Jerel Ehlert – Ehlert & Associates

Texas Deeds

Jerel Ehlert — Wed, 22 Jul 2020 13:51:26 +0000

Deeds in Texas and the Real Estate Investor

Texas Deeds

A warranty deed conveys to a grantee a fee simple estate in real property with certain covenants of warranty, subject to reservations and exceptions stated in the instrument. The granting clause, habendum clause, and warranty clause compose the core components in a traditional deed. The granting clause grants the property with its related rights and appurtenances, beginning with “grants, sells, and conveys.” The habendum clause defines the extent of property ownership conveyed to the grantee, beginning with “to have and to hold.” The warranty clause describes the warranties of title made by the grantor, beginning with “Grantor binds.”

As for requirements, no particular form is required, but the Texas Property Code suggests that any form that substantially the same “conveys a fee simple estate in real property with a covenant of general warranty.” Tex. Prop. Code § 5.022. A deed must name the grantor (the one conveying), the grantee (the one receiving), use words showing intent to convey title to real property, and adequately describe the property sufficient to identify the subject matter of the grant. Harlan v. Vetter, 732 S.W.2d 390 (Tex. App.—Eastland 1987, writ ref’d n.r.e.). Deeds must be in writing, subscribed, and delivered to the grantor. Tex. Prop. Code § 5.021.

An unrecorded deed is binding on grantors conveying title, but is void as to creditors and subsequent purchasers for value without notice. For this reason, the old practice of “getting the deed,” then tearing it up if the deal didn’t pan out is very dangerous.

Marital property is another hazard for intrepid real estate investors. Texas follows the community property system of rights of spouses, and the inception of title doctrine sets the character of property as separate or community at the time of acquisition. Real property acquired during marriage is presumed to be community property, unless the spouse acquired title by gift, devise, or descent. There are methods to rebut this presumption, but if you seek to purchase real estate acquired while married, would-be purchasers are wise to get both spouses to sign.

General Warranty Deeds

There are six warranties in a warranty deed, three present and three future:

Present Covenants

- covenant for seisin,
- covenant of the right to convey, and
- covenant against encumbrances.

Future Covenants

- covenant for quiet enjoyment,
- covenant of general warranty, and
- covenant for further assurances.

So what does that even mean? Seisin is a custom going back to pre-literate England and was used as a means to embed transfer and ownership into the community’s collective memory. The covenants of seisin assure that the grantor is the owner and can convey. Together with the covenant against encumbrances, means the grantee takes the highest estate the grantor has, except for any reservations already disclosed. Quiet enjoyment means no one else will come and dispossess the grantee of ownership. The covenant of general warranty means the grantor will defend the grantee from claims, should they arise. And the covenant for further assurances requires the grantor to take affirmative steps to cure any defects in title.

The “General” in a General Warranty Deed means the grantor provides all six covenants FOR ALL TIME, at least in theory. In reality, a grantor also relies upon the warranties from the persons who conveyed title to them, and so on back through the chain of conveyances.

Special Warranty Deeds

Special Warranty Deeds contain all six covenants described above, but the grantor only warrants title for the time during which they held title. No warranty is made about the state of title prior to their ownership.

Deeds without Warranty

Once you understand the six covenants in a Warranty Deed, a Deed without Warranty becomes fairly self-evident. These convey ownership, but makes no guaranty about the condition of the title the grantee receives. The advantage of this instrument comes from the doctrine of after-acquired title. Should the grantor later acquire title to the property by operation of law, this deed acts to convey that grantor’s title to the grantee.

Quitclaims

Unlike Deeds without Warranty, Quitclaims act merely to denounce title in favor of another. Under Texas law, these instruments do not convey title to property. A grantor makes no warranties or covenants. And should the grantor come into title by operation of law at some later time, nothing conveys to the grantee.

Bills of Sale and Other Transfers

Bill of Sale: Certain personal property statutorily requires a bill of sale, including livestock, trees/timber, used pipelines and oil/gas equipment, just to name a few. In other instances, a bill of sale may not be required, but useful. Titled vehicles cannot be sold without designating the transfer on the title to be recorded with the proper county. Sales involving appliances under warranty may be subject to the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act, 15 U.S.C. §§ 2301–2312.

Gift Deed: These avoid the requirement to recite “consideration” for a valid conveyance, other than the traditional “love and affection.” A Gift Deed requires a gift made during a grantor’s life are donative intent, delivery, and acceptance. Gannon v. Baker, 830 S.W.2d 706, 710 (Tex. App.—Houston [1st Dist.] 1992, writ denied).

