Family Transactions
As a real estate agent attempting to represent family members selling a property between themselves, there is a Texas specific nuance that is very important to understand before writing a contract. First, we need to review a few concepts that come into play with a family sale.
Lien Enforceability on Homestead Properties
Lien Enforceability on Homestead Properties
The why comes from a little backstory on the Texas Constitution and how it affects lien validity (which a title company very much cares about since we insure lien validity).
The Texas Constitution states that there are only 8 permissible lien types on a homestead:
The money to purchase the home,
The money to purchase the home,
- Property Taxes,
- Money to build improvements (mechanic’s lien contract),
- Home equity,
- Reverse mortgage,
- Refinance of a filed federal tax lien,
- Owelty of partition,
- Conversion of a personal property lien on a manufactured home into a real property lien.
Bona Fide Sale / Avoiding a Pretend Sale:
In order to insure, the purchase money transaction must be a bona fide sale. This is a place where the family to family sale becomes an issue. Texas courts have held for decades that a sale deemed to be a pretended sale is void under the Texas Constitution. A pretended sale occurs when the parties intend to convey property between family members but the seller will not be moving out of the property.
The Texas Constitution treats a pretended sale of a person’s homestead as void.
Let’s say that a son wants to buy mom’s home because mom is getting older and they want to avoid probate. He also wants to give mom some “cash” (i.e. sales proceeds) for living expenses. The issue though is that mom is not going to move out and it’s still her homestead.
If mom stays in the home it is her homestead but the lien used to purchase the property from mom is in son’s name making it an invalid lien on her homestead. This is something that has been tested in case law and Texas courts have held for decades that a pretended sale is void under the Texas Constitution. That is quite problematic since the title company has been asked to issue an Owner’s Title Policy and a Loan Policy.
For this reason, in most cases, we have to be able to show one of the following items to be able to insure: Seller owns and occupies another property as their homestead; Seller is simultaneously buying another homestead property; or Seller has a long term lease (this one requires pre-closing underwriter review and may have additional requirements such as copies of a moving contract, removal of exemptions
pre-closing, or a physical inspection to confirm vacancy).
Both buyer and seller will be asked to execute documents at closing proving up the claims of this being a bona fide sale. In these affidavits the seller will disclaim the current property as homestead and claim other property as homestead, buyer will designate this property as their homestead, both parties will swear that they have no agreements to reconvey the property back to seller and additional certifications to title.
Value Considerations
Assuming that we’ve cleared the pretend sale hurdle we then need to show that the sale is for fair market value. To substantiate this the parties can provide an appraisal, comparative market analysis or other documentation to justify the sales price.
Power of Attorney Use
Power of attorney use in these types of transactions is limited and subject to underwriter review and approval. Specifically a POA cannot be used for the seller when the buyer is the agent under the power of attorney as this could be considered self-dealing. Also using a power of attorney could remove the seller’s liability for the affidavits and other representations required.
Are there exceptions?
Cash transactions are less rigorous to close because there is not a lien to be insured. Instead we are able to take exception to the concerns listed above and proceed to closing.
Most consumers do not understand the complicated issues surrounding Texas homestead rights and the Texas significant Constitutional limitations on the kind of liens that can be legally created against a homestead. Likewise, they may not understand that a sale of the homestead property to a family member who can qualify for the desired loan, to circumvent homestead laws, is inappropriate, potentially illegal, fraudulent and/or qualifies under the law as a “pretended sale.” Before a real estate agent gets too far into writing a contract between family members it’s a good idea to call your favorite Texas National Title escrow officer so that we can discuss options for your clients.
In order to insure, the purchase money transaction must be a bona fide sale. This is a place where the family to family sale becomes an issue. Texas courts have held for decades that a sale deemed to be a pretended sale is void under the Texas Constitution. A pretended sale occurs when the parties intend to convey property between family members but the seller will not be moving out of the property.
The Texas Constitution treats a pretended sale of a person’s homestead as void.
Let’s say that a son wants to buy mom’s home because mom is getting older and they want to avoid probate. He also wants to give mom some “cash” (i.e. sales proceeds) for living expenses. The issue though is that mom is not going to move out and it’s still her homestead.
If mom stays in the home it is her homestead but the lien used to purchase the property from mom is in son’s name making it an invalid lien on her homestead. This is something that has been tested in case law and Texas courts have held for decades that a pretended sale is void under the Texas Constitution. That is quite problematic since the title company has been asked to issue an Owner’s Title Policy and a Loan Policy.
For this reason, in most cases, we have to be able to show one of the following items to be able to insure: Seller owns and occupies another property as their homestead; Seller is simultaneously buying another homestead property; or Seller has a long term lease (this one requires pre-closing underwriter review and may have additional requirements such as copies of a moving contract, removal of exemptions
pre-closing, or a physical inspection to confirm vacancy).
Both buyer and seller will be asked to execute documents at closing proving up the claims of this being a bona fide sale. In these affidavits the seller will disclaim the current property as homestead and claim other property as homestead, buyer will designate this property as their homestead, both parties will swear that they have no agreements to reconvey the property back to seller and additional certifications to title.
Value Considerations
Assuming that we’ve cleared the pretend sale hurdle we then need to show that the sale is for fair market value. To substantiate this the parties can provide an appraisal, comparative market analysis or other documentation to justify the sales price.
Power of Attorney Use
Power of attorney use in these types of transactions is limited and subject to underwriter review and approval. Specifically a POA cannot be used for the seller when the buyer is the agent under the power of attorney as this could be considered self-dealing. Also using a power of attorney could remove the seller’s liability for the affidavits and other representations required.
Are there exceptions?
Cash transactions are less rigorous to close because there is not a lien to be insured. Instead we are able to take exception to the concerns listed above and proceed to closing.
Most consumers do not understand the complicated issues surrounding Texas homestead rights and the Texas significant Constitutional limitations on the kind of liens that can be legally created against a homestead. Likewise, they may not understand that a sale of the homestead property to a family member who can qualify for the desired loan, to circumvent homestead laws, is inappropriate, potentially illegal, fraudulent and/or qualifies under the law as a “pretended sale.” Before a real estate agent gets too far into writing a contract between family members it’s a good idea to call your favorite Texas National Title escrow officer so that we can discuss options for your clients.
