Hector A. Chavana Jr. is a licensed real estate broker, and a practicing attorney in Houston, Texas. He has invested in real estate, and is familiar with current trends in real estate investment. He has prepared forms for real estate investors who are also real estate agents and Realtors, and has also helped consumers make claims against real estate investors. Call 713-979-2941 to set up a consultation with Hector Chavana Jr. Attorney Chavana is an attorney for real estate investors and consumers who deal with real estate investors.
This post discusses laws that should interest consumers and real estate investors:
- Chapter Five of The Texas Property Code
- The Law that Might Allow Courts to Re-Write Overreaching Documents
- The Texas Real Estate Fraud Statute
- The Texas SAFE Act
- Dodd Frank
- The Statute of Frauds
- Insurance Funds and Real Estate Investors
- Wholesaling, TRELA and the Administrative Code
- MLS Rules that Apply to Realtors
- Texas Deceptive Trade Practice Act (DTPA)
- Subject To Mortgages in Texas
Chapter 5 Tex. Prop. Code
Chapter Five of the Texas Property Code should be of interest to real estate investors. Chapter five is often associated with contracts for deed. Contracts for deed are contracts in which the seller promises to release legal title to the buyer only after the buyer has made full and complete payment under the contract. It is true that Subchapter D, in part, regulates contracts for deed. However, the scope is limited to a “conveyance 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.”
In another respect, Subchapter D is wider than a just a “contract for deed statute.” The Subchapter regulates all executory contracts for the sale of real estate in which the seller will not convey title within 181 days, and even regulates certain purchase options. For example, a standard TREC contract in which the parties contemplate a closing in a year would likely bring the contract under the purview of Subchapter D.
Subchapter D has very strong protections and remedies for buyers, including rescission and eviction protection. An attorney for real estate investors can help you determine whether a particular deal is subject to Subchapter D. Call Hector Chavana Jr to set an appointment to discuss your real estate investment contract. 713-979-2941.
Overreaching Can Harm Contracts
Here, overreaching just means creating terms in a contract that go against the intent of the parties or terms that are contrary to public interest. As part of investment strategy, some real estate investors lend money to homeowners and require that the homeowners sign a deed (instead of a deed of trust) in exchange for the loan. The lender/investor believes that doing so puts him in a stronger position.
Many decisions disagreed even before relevant statutes were enacted. “Any conveyance of land absolute on its face, without anything in its terms to indicate that it is otherwise than an absolute conveyance, and without any accompanying written defeasance, contract of repurchase, or other agreement, may, in equity, by means of extrinsic and parol evidence, be shown to be in reality a mortgage as between the original parties.” Rincon Inv. Co. v. White, 54 S.W.2d 1052, 1053 (Tex. Civ. App.-San Antonio, 1932, writ dismissed). See also Wilbanks v. Wilbanks, Tex., 330 S.W.2d 607; Bradshaw v. McDonald, 147 Tex. 455, 216 S.W.2d 972; Kokernot v. Gilstrap, 143 Tex. 595, 187 S.W.2d 368; Parmenter v. Kellis, Tex.Civ.App., 153 S.W.2d 965.
Whether Section 41.006 Provides Exclusive Remedy
Texas courts have historically construed the constitutional prohibition against pretended sales of the homestead under conditions of defeasance to include situations where the owner conveys the property to a purchaser, who then leases the property back to the original owner with an option to purchase. Texas courts employ equity to look past the literal language of a deed to ascertain the true intention of the parties, namely, whether the parties intended the deed, otherwise absolute on its face, to in fact be a mortgage. The Supreme Court of Texas reaffirmed this state of the law on February 11, 1987, with its holdings in the case of Johnson v. Cherry, 726 S.W.2d 4 (Tex.1987).
Section 41.006 [of the Texas Property Code] was added by the Texas Legislature in 1987, to be effective as of September 1 of that year. Section 41.006 was apparently added by the Texas Legislature in order to codify the holding of Johnson v. Cherry. See Phillip D. Weller, Annual Survey of Texas Law Part I: Private Law Real Property, 42 Sw. L.J. 295, 310 (1988). Since its enactment, no published Texas opinion has applied or otherwise interpreted section 41.006. The issue, therefore, is whether section 41.006 replaces the previously developed Texas common law with respect to the conveyance of a homestead and a lease-back. In other words, does section 41.006 provide the exclusive remedy for the Jays?