Transfer on Death Deed: These allow owners the conveyance of real property to take effect upon death and mostly used to avoid having the property become part of their estate to be probated. The grantor can change the named grantee until their passing.

Ladybird Deed: Similar to a ToDD (above), except the transfer takes effect immediately, with the grantor retaining and “Enhanced Life Estate.” There are other distinguishing characteristics, including that the grantor can still lease, mortgage, or sell the property.

Where to go from here.

There are numerous variations, additional clauses, and fact patterns not included in the description above. When reviewing or drafting deeds, you should consult with an attorney in your jurisdiction. This is meant merely to act as an introduction to a complex legal topic. Contact us to discuss your legal needs.

All content is for informational and educational purposes. Jerel Ehlert is licensed to practice only in Texas. The laws of your state may be different. Laws change over time, and discussions are a reflection of the laws at the time of writing. Seek competent legal advice based on your circumstances. This is not a substitute.

Basic Private Lending Docs

Jerel Ehlert — Wed, 29 Apr 2020 16:51:22 +0000

Bare Minimum - Promissory Note & Deed of Trust

A promissory note (“Note”) is a class of legal instruments that represents the obligation of a Borrower to pay money to another party. The Note is the Borrowers unconditional promise to pay a sum certain to the Lender. A promissory note is a Negotiable Instrument that requires specific language and gives the Lender immunity to certain defenses. By itself, a Note is unsecured. Notes are typically signed only by the Borrower and almost never recorded in Texas.

A Texas Deed of Trust secures repayment of a Note against real property. If Borrower fails to pay as required under the Note, the Lender can foreclose on the real property by following applicable state and federal laws. Deeds of Trust involve the Borrower conveying a lien to a Trustee, for the benefit of the Lender, and details the specific terms and conditions of when the Trustee may foreclose on the lien. Where the Promissory Note represents the IOU, the Deed of Trust represents the Lender’s security in the Borrower’s collateral. A Deed of Trust can secure fixtures and personal property, as well as real property. To set priority in Texas, the lien must be recorded in the real property records of the county where the property is located.

Augmenting

Moving beyond just a Note/Lien, Lenders and others require more to close a real estate transaction. Institutional Lenders (big banks) have their package of notices and disclosures. Hard Money Lenders will develop their packages to protect their interests. For Texas Gulf Coast Lenders, a flood insurance rider may be common. Federal regulations require certain consumer disclosures under TILA/RESPA and CFPB. Texas has consumer lending requirements under Texas SAFE Act. Mortgage brokers and title companies have disclosure requirements for their licensing compliance. Attorneys typically have a non-representation letter because the Borrower usually pay the fees, but the attorney represents the Lender, and the letter is the Borrower’s acknowledgement.

Private Lenders should discuss what other documents to include with the Note/Lien. In REI, if the Borrower is an individual, it is common to have a “Business Purpose Affidavit” to estop consumer claims. If the Borrower is an entity, the Lender should require a personal guaranty.

“Stay Home, Stay Safe” and the Constitution

Jerel Ehlert — Wed, 15 Apr 2020 20:01:37 +0000

Feds Can't Tell Me What To Do!

Over the last couple of weeks, anyone who’s been on social media has been bombarded with claims that “Stay Home” orders by counties and governors are unconstitutional. I think it’s great that people take an interest in how government works, so let’s take a closer look at this.

Most claims start off with the premise that we have a 1st Amendment (1A) right to assemble, and that’s a good place to start. Correct! Under the 1A assembly clause, people have the right to “peaceably…assemble.” But like all rights under the Constitution, the right to assembly is not absolute. Like the 1A right to free speech, government can tell you that you cannot yell “fire” in a crowded theater.

Two Constitutional provisions, the Commerce Clause and the Taxing and Spending Clause, permit the federal government to regulate certain public health activities. The Commerce Clause grants Congress the authority to regulate international and interstate commerce. As applied to public health, the federal government has the authority to make laws and regulate in areas affecting international and interstate transmission of disease. The Taxing and Spending Clause grants Congress the authority to tax and spend for the general welfare and national defense. It is through the taxing and spending power that the federal government is authorized to allocate funding and other resources to a state to assist with a state response to a public health emergency.

States Can't Tell Me What To Do!

