Surplus or Excess Funds After Foreclosure

The typical foreclosure will not result in an amount above and beyond that which is owed to the lender, and the defaulted borrower may be on the hook for the deficiency. New laws allow the deficiency of the borrowers to be limited to the difference between the amount of the sale and fair market value, not the amount of the loan. It is in deficiency situations that the recommendation is to negotiate a short sale with the lender, which will release the borrower from a deficiency. However, in some situations, such as a long term loan which is mostly paid off or a foreclosing junior lien, there may be funds left over from the sale, which under the typical deed of trust must be returned to the defaulted borrower.

The primary document which by Texas law governs foreclosures and the distribution of funds by a trustee or substitute trustee is the deed of trust. In the standard deed of trust the funds obtained from a foreclosure sale are to be distributed first to cover the costs of foreclosure and the trustee’s fees. The fees are required to be reasonable, which means the trustee should have a reasonable fee policy and should have documented all actions undertaken in the foreclosure process. There are no supreme court cases or laws regulating the reasonableness of trustee fees, however, one case has rejected a 10% fee because the trustee failed to properly account for the work performed. Another case permitted a 5% fee as reasonable, so the assumption is that a fee should be between 5% and 10% and the services performed should be well documented to be permissible.

Next the deed of trust should require the repayment of the foreclosed loan. There are no legal requirements for notification of either junior or senior lien holders, however, most trustees will probably notify junior lien holders at least, so that a future claim against the trustee does not materialize, for collusion with the foreclosing lender, for example. The trustee may pay off the junior liens on its own, in order of priority. If a conflict exists between junior lenders regarding priority, the trustee will likely interplead the funds into the registry of a court, and allow a judge to decide to whom the money belongs, and in what order. Strong case law dictates the trustee may not pay off senior liens without the permission of the defaulted borrower. There is no reason to do so, since the prior lien is still attached to the property, and the borrower is still on the hook for it.

Finally, the left over funds, after paying the junior liens should be distributed to the defaulted borrower. This process typically takes some months to work through the banking and trustee/attorney web of intrigue and indifference. Demands and communications with the trustee should be made early and frequently, with all demands sent certified mail and calls well documented, in order to prod them to conclude the process of returning the funds. Typically, litigation should not be required, because the case will probably never make it to trial, and result in needless legal expenses. The law in this area is relatively well settled, and only in rare cases will a dispute result in a prolonged court battle. Typically, in case of a dispute between claimants, such as multiple defaulted borrowers each claiming a share, the trustee will simply interplead the funds and let a court decide who gets paid what.

Escrow Agreements

Escrow agreements are used to safeguard money or property with a neural third party while a transaction is completed. The escrow agent is the neutral party that will hold the property until the transaction is completed or fails and will act according to the terms set forth in the escrow agreement. To be more specific, the escrow agreement will detail the circumstances under which the agent will take and retain the property and whether anything will be done with it while it is stored. The agreement states how the property will be distributed, and finally, the agent’s fees, release from any liability while storing the property, and possibly an indemnification provision for any losses arising out of the storage of the property.

Typically, escrow agents require joint written instructions from the parties, because they agree as to the terms, otherwise a court order may be required, or some sort of neutral dispute resolution procedure. Sometimes, an agent will be permitted to resign if the parties cannot agree to the terms of the escrow agreement. In either case, an agent will be permitted to bring a legal action seeking declaratory relief as to the disposition of any property. Pertaining to the purchase of real estate, the escrow deposit takes place at the simultaneous signing of the contract and escrow agreement, wherein the purchaser deposits the earnest money with the agent until the deal is closed or a certain period of time passes without closing, or the buyer is at fault for the failure to close on the property and the funds are then remitted to the seller. Otherwise, the deal may fail to close through no fault of buyer or seller and the funds or a portion thereof are returned to the buyer. Problems in escrow agreement drafting occur when the terms of the storage, transfer or return of the funds are not made clear to one of the parties, or when certain expenses that the agent expects to have reimbursed, have not been explicitly listed, and the agent is permitted to deduct those expenses from the stored property, and even hold the property as security until the fees are paid.