While it is natural to bargain for the best position, courts will not allow an overreach in contracts. There is also a line of cases discussing equitable relief against forfeiture, which may apply to overreaching arrangements. Once a court determines that a contract is against public policy or that a contract is against some equitable principle, the court has wide latitude to fashion a remedy, a remedy that a real estate investor may not like. A real estate attorney can help draft contracts that are less likely to be seen as an overreach by a court. Courts generally do not undo a contract just because someone made a bad deal, but they might “look behind” the words of the agreement to ascertain the intent of the parties.
Statutory Real Estate Fraud
Tex. Bus. and Com. Code 27.01 can make certain real estate investors liable for the misrepresentation of others. Outside of this statutory contract, imposing liability on a person who has not actually engaged in misrepresentations is a little more difficult. For example, different theories of agency can impose liability on people who have not actually engaged in misrepresentation. The DTPA can also impose liability on a person who is “connected” to a transaction. Tex. Bus. and Com. Code 27.01 imposes liability on people who know of a misrepresentation, benefit from that misrepresentation and do not correct the misrepresentation.
A person who (1) has actual awareness of the falsity of a representation or promise made by another person and (2) fails to disclose the falsity of the representation or promise to the person defrauded, and (3) benefits from the false representation or promise commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages. Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.
This means that a real estate investor or real estate agent/broker can be held liable for the fraud of others, if he was actually aware of the fraud and benefited from the fraud. An attorney for real estate investors or an attorney for real estate agents can help to defend against or prosecute a claim for real estate fraud. Call Hector Chavana Jr at 713-979-2941.
Texas SAFE Act
The Texas SAFE Act requires investors who owner finance residential properties to people for personal, family or household use to be licensed. There is a de minimis exemption for people who finance “any owner of residential real estate who in any 12-consecutive-month period makes no more than five residential mortgage loans. Tex. Fin. Code 165.20.
Dodd Frank Act in Texas
Went into effect January 10, 2014. The complete rule can be viewed on the consumerfinance.gov site. This is a handy flowchart that will help you determine if Frank Dodd applies. Frank Dodd is very complex, and you should analyze the situation with a lawyer. The very basic things to understand is that Frank Dodd
- Generally Regulates investors that finance more than three residential purchases in a twelve month period;
- Regulates the types of mortgages that investors can offer; and
- Requires that investors analyze whether the borrower is in a financial position to pay the loan back.
An investor who does not follow the requirements under Frank Dodd may be subject to buyer-friendly remedies. Real estate agents may be responsible for Dood Frank requirements under certain circimstances. A good analysis of Frank Dodd can be found here.
Statute of Frauds and Legal Description
The Texas Statute of Frauds is a statute that requires a legal description to allow an unrelated party to locate the boundaries of the property. There is case law related to the Texas Statute of Frauds that speaks to the standards for the legal description. An address, alone, has been held to be sufficient, under some circumstances. An insufficient legal description can render a deed or a deed of trust void. An attorney for real estate investors can help you determine if a legal description is sufficient. Set up a consultation with Attorney Hector Chavana Jr. at 713-979-2941.
Insurance Funds
Chapter 557 deals with situations in which a lender holds insurance funds. The chapter requires that the lender promptly notify the borrower of the lender’s requirements in order for the lender to release the check. A lender’s failure to comply with the statute entitles the borrower to recuperate interest and a civil penalty. Real estate investors in Texas often create an escrow account for their buyers. In doing so, they are arguably a trustee for the insurance funds, and they have common law fiduciary duties. However, they also have statutory duties under Chapter 557.
Consider the doctrine of equitable conversion. “Where the vendee bears the risk of loss, and the contract is silent as to insurance, proceeds of any insurance policy maintained solely by the vendor, constitutes a trust fund for the benefit of the purchaser to be credited on the purchase price of the destroyed property. Cheatwood v. De Los Santos, 561 S.W.2d 273, 278 (Tex.Civ.App.—Eastland 1978, writ ref’d n.r.e.).” Guzman v. Acuna, 653 S.W.2d 315, 319 (Tex. App.—San Antonio, 1983), dismissed (Nov. 23, 1983). See also Cheatwood v. De Los Santos, 561 S.W.2d 273, 278 (Tex. Civ. App.-Eastwood, 1978, writ ref’d)(buyer gets insurance proceeds even when they did not pay for the policies)(“…the rule quite generally followed is that the proceeds of the vendor’s insurance policies, even though the purchaser did not contribute to their maintenance, constitute a trust fund for the benefit of the purchaser…”).
