Episode 104: Foreclosures

By on December 23, 2021   /   Blog, The Legal Play Podcast   /   Leave a comment
Foreclosures

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Mortgage foreclosures in Texas have been a part of the real estate industry for years, but the process can be so intricate and complex, it leaves many wondering exactly what they are and how they work. This is a critical concept for sellers, buyers, borrowers, and lenders to have. Whether you are facing a foreclosure or are an entity struggling to foreclose on a piece of real property, a knowledgeable real estate attorney is an asset you will need moving forward.

What Is a Foreclosure?

When someone buys a piece of property, they generally have to borrow money to do so either from a bank or mortgage company. Sometimes a seller will even make a loan, and then the buyer/borrower will sign a promissory note committing to make payments over a predetermined number of years and pay interest on it. Should those payments not be made, the buyer or borrower agrees their house can be foreclosed upon.

The instrument that allows a foreclosure to happen is often referred to as a deed of trust which acknowledges the real property in open records so the public can see that the lender has a lien on the property. This action protects some other lien or subsequent buyer of the property from declaring they were unaware about the mortgage or debt on the property because it is a matter of public record.

In a deed of trust there is something called a power of sale clause, which gives the holder of a mortgage the right to foreclose on a property if there is a default on the mortgage. These defaults can be considered breeches of the deed of trust and may take different forms, such as:

  • Not making a required payment
  • Not paying insurance on the property
  • Not paying taxes on the property
  • Not paying homeowners’ association dues
  • Damaging or modifying the property in a way that affects the property’s value

If there is a default and the borrower and the lender have been unable to work out their differences, the lender may choose to go ahead and foreclose. If the property is a residence which is the primary residence or homestead of the owner, the mortgage company is required to give the borrower a limited window of time to cure a default. In other words, if the borrower has three payments to make up or taxes to pay, they may be able to do so in this window.

If the borrower fails to cure a default, then the mortgage company or holder of the note can accelerate the mortgage requiring the borrower to pay the entire balance of the note due immediately or else the property may be foreclosed upon in twenty-one days. At this time the lender will post the property in the county where the property is located.

How Foreclosure Sales Work

Foreclosure sales are typically set for the first Tuesday in every given month, with the exception being if the first Tuesday of the month falls on either January first or July fourth, in which case the sales would take place on Wednesday.

A foreclosure sale can in some ways be reminiscent of a wild west auction. In general, they occur in front of a county courthouse, although Harris County in Texas has been known to hold it at the Bayou Event Center. This event attracts a wide variety of people who attend with the intent to pay cash in the form of cashiers checks to the trustee or substitute trustee conducting the sale.

These sales are set within a 3-hour window usually between the hours of 10a.m. and 4p.m. on that first Tuesday of the month. A trustee will come forward and announce they have a property for sale along with some statutory required information. They will then verbally declare they will allow the property to be bid on and normally the mortgage company will start the bidding.

The mortgage company can bid the balance of their note as a credit bid, which means they do not have to come up with the money because they already have it. The balance of the note still generally includes attorney fees, interest that accrues, the principal balance of the note, other things a mortgage company may have had to do to secure or insure the property, and a reasonable commission for the trustee who sells the sale.

Once bidding opens, the high bid is often from the mortgage company. This is frequently why a property is foreclosed upon to begin with, because the property does not have enough value to cover the balance of the mortgage due to the lack of equity. If the mortgage company bids and no one else does, the trustee or substitute trustee will issue a substitute trustee’s deed to the mortgage company. The mortgage company then owns the property.

There are some cases in which after a mortgage company takes ownership that they may have to go through an eviction to take the house. However, in general, most mortgage companies do not like to hold on to houses and instead prefer to have someone fix up the property, list it with a realtor, and sell it as quickly as possible.

If there is some equity in the property and the bid by the creditor is low enough that other people want to bid too, they can. It is not uncommon to see groups of people who attend foreclosure sales every month in search of finding a property that is worth bidding on and then entering a bidding war. It is worth noting that these individuals and groups must have cash or cashiers checks ready to pay to the substitute trustee’s deed upon conclusion of the sale.