There are also quasi-criminal escrow services that operate with relative frequency which possess the intent of creating ambiguous escrow agreements and count on the failure of the parties to retain legal counsel to review them. As a result there are various fees tacked on to the agent’s expressly stated fees, which were not expressly disclosed. Sometimes the terms of the agreement permit the agent to sell or otherwise dispose of the held property if it unclaimed for a specified period, or to pay off the fees. In Texas, escrow officers are required to be licensed by the state, prior to which they must be sponsored by another agent, post bond, and undergo a criminal background investigation. The parties should be certain to investigate the license and the commercial status of any escrow company they are planning to deal with, and get the escrow agreement reviewed by a knowledgeable professional.

Texas Deeds

There are three basic types of deeds which are commonly used in real state transactions. Deeds are evidence of legal title, and they are used to transfer legal title when buying or selling real property; and title simply means ownership. Deeds are written declarations of intent to transfer title, stating that consideration (payment or something of value) has been transferred in exchange for the title, and contain a description of the property to be transferred as recorded in the county clerk’s office. Most deeds should be recorded with the clerk’s office in order to provide public notice that a new owner of the property exists, which will prevent any parties from placing liens or ‘clouds’ on that property’s title or a fraudulent seller from reselling the same property to others.

A quitclaim deed is the most basic and lowest form of deed, and it does nothing more than transfer all the interest the transferor/seller has in the property, which could be partial or none. Quitclaim deeds are highly risky purchases, and one risks being swindled accepting one. On the other hand, buyers are required to accept quitclaim deeds after some purchases such as at government auctions. Most attorneys will advise against accepting a quitclaim deed in any form of real property transaction, unless the transfer is from a relative such as a spouse or a parent, for example.

A special warranty deed only guarantees good title of the seller, and no farther back in time. As such, it is a better deed than a quitclaim, although it still carries some risk, depending on how long the seller has owned the proeprty. However, with a professional title search and opinion it is possible that the title is perfectly clean and the buyer may receive a significant discount on the property for accepting such a deed. This type of deed is not common, except in commercial transactions, and occasionally some sellers simply want to sell the property without the unqualified promise of a title guarantee to the first owner of the property. A special warranty deed is a perfectly acceptable way to transfer title.

A general warranty deed guarantees good title all the way back in time to the first owner of the property. This is the most common form of deed and one on which many title companies will insist on if the buyer is to obtain title insurance. This type of deed comes with six specific warranties, which will be discussed in a separate article, however, the main point here is that if there is any defect in title, ever in the history of the property, and the purchaser is disturbed in his unqualified possession and ownership of the property, the previous owner is legally bound to commit the time and expense necessary to resolve the matter and quiet title in the new owner or be subject to litigation and potential recission of the sale. A “subject to” clause may be inserted into this deed or a special warranty deed, which will state any known defects, or potential defects in title right on the deed, and limit the seller’s liability for them to the transferee buyer.

Typically, title companies will insist on a general warranty deed to provide title insurance, although sometimes a special warranty deed will be sufficient if the title search discovers a particularly clean history for the subject property. A quitclaim deed will have a very difficult time obtaining title insurance.

A buyer of property should consult an attorney before the contracting stage, so that the contract may be reviewed prior to the title transfer, as the contract may obligate the buyer to accept a certain type of deed, among other potentially dangerous obligations, and once signed it will be too late to demand a more favorable type of deed.

There are numerous other types of deeds used in specific situations. To ensure you are planning on using the correct type you should consult a knowledgeable attorney.

Home Owner Associations Primer

When purchasing any property serious consideration must be given to whether or not a home owner’s association membership is attached to the property. A HOA is a governing entity formed by the neighbors of a community or building with the intent to take turns ‘governing’ and overseeing the community or building in accordance with the passed bylaws, in order to ensure the grounds maintenance and increase in property values. The failure to fully understand the consequences of involvement with these groups may lead to dire repercussions down the road.