Some realize that it is the state and local authority telling them to stay home, so after making a federal 1A argument, they question the authority of their locals to restrict movement. Well, under the 10th Amendment, “[t]he powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively…” Most of the general ‘police powers’ fall into this category. Under Jacobson v. Massachusetts, 197 U.S. 11 (1905), the Supreme Court addressed almost this exact set of facts. Under Jacobson, the Court found “[t]he police power of a State embraces such reasonable regulations relating to matters completely within its territory, and not affecting the people of other States, established directly by legislative enactment, as will protect the public health and safety.” So long as the local regulations do not conflict with the Constitution, local authorities have police powers to enforce laws that came to be through a legislative process. The Supreme Court acknowledge that “liberty secured by the Constitution of the United States does not import an absolute right in each person to be at all times, and in all circumstances, wholly freed from restraint.”

Texas Emergency Powers

Through the police powers reserved to them by the 10th Amendment of the Constitution, states have the authority to protect the health, safety, morals, and general welfare of the people. The power to implement public health control measures, including quarantine and isolation, is a well established exercise of state police power.

In Texas, the Communicable Disease Prevention and Control Act defines the roles and responsibilities for public health control measures in both standard and emergency situations. On the local level, the local health authority (LHA) has supervisory authority and control over the administration of communicable disease control measures within their jurisdiction unless specifically preempted by the state. Rights and duties during public health emergencies are delegated between the Executive Commissioner of the Texas Health and Human Services Commission (HHSC), the Commissioner of the Texas Department of State Health Services (DSHS), and the LHA. Ensuring cooperation between these entities is essential to responding adequately to a public health emergency.

The Governor’s authority during a public health emergency is based on (1) the Texas Disaster Act, which allows for state and local declarations of a state of disaster; and (2) the Texas State of Emergency Act, which allows the Governor to proclaim a state of emergency upon application of a locality. The Governor may, by Executive Order or proclamation, declare a State of Disaster if a disaster has occurred or the occurrence or threat of a disaster is imminent. Once a State of Disaster is declared, the preparedness and response aspects of the State Emergency Management Plan are activated. During a State of Disaster, the Governor has the power to suspend laws relating to the normal order of state business and state agency provisions, orders, or rules. The governor’s office shall compile and maintain a comprehensive list of regulatory statutes and rules that may require suspension.

More information can be found at the University of Houston Law Center’s COVID-19 Pandemic Legal Resources for Texas page.

Private Lender Scams

Jerel Ehlert — Tue, 14 Apr 2020 21:00:22 +0000

Private Lender Paul met Big Bad Brad at a local real estate investor networking group. They hit it off pretty well, and Brad told Paul that he’s got this rehab he bought but needs some extra cash to finish out. Or maybe it was to buy and flip a house? Does Paul know anyone interested in coming in as a partner or junior lender? Paul says “Do I? Me!” A few days later Brad sends Paul some papers, Paul sends his money to Brad.

This is one of several ways unwary private lenders can get caught in a scam. A partial list is:

Brad is almost done with a rehab and needs just a little more to finish to be able to list on the market for sale.
All of Brad’s money is tied up in one property, but has a really great deal under contract and needs money to take it down.
An unscrupulous contractor ran off with the rehab money, and now Brad needs to give up his profits to anyone willing to come in with more.
Brad can run your rehab, but you have to give him all the money up front “for materials.”
Brad gets Paul’s friends to contribute on the next, bigger deal.

How do Lenders protect their capital from scammers?

With prudent and reasonable Underwriting and Policies.

Underwriting

Define your lending criteria.

Paul never has a written set of criteria. One way to look at underwriting is that it is the process of investigating whether a proposed transaction meets your lending criteria. To do this, you have to have criteria. Whole books can be written on underwriting, but for this topic, if the proposed scam doesn’t fit the type of transaction you lend or invest on, you won’t be interested in parting with money. If Paul only funds 1st lien loans, taking a 2nd lien position just won’t be a deal he will do.

Investigate.

Paul doesn’t look into the facts. Another aspect of underwriting is to investigate whether Brad’s representations are true.

Get a copy of the borrower’s driver’s license and social security card. If you have to file a police report or sue to recover, you will need these. States publish ways to spot fake ID’s and you can pull background checks. Visit the borrower’s business and home addresses (drive by). Mailbox store fronts are sure warning signs.

Get a copy of the closing docs from where the Borrower purchased the property, the Lender’s info, and proposed rehab scope of work. Talk to the Lender and see if they have any warnings. If the scope says one thing and the job site says another, that will tell you something, too.

Policies

Draws.