At this point, the substitute trustee must then take their commission, pay the balance due to the mortgage company, and then the excess money can go to whoever has the next claim on the property. This may be the owner if there are no other liens on the property. In some situations, in which there is a sizeable amount of money left over, a trustee may choose to enter the money into the registry of the court and name others who may be on lien or title documents to have claim to it. This may be followed by the trustee having their legal fees paid and then stepping away from the lawsuit, leaving lien holders to fight it out for the money.

How Foreclosures Can Sometimes Be Halted

Just because a lender has posted the property for foreclosure does not necessarily mean they are going to actually foreclose. There are three specific situations in which foreclosures may be halted, such as:

  1. A solution between the borrower and lender. It may be possible in the 21 days between the posting of the property and the actual foreclosing of the property for a borrower to work something out with the lender and either get caught up or have a buyer for the property.
  2. Injunctions and TROs. Should there be a dispute between the borrower and lender due to the amount of equity in the property, the borrower may have a court enter an injunction enjoining the lender from foreclosing. This can take the shape of a TRO or temporary restraining order of 14 days. This often requires the borrower to post a bond, something they are frequently unable to do if paying the mortgage was already a challenge.
  3. Bankruptcy. This is becoming increasingly common. On the day of or before the foreclosure, some people will file either Chapter 13, 11, or 7 bankruptcy that in turn places an automatic stay that prevents a foreclosure until the bankruptcy case is dismissed or the court enters an order to modify or lift the automatic stay.

How an Attorney Can Assist with the Foreclosure Process

Lawsuits can happen both before and after a foreclosure and typically a knowledgeable attorney’s assistance is needed to ensure a smoother process. Real estate attorneys can assist with:

  • Getting temporary restraining orders
  • Helping a client file bankruptcy to prevent a foreclosure
  • Representing lenders if a borrower is not paying and refuses to vacate the property
  • Representing buyers of loans who go through the process of negotiating with lenders and proceeding with foreclosures
  • Helping with related title issues

Foreclosures do not just apply to houses, although that is the most common scenario. Foreclosures can also happen on high rise buildings, farms, raw land, oil and gas rights, or any interest in real property that is financed and has a lien on it. For assistance with all things related to foreclosure, ensure that your rights are protected with the help of a reputable attorney.

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Ep 102: Capital Gains and Real Estate Tax Law Planning

By on November 3, 2021   /   Blog, The Legal Play Podcast   /   Leave a comment

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With a new tax plan from the current White House administration becoming a distinct possibility, it leaves many Americans wondering about capital gains as it applies to real estate transactions. With the plan still in the discussion phase, there are few concrete details about what new capital gains rates could eventually be if it were to go through, but even the likelihood of the plan passing has many people asking what they can do to maximize their investments.

In terms of selling a personal residence or real estate that is held for investment or business use, it is crucial to look at what capital gains rates have been, and what they could be sometime soon.

Capital Gains Rates Now

Until the law concerning capital gains rates is changed, the rates are typically 15 to 20 percent depending upon whether an individual makes more than $250,000 or not. In addition to this, there is 3.8% that gets added to that investment income coming out of Obamacare for people who make more than $250,000.

The capital gains rate is 15% for people who:

  • make $400,000 or less if they are single
  • make $450,000 or less if they are married

And in addition, an individual making more than $250K a year has a 3.8% Obamacare net investment income tax added to that. Prior to this year, the maximum gain someone would be required to pay on a capital gains transaction is 23.8% which is essentially the 20% plus the 3.8%.

Capital Gains Rates and the Future

During the last year and a half and even prior to that, the government has spent a great deal of money due to COVID and other reasons. Because of this significant uptick in spending, it is not inconceivable that Americans will see a tax increase.

The new administration has already proposed an aggressive tax increase that would raise capital gains rates significantly, to as high as the mid-40s. While this is possible, some consider it even more likely that instead of the rates going from 23.8% to the 44%, the tax hike will instead put the maximum rate at 28%. This rate would only be reached with compromise.

America has had capital gains rates in the past of 28% so it is possible they will see them again if the tax plan passes. In light of this, it could be prudent for investors who are looking at potentially large capital gains transactions to anticipate a 28% rate in the near future.

Realistically, an individual who sells something now will continue to be at the lower tax rate, but if they decide to sell it toward the end of the year or after, it could very well be at a much higher rate.