Not all real estate has HOAs attached to ownership, although all condos do in Texas, and if membership is not required you would be well served to make sure that a HOA is not being planned for your community or building in the future. If a HOA is being planned and you do not know your future neighbors personally, you would be well served to either meet them or refrain from the purchase, until you can review the HOA bylaws. If a HOA exists you should obtain a copy of the regulations promulgated by the association and carefully review them or have an attorney review them, as they can be very lengthy and detailed. Some examples of regulations that may be included in the rules that you will be required to obey are: the color of window shades; the length of your lawn grass; color of any and all paint visible to the public; times, number and days of when vehicles are allowed to park in front of your home or in the driveway; the size of any displays outside your home or window; and many many other matters the HOA may consider important.

The weapons at the HOA’s disposal are numerous, and ultimately they do have the authority to foreclose on your property because of the binding contract you sign with the HOA when you purchase the property. Basically, by purchasing the property you have no choice but to sign the agreement which will permit the HOA to take legal action against you if they deem it necessary. Typically, the HOA will fine you for any violation they deem you to have committed and mail you the fine. If you refuse to pay it, eventually the file will go to the HOA’s attorney who will not only tack on the penalties added by the HOA for non-payment but also add that attorney’s legal fees. Each subsequent letter will add more fees, and eventually the HOA may give the attorney permission to file a lawsuit on their behalf to collect the amount owed. If you do not defend yourself or lose the case you will be ordered to pay the amount owed or whatever the proven amount is, plus the HOA’s legal costs, and if you do not pay then an abstract of judgment document will be filed with the county recorder’s office on your property and you will need to pay the amount owed off before you are able to sell the property because of the cloud on the title and the next lender’s policies regarding clean title. If you defend yourself and win the lawsuit, then clearly your will not owe anything.

If the amount owed is very significant, such as for a lengthy non-payment of HOA dues, the HOA may foreclose on your property, which is another topic altogether. Because the lender/bank will have a secured priority lien on your property, and the HOA lien is unsecured, that first lien will need to be paid off after a foreclosure occurs and the HOA will thereafter attempt to sell the property and attempt to obtain the money it is owed. If the property is ‘under water’ then clearly foreclosure would not be in a HOA’s or the bank’s interest, since the HOA may actually owe the lender money after the sale since the value of the property may not cover that first priority lien. Litigation between the HOA and the lender may ensue.

Finally, there have been many circumstances where an individual or a small group gains control of a HOA and the actions taken as a result may either be oppressive, unreasonable, invasive, or outright fraudulent and criminal. A HOA board may pass extremely oppressive and unreasonable regulations, regardless of the wishes of the residents, in some instances. Some HOA board members become power mad and controlling, attempting to enforce all rule violations, or dominate rule making, or attempt to carry out personal vendettas against some neighbor(s) using their new powers. There have been many instances of resident revolts and mass disobedience due to unhappiness with a HOA board, and other times the residents fail to organize and the oppressive regulations are implemented and violators punished accordingly. There have been times when a group or individual that gains control of a HOA or a HOA’s finances actually carries out a criminal scheme to embezzle or misappropriate some amount of funds from the HOA’s coffers. Some board members have been known to steer HOA funds to parties they have a relationship with, such as plumbers or construction companies, and may get kickbacks for such actions. Some of these criminals are caught, some are not and the residents bear the loss. But the moral of the story is that one should be very careful getting involved with any HOA unless a buyer knows exactly what they are getting into. The stories of distress, anger, conflict, expense, and loss abound as a result of these governing bodies. You should consult a knowledgeable attorney regarding a dispute you are having with your HOA, or if you are considering joining a HOA you would be well served to conduct a due diligence audit of the HOA’s finances, past accountings, and a thorough review of their bylaws.

Realtors vs. Attorneys; a Question of Ethics

It is a commonly propagated and accepted truth that to sell a property faster and obtain the best price you need to retain the services of a realtor or broker. Unfortunately the truth is that the entire profession is a bank/government subsidiary designed to facilitate the liquidity of real estate and therefore increase these parties’ profits which are commensurate with the increased transfer of real estate. Greater liquidity of real estate allows a more frequent reassessment of a property’s value, easier acquisition, and disgorgement to banks. Banks are able to scoop up properties in a bull market and ditch them to unsuspecting buyers and investors when they know a downturn is imminent; and they are always aware of downturns before the fact. The government as well has a significant financial interest in the realtor profession, from the government policing apparatus to the tax revenue generated and needed to run itself.