For a discussion of what happens when seller and buyer have a policy and when buyer holds equitable title, see Indiana Lumbermens Mut. Ins. Co. v. Metro Material Mktg., Inc., 646 S.W.2d 547, 550 (Tex. App.—Dallas, 1982)
Wholesaling, TRELA and the administrative code
For an good article regarding the new, codified in TRELA, regarding wholesaling, check out the link. As of September 1, 2017, there is an open question about what the state intends to regulate. Under one reading, a wholesaler need just disclose his equitable interest in order to comply with the statute. Under another reading, the wholesaler must avoid using his purchase contract (or option contract) to engage in real estate brokerage.
Many of the activities in which wholesalers engage seem to be in the nature of real estate brokerage. TRELA 1101.002. For example, selling or offering to sell real estate are considered real estate brokerage. The question will turn on whether wholesalers are “performing for another,” which is a requirement under the TRELA. Id. If courts find that wholesalers are performing for another, then, they could be liable for “a penalty of not less than the amount of money received or more than three times the amount of money received.” TRELA 1101.754.
TREC also has an administrative rule which may regulate some of the wholesaling activities.
What are the penalties for engaging in unlicensed brokerage activities? According to TREC, they are as follows:
Practicing real estate without an active license is a criminal offense, specifically, a Class A misdemeanor punishable by confinement of up to one year in a county jail and a fine of up to $4,000.00. [TRELA §1101.756] TREC can also pursue administrative penalties not to exceed $5,000 for each violation. Each day a violation continues can be considered a separate violation for imposition of the administrative penalties. [§1101.702 of the License Act] The Commission may also issue a “cease and desist” order. [§1101.759 of the License Act] Finally, as a State Agency represented in civil court proceedings, TREC can obtain injunctive relief, including court costs and attorneys fees incurred in obtaining such relief. [TRELA §1101.751]
See TAC §535.181 for authority.
DTPA
The Texas Deceptive Trade Practices Act (DTPA) is a statute that is often used to litigate disputes in real estate sales and leases. The DTPA is a powerful statute often used against real estate investors. The statute imposes liability for misrepresentations, even unintentional misrepresentations, and other conduct (nicknamed the laundry list) related to the sale and lease of goods. The statute defines real estate as a good. Furthermore, the statute allows for plaintiff to recuperate reasonable attorney fees for violations of the laundry list, for breaches of warranty and for unconscionable acts.
Tex Ins. Code Chapter 541
While case law does not appear to speak to the issue, at least one Harris County petition has alleged that an owner-financier can be held liable for duties under Chapter 541 of the insurance code. The claim appears dubious, since the express purpose of the chapter is to regulate “trade practices in the business of insurance.” Additionally, the statutes definition of a “person” does not appear include real estate investors. Still real estate investors should know that it has been alleged that they have duties under Chapter 541.
MLS Rules
Simply put, MLS is the multiple listing service administered by a private organization that allows its member-Realtors to list properties for sale on its website. As a private organization, the group can generally set its own rules and standards for listings. The Houston Association of Realtors has its own rules for MLS listings. Sometimes, wholesalers will want to list properties that they have under contract before they have become the owner of the property. MLS has rule 1.6, which might apply:
Listings which contain contingencies which render the listing unenforceable until the occurrences of a subsequent event shall not be accepted by Multiple. Examples of such contingencies are that the listing is contingent on owner(s) purchasing another property or contingent on owner(s) obtaining new employment.
The rule is somewhat ambiguous, but it may apply, depending on the structure of the underlying contract. Additionally, the rules say that “the Service may not accept net listings because they are deemed unethical and,
in most states, illegal.” In some cases, wholesale deals look somewhat like net listings. The question, as mentioned in the wholesale section above, might come down to whether the investor is “performing for another.” Rule 1.19 may also be read to exclude wholesale listings.
Owner’s Signature: Participants shall not sign seller’s or lessor’s name to a listing contract or any other Multiple form and the signature of all sellers or lessors is required for a listing or any other form to be broker-loaded or submitted to Multiple.
Subject To Mortgages in Texas
As part of an investment strategy, investors will often purchase property subject to an existing mortgage. Usually, the investors are fully aware that the mortgage company will likely have the right to call the note due. Tex. Prop. Code Sec 5.016 requires sellers to provide certain notices to the buyer and to the lienholder regarding the existing mortgage. A failure to provide the notices could result in termination of the contract.