When Paul funds the construction, he gives Brad all the money. Seasoned lenders will work off draw schedules.

Borrower does work, makes a draw request (listing work done). Lender sends a licensed inspector with the list to do a visual check, who reports back the status of the work performed (% done). Lender cuts check or sends wire to the borrower in a timely manner. Borrower gets reimbursed for work done and Lender is assured that funds go into the collateral.

Docs.

Paul might get a “promissory note,” “lien instrument,” “partnership agreement,” or “JV agreement.” Lenders hire attorneys to draft documents; Borrowers sign documents. Some papers look really convincing, but might not be worth much if you have to put them before a judge. Lenders wire money, if any, to title companies, not Borrowers. The title company will verify, to some extent, identity and record lien instruments as needed, deliver copies of everything, and disburse any money they are instructed to pay out. Unrecorded liens can put Lenders in unstable positions.

Take Away

Scammers like the Brads in the world (apologies to people named Brad) will fight against these defenses. They may comply on the first deal, chaffing the entire way, to get Paul to drop these “ridiculous” requirements on the next, bigger, deal. Or Brad may perform as promised (without Paul asking for any of this), to get more of Paul’s money on the 2nd deal or more time before Paul calls out Brad’s scam. Brad may work a scheme to pay Paul from Peter’s loan (the next Lender). There are many variations, which makes it hard to spot and defend, but Lenders must always stick to the tools that keep them safe.

COVID-19 and the CARES Act

Jerel Ehlert — Tue, 14 Apr 2020 20:57:24 +0000

The largest economic aid package in U.S. history became law on Friday, March 27, 2020, when Congress passed, and the president signed, the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act). The CARES Act provides a total of approximately $2 trillion in economic assistance to various sectors of the economy impacted by COVID-19, with a number of provisions directly promoting the interests of small businesses. The sweeping legislation also contains relief for individual taxpayers, distressed industries, and the health care sector, among others.

A purpose of the Act is to bring relief to those most impacted by the pandemic. It appropriates an additional $349 billion for the Small Business Administration’s (SBA) long-established and popular Section 7(a) loan program. In addition, the CARES Act establishes a new Paycheck Protection Program (PPP) under Section 7(a). These federally backed loans are available in an amount that is 2.5 times of the monthly average payroll cost for the one-year period prior to the loan, but not to exceed $10 million. PPP Loans may be used to pay qualified payroll and salary costs, rent, utilities, interest on mortgages, and other debt incurred before February 15, 2020. These loans may be forgiven at an amount equal to eight weeks of payroll, mortgage interest, rent, and utilities that is then reduced based on the levels at which small businesses rehire and reemploy workers, as well as restore or retain salary levels. The Act increases the maximum amount of a loan under the SBA Express Loan program from $350,000 to $1,000,000. Further, it provides for the SBA to make payments on most outstanding SBA-guaranteed loans for six months, alters the SBA Emergency Economic Injury Disaster Loan (EIDL) grant program and several other federal assistance programs and provides payroll tax relief and other benefits.

Below are links to PDF articles you can use to assist in accessing these aid packages for you, your businesses, and your employees.

Small Businesses
Real Estate
Restaurants, Hospitality, Food Service, Entertainers, & Artists

Tip: Private Money Lending

Jerel Ehlert — Tue, 14 Apr 2020 20:53:41 +0000

When making asset based loans to Real Estate Investors, here are a couple of tips to maximize success and minimize the risk of loss:

Always get a copy of their state-issued ID and social security number.

Even if you never plan on pulling credit reports, this is your main method of positively identifying the person with whom you are doing business. This is especially critical when the person has a common first or last name. This helps you check their background and history, and in the event of default, aids in complying with the Servicemembers’ Civil Relief Act (SCRA).

Insist on getting a lender’s title policy.

While this is an additional cost to the Borrower to close at a title company, the savings is huge if a title defect comes up. If there is a claim, the borrower’s policy may reimburse up to the purchase price. When you make a loan that includes repairs, your claim may not cover the full loan amount. That’s what your lender’s policy covers.

Always get a written scope of work.

Your underwriting assesses the risk based on the REI making certain, specific, improvements to your collateral. To adequately protect your investment in this loan, you need a written scope of improvements the Borrower promised to make. If their rehab isn’t progressing or varies from their representations, you have grounds to address the potential default informally. If the Borrower refuses to correct the situation or is in over their head, you can foreclose to protect your collateral instead of waiting for them to miss a payment.