The fact that the realtor profession is lightly regulated, with dubious ethical rules, minimal necessary education and knowledge for certification, and promises great profits to its practitioners attracts a wide breadth of individuals to it, many of who with dubious intent. Although there are certainly decent and honest people in this profession, they are few and far between, and as a whole, the industry is just like any other: you are the source of income and your interests come second to that fact.

The major problem with real estate professionals is their divided loyalty. Realtors are not prohibited from representing both sides in a transaction, and although this fact must be disclosed to both sides, and they are taught that their main loyalty must lie with the first party that hired them, much of the time people don’t realize the clear conflict of interest this arrangement creates. Attorneys are typically prohibited from representing both sides of a transaction, except in a few circumstances such as business and divorce. The problem for the realtor is that the buyer’s and seller’s interests are directly opposed. The seller wants the highest sale price, while the buyer wants the lowest price. Because the realtor’s commission comes from the seller’s end, that party will have less room to negotiate, and the final price is likely to be less advantageous for the buyer. The seller will probably get less than he could have because he will lose the commission, which can range from 3%-7%.

Although it may seem that the real estate professional will work diligently to obtain the highest sale price possible and negotiate arduously on the seller’s behalf in order to obtain the highest commission, the fact is that an increase in price from the initial offer will be negligible in the commission received by the realtor; perhaps a few hundred dollars at most, even if the purchase price is increased by thousands. The investment in time will simply not be worth the effort to push the price higher. Much of the time the realtor will initially lower the seller’s expectations when discussing the property, this is to make a higher offer the seller receives easier to swallow, even if it is low in fact. At that point many realtors will simply try to talk the seller into accepting the first or second offer as the best he or she is likely to receive so they can close the sale, stop spending time on it, and move on to the next property. Ultimately the truth that all realtors know is that the sale price is not as significant as the number of closures they can facilitate. Time is money and the longer a transaction hangs in limbo, unsold, the less attention the realtor can devote to closing other sales for an insignificant reward. In closing, buyers and sellers should be extremely careful when dealing with realtors, and always consult an attorney when selling or buying a property, because although realtors can fill out the necessary forms, they are not allowed to alter their terms, as attorneys are allowed to do, because that is the practice of law. Realtors also may not give legal advice, and an attorney can provide all the same services at a lesser price, the only difference is that you will need to find the buyer. In this age of unlimited technology finding a buyer is not all that much more difficult for you than a realtor.

Owner of Your Property

A tenant is entitled to know the name and address of the landlord (the actual owner of the property) and also entitled to know the name and address of the management company if the landlord has hired a separate company to manage to the property. It is often best to communicate your concerns with the actual owner of the property, and not some manager. It is often better still to send letters to the manager and the actual owner of the property. Sometimes managers do not want you to know this information so they will lie and claim to be the owner, or will give you the name of the management company instead of the owner. If you have a serious problem, demand the correct information of the owner.

One way of confirming or locating the landlord is to ask. If you are caught up on your rent, you should send a letter to the manager or any person claiming to be the owner and specifically request the name and mailing address of the owner of the property. The landlord must get back to you within seven days with the correct information unless the information can be found posted inside or outside the on-site management office for the property, or within the lease agreement or house rules. So if you do not get a response to your letter at all, check your lease and house rules, and then go to the office if you have one on site for your property and look around inside and out. And, if someone asks what you are doing, tell them. You just want information you are entitled to. The landlord got a ton of personal information about you on their rental application. It is not too much to ask for the actual name and address of the owner.

The landlord can be liable to you for failing to timely provide you with the correct information which will include the cost of you locating the correct information, $100 plus one month’s rent, and you might be able to terminate your lease.

