawsuits
Ease of transfer of the beneficial
interests without affecting title to the
real estate
Convenience of multiple ownership
Benefits



Avoidance of probate
Ease of establishment and dissolution
of the trust
Minimal tax reporting requirements
What if the settlor
is also the beneficiary?


Known as a self-settled trust
Creditors of the beneficiary can reach
the assets of the trust in the hands of
the trustee
Federal income taxation


If the trustee has no real duties (an
empty trust), the taxable income is
taxed to the beneficiary
The beneficiary reports the income on
the beneficiary’s own tax return
Confidentiality

The trust agreement provides that
– The trustee may not disclose the name of
the beneficiary without the express
written permission of the beneficiary or a
court order directing the trustee to do so
– The public record merely reflects the
interest of the trustee, as a trustee
Issues


Duty to defend, indemnify, and hold
harmless the trustee
Title transfer questions
– Title insurance issues



Property and casualty insurance issues
Homestead issues
Income tax issues
It’s magic!


But is it?
No true protection of the assets in the
hands of the trustee
Why it works




Creditors don’t see the assets in the
hands of the trustee
Creditors don’t see the interest of the
beneficiary
Creditors are less likely to sue
Creditors are more likely to settle
Title problems


The mystery of the self-settled trust
Will a title insurer require the joinder
of the original owner, the trustee, and
the beneficiary?
Why Texas lawyers don’t
currently use land trusts

Uncertainty

Uncertainty

Uncertainty
Sources of
Statutory 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!
Follow through! Execute!

“Things may come to those who wait,
but only the things left by those who
hustle.” -- Abraham Lincoln

“Being very rich, as far as I am
concerned, is having a margin. The
margin is being able to give.” Unknown
You must ACT!
Follow through! Execute!

“The most successful businessman is
the man who holds onto the old just
as long as it is good, and grabs the
new just as soon as it is better.” -Unknown

“Even if you're on the right track,
you'll get run over if you just sit
there.” -- Unknown
You must ACT!
Follow through! Execute!

“The aim of education is action.” –
Unknown


“An ounce of action is worth a ton of
theory.” – Unknown
“Action is eloquence.” -- Shakespeare
Keys to success

Use what you learn:
– “Failures are divided into two classes --
those who thought and never did and
those who did and never thought.” -Unknown
222
Keys to success



Don’t play if you can’t pay.
Don’t buy property if you can’t afford
to independently service the debt for a
reasonable period of time.
The two primary reasons business fail
– Inadequate capital
– Lack of managerial experience
223
Keys to success

Perform your due diligence
– Know the market – get a good real estate broker on board
 For rental rates
 For sale prices
 Number of properties on the market? Going up, or
down?
 Average number of days on the market? Going up or
down?
– Condition of the property
 Use a third party inspector
 Inspect it yourself
 Get contractor bids
224
Keys to success

Perform your due diligence
– Title insurance
– Survey
– Property insurance
– Liability insurance
– Use an experienced lawyer, CPA, mortgage broker, and
real estate broker that understands creative real estate
techniques
225
Keys to success

Reduce your risks
– Don’t deal with “bad” people – check them out –
publicdata.com. If they’re a pain in the ass when you’re
first dealing with them, what should you expect down the
road when there’s a problem?
– Use a separate legal entity (Series LLC, LLC, or
corporation) to do your buying and selling
 “Corporation, noun, An ingenious device for obtaining
profit without individual responsibility” – Ambrose
Bierce
– Use contractual provisions to limit your liability
– Give the other party a clear remedy, but one that is
226
limited
Thank you for your attention.
Bryan Dunklin
Texasrealestatelaw.net
texaslaw@email.com
214-769-7377