The Potential Effect of Higher Capital Gains Rates on the Market

The fact that Americans are anticipating higher capital gains rates has had an effect on the market to a certain extent. Most people who are facing capital gains transactions have one of two reactions:

  1. “I need to do it now while the rates are lower.”
  2. “I’m not going to sell that stock or real estate ever because I’m not going to pay that kind of tax.”

The second reaction is particularly disheartening because this is not the desired effect. The goal is to still have individuals be able to sell their assets when they can and change their portfolio and doing so without having to play some sort of tax game with the respect to their business and investment decisions.

Personal Residences and Capital Gains Rates

A personal residence is only taxable to the extent that the gain on the house exceeds $250,000 for a single individual or $500,000 for a married couple.

For example, if a person and their spouse bought a house for $400,000 ten years ago and are now selling it for $800,000, it is simply a $400,000 gain.

However, a married couple who sells a house that exceeds the $250,000 or $500,000 limits may have to face new capital gains taxation on some of the proceeds of the sale of their house. Individuals who find themselves in this situation have either typically held on to their house for a long time, so it has greatly appreciated in value, or they own upper-end houses that have continued to go up in value since the time of purchase.

Tips for Capital Gains as It Applies to Real Estate Transactions

When it comes to capital gains as it applies to real estate transactions, there are a few tips that individuals may find helpful, such as:

  1. A person considering selling this year or next, may want to sell this year to take better advantage of a market that certainly seems to be hot right now.
  2. Individuals who do not typically have incomes that would kick in the higher capital gains rates may be wise to do something such as sell their house on an installment basis where they can recognize the gains spread out over several years because it looks as though the higher capital gains rates will only kick in at high income levels, like $1 million. However, if somebody doesn’t typically make that much money but has a one-time house transaction that’s going through soon, they may want to spread that out over more than one year via a seller note.
  3. For a business or investment property, an individual that wants to sell a portion of commercial or business use property may want to take care of that this year and recognize that income. If they want to avoid the income or spread it out, an installment sale could be a possibility.
  4. If an individual with commercial or investment property is wanting to sell a piece of their property and purchase another one, they may choose to defer some of the gain via a 1031 or a Like-Kind Exchange but should be aware there are many regulations and rules surrounding this process.
  5. A person buying property that costs as least as much as the one they are selling may be able to defer the whole gain. Or it might be possible to recognize some of the gains to stay under the threshold for higher capital gains rates.
  6. As part of the 2017 Tax Cuts and Jobs Act dealing with opportunity zones, some individuals may be able to invest to defer their capital gain until the year 2026. It must be an investment in certain geographically qualified areas.

The key to knowing about capital gains as it applies to real estate transactions is to try to figure out what your income is going to be, what impact the capital gain may have on it, and then plan ahead using some of the tips and strategies mentioned above. For more information, please contact our Real Estate Lawyer today.

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Episode 101: Real Estate

By on October 30, 2021   /   Blog   /   Leave a comment
Episode 101: Real Estate

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When it comes to commercial or residential real estate, most people readily understand that a real estate agent’s services will be required, but in many cases it may also require those of a lawyer. When it comes to the basic building blocks of buying or selling a property as set forth by the Texas Real Estate Commission, agents are well positioned to care for clients. However, in the event that a unique circumstance should arise such as a dispute, title issue or easement, a real estate attorney can be an individual’s best bet.

Why People Need a Real Estate Lawyer

In many cases, a real estate agent will help a party look for property and communicate and negotiate an offer on that property. From there, on the buyer’s behalf, a title company will examine real property records to ensure the seller indeed does own the property and that there are no liens, judgements, or clouds to title on the property lasting after the close of the transaction. A lender also normally becomes involved and will draft the appropriate documents.

With a realtor, title company and bank lined up, a real estate deal has most of the right players in place. Still, when what was thought to be a small, standard purchase develops a complication with the transaction or the base use of the property, a lawyer’s knowledge is needed to provide guidance for that real estate deal.