Another easy place to check for ownership information is with the tax appraisal districts. These are largely organized by county. Unless the owner is a police officer, the tax appraisal district will post the name and mailing address of the owner of every piece of property in their district according to their records. It is not 100 percent accurate especially if there have been recent changes in ownership of the property, but it is an excellent resource you should use. Many larger districts have all their records online and you can search them often for free. You can also call them and get information about property right on the phone. You can also put in an owner’s name and find other properties they own in that district, including their home address, and value of their home. Look for the property that has the “homestead” exemption claimed.

The House Set to Reverse “Kelo” Eminent Domain Decision

In 2005 the Supreme Court sided with the City, in Kelo v. City of New London in allowing the government to seize abandoned, albeit privately owned, properties, under eminent domain, and after paying a minimal but fair price for them, sell them to another private party, a developer, and turn a profit on such a sale. This obviously caused a significant backlash among many in the legislative branch and the populace, since eminent domain exists to further only public good. The property must be taken for public use, and not resold to another private party who may be able to put the property to a better use than the original owner. The Supreme Court held that economic development and increased tax revenues were of sufficient benefit to the public to permit a local government to seize and resell private property.

This week the House of Representatives is expected to pass a bill which is to reverse this decision, as the legislature has a right to do with much of SCOTUS’ jurisprudence, which provides a cause of action to any private party against any state or local government which exercises its eminent domain powers in furtherance of the Supreme Court’s ‘economic development’ reasoning. Whether such a bill will pass the Senate and then be signed by the President is unclear; no statements have come from either side. However, the House bill passed on a bi-partisan platform, and appears to have popular support behind its implementation. 7 years to pass such a bill is far too long imho.

Community Policies Cont’d

Rules on cars and other outdoor property cannot be changed without clear notice

The Texas Legislature recently enacted a law requiring landlords to give prior written notice to a tenant regarding a landlord rule or policy change that is not included in the lease agreement and that will affect any personal property owned by the tenant that is located outside the tenant’s dwelling, including any change in vehicle towing rules or policies. A landlord who fails to give notice as required by this section is liable to the tenant for any expense incurred by the tenant as a result of the landlord’s failure to give the notice. There are additional towing rule changes for multi-unit apartment complexes.

Of course, a landlord cannot change the rules in the middle of a lease term, just like tenants cannot shorten the length of a lease without consequences. And clearly the landlord should notify a tenant of any change in the rules before the tenant renews the lease, otherwise the rule would not be enforceable against the tenant.

Limits on occupants who live in the premise

The landlord can limit the number of occupants who live in the house or apartment. The maximum number should depend on the number of bedrooms and the age of the occupants. Texas law generally gives a landlord the ability to set occupancy to three adults (persons over 18) for each bedroom of the dwelling. The landlord can set lower standards, as long as he does not illegally discriminate. For example, if a couple living in a one bedroom apartment have a baby in the middle of their lease, the landlord probably cannot require the couple to move to a two-bedroom apartment because this may unfairly penalize them merely because they had a child.

Limits on visitors

A landlord generally cannot limit visitors as long as they do not disturb other residents or violate some other provision of the lease. However, a tenant should be careful not to have the same visitor spend the night too many times in a row without the landlord’s permission, otherwise, the landlord may consider the visitor as an unauthorized occupant. Certainly, a visitor should not get mail or other deliveries at the premises, as this will surely arouse suspicion. Too many visitors (even as few as three an hour) might be incorrectly perceived as illegal drug activity. Although the landlord has the burden to prove that a tenant has violated the lease in an eviction case, a tenant may be wise to avoid these disputes from arising in the first place. (And, the landlord can always refuse to renew the lease based upon a suspicion so long as it is not illegally retaliating or discriminating. The landlord does not need any proof, just a desire not to rent to the tenant any more.) Therefore, a tenant should consider explaining the situation to a landlord to remove suspicion.

Community Policies

Generally

House Rules, Apartment Regulations, and Community Policies are all the same thing — rules of the landlord. Even though these are not usually in the lease documents you signed, they are often made a part of the lease by reference (if the rules are not referenced and you are not given a copy when you sign the lease, then the rules legally should not be applied to you).

Before you sign the lease, ask for a copy of the rules. If the rules have not been written down, ask the landlord to write them down, and have the landlord sign and date the document. Having written rules will prevent the landlord from changing the rules in the middle of your lease. In general, most house rules are enforceable as long as they do not illegally discriminate. See Discrimination. For example, sometimes a landlord will improperly require families with children to occupy certain units or require the tenant to lease a unit with more bedrooms than necessary. A landlord is allowed to set reasonable rules regarding occupancy, but at some point these rules could violate fair housing laws.

Rules may be unenforceable if they are completely unreasonable. For example, some lower courts have considered a broad curfew on adults unreasonable. But, if you feel a landlord’s rules are unreasonable, it may be safer to follow them temporarily and move rather than attempt to challenge them, unless you have an attorney or tenant organization to back you up. It is never good to be a defendant in an eviction case (even if you win court records will show that a case was filed against you).

But most all rules clearly made a part of the lease are likely to be upheld by the courts. And if you violate a house rule, even once, the landlord could attempt to terminate your right to possession of the premises and attempt to evict you. Certainly, a minor violation is likely to be overlooked by a landlord; however, be aware that you take risks when you ignore the rules. A landlord can fail to renew a lease or may terminate a month-to-month lease by giving a 30-day notice for most any reason and a court will probably uphold that decision. There are some exceptions: Retaliation, Discrimination.

Rules easily changed in month-to-month leases, but not in the middle

A landlord can also change the rules easily if you are renting month-to-month by just giving you 30 days advanced notice of the change. That may seem unfair because it is often expensive to move and time consuming to find another place that may be more acceptable. Since when does fairness matter in landlord-tenant relationships?

A landlord cannot change the rules in the middle of a lease agreement without your agreement. Ultimately, it is your decision whether to accept the new rules. If you accept them, then the landlord is more likely to renew your lease when it expires. However, if you fail to accept the change in the rules in the middle of the lease, a landlord may fail to renew your lease or charge you more rent in the future when the lease expires. This is likely to be legal.

Removal of Property

The law relating to removal of property by the landlord first depends on who owns the property.

Landlord cannot remove own property

A landlord CANNOT remove doors, windows, locks, doorknobs, or any other appliance (such as a refrigerator or stove) supplied by the landlord because the tenant is behind on the rent. If a landlord removes one of these items for repair it must be repaired quickly. Nobody would believe a working door is really being repaired if it is removed overnight and no other replacement door is provided. If the landlord improperly removes such property, the tenant may obtain a court order to have the property returned or may terminate the lease. In either case, the tenant may also recover actual damages, one month’s rent and $500, plus reasonable attorney’s fees and court costs, less any past due rent owed by the tenant. In some circumstances the landlord may remove the tenant’s property.

Tenant Property: Lien for unpaid rent enforceable if in lease

When a tenant fails to pay rent, the landlord has a lien (a right to possess) all of the tenant’s “non-exempt” property that is found in the tenant’s apartment or house. According to the statute authorizing this action, the property the landlord can take must be found inside the residence or storage room. If it is outside in the yard, for example, it cannot be taken.

The landlord’s lien gives the landlord the right to peacefully take the tenant’s property, and to sell it after a proper time period and notice to satisfy the rent outstanding. The landlord’s lien can be enforced by the landlord without taking any formal action in court ONLY if it is spelled out specifically in the lease, and the lease provision is underlined or printed in conspicuous bold print. The landlord cannot sell or dispose of the property unless this also is written in the lease. (However, the landlord is allowed to remove all the contents of an apartment or house, without a specific lease provision, when the tenant has abandoned the premises.)

There is no specific limit on the amount of non-exempt property the landlord can take. Generally, if the landlord takes property (valued at market prices) worth more than three times the rent owed, the tenant may have a wrongful seizure suit. The landlord cannot lien property for any other charge. In other words, the landlord cannot deduct late fees or something else from a rent payment and still claim the tenant is behind on rent, and then attempt to lien property. While the landlord may claim their lease says they can assign money they receive to any account they wish, the Texas Property Code would consider such a provision void.