There are three main considerations of real estate that can account for a rather large percentage of real estate deals, including:

  1. Ownership. Who is the owner? Who has title to the property? What rights do they have and what type of restrictions are there on those rights?
  2. Property use. Who uses the property? Is a tenant? Is it somebody who is in possession? Is it someone who has an easement in the property? Is it someone that has no authority to use it but is using it anyway and may have been using it for a long time and they have acquired some rights by doing so?
  3. Leins. Are there mortgage liens? Are there tax liens? Are there judgement liens? What is it that would cloud the title and ultimately give someone else the right to foreclose upon the property by having a foreclosure sale?

The 7 Most Common Situations in Which a Real Estate Lawyer Is Needed

The real estate industry is vast, and with it can come many issues that require the assistance of a knowledgeable attorney in the industry. The seven most common situations in which a real estate attorney is needed include:

  1. Title to real estate
  2. Borrowing of money
  3. Possession of property
  4. Border disputes
  5. Oil and gas issues
  6. Title/possession/ownership dispute
  7. Earnest money contract cases

Title to Real Estate

This area of real estate involves who owns the property. A title company can be instrumental in ensuring a buyer, lender, or borrower that is pledging a piece of property as collateral is indeed the right person signing the deed of trust and the note. It is critical to guarantee that the seller is the person who owns the property and has the ability to sell it. Unfortunately, this is not always as clear cut as one would think.

When a title company issues a title commitment or title report, it ensures that the title is claimed to the property in question and that the buyer is getting a good title and the lender is getting a good lien on the property. This is then generally followed by a list of exceptions that may concern city ordinances that could restrict the use of property. It may also include deed restrictions from homeowners’ associations. Sometimes it may be possible to find a lien or someone who has rights to a property because they had a lien on it or a fractional interest.

Without a lawyer to look at easement issues, there may be someone who buys a property who discovers an easement that keeps them from using the property the way they intended. In cases like these, navigating real estate title issues can be a challenge that requires a successful real estate attorney.

Borrowing Money

Real estate is pricey and is generally one of the most expensive things an individual will ever buy. Most people do not have enough money to buy real estate up front, so then the property can be used as collateral to borrow money to purchase, improve upon, or build on the property.

As long as the property value is solid, the property can also be used to finance other things. This typically happens by a lender such as bank or mortgage company working together to determine a property’s value and then using a formula to establish what percentage of the value will be lent. From here, legal documents will be drafted, such as loan agreement, promissory note, deed of trust, etc.

In these documents it is common for borrowers to make many promises about what they will do with the property and how they will make payments. This also typically includes an understanding about maintaining insurance and taxes as well as that the property can be foreclosed upon if payments are not made. Businesses may have additional requirements for loans.

A real estate attorney can be instrumental in reviewing and drafting paperwork as much of this will go well beyond the realm of general real estate but is still part of the transaction.

Possession of Property

Although tenants are expected to pay rent, sometimes they do not, and then demands are generally made of the tenant. If those demands are not met, they may eventually be evicted.

In many ways, the coronavirus pandemic put a spotlight on landlord and tenant issues related to possession of property issues. For example, even if a tenant is not forced to be evicted during an unprecedented event like a pandemic, landlords are still usually on the hook to pay the mortgage. This in turn strained families with rental houses or properties who had to then pay the mortgage without any help from their tenants.

While it may be possible in some standard cases to evict someone without the help of a lawyer, many find legal counsel necessary when it comes to the related court proceedings, filings, and notices.

Border Disputes

Border disputes are another area of real estate where an attorney’s help is welcome. The main issues in this particular area can be a dispute over something like determining who owns a fence or how to navigate properties with zero lot lines.

While most attorneys will advise against purchasing a property with a zero lot line because it can create a bevy of problems, if a party should find themselves in this exact situation, they will likely need a lawyer to help them successfully navigate it.

Oil and Gas Issues

Texas is an oil and gas state, so it is not uncommon to have issues with old pipeline easements that may or may not still be good. This can be an especially sensitive issue when it comes to properties as it is possible that a party that owns the surface of the ground is different from the party who owns the minerals below the surface.

In other words, if an individual owns several acres of land and has surface rights, they may have to allow people owning the mineral rights to be able to drill down and get oil or minerals.

Some good advice can be not to buy a property that someone can put a rig on and then drill for oil in your backyard. However, if this is a situation you are already currently in, finding help from a lawyer with real estate knowledge is essential.

Title, Possession, or Ownership Dispute

This type of dispute can be straight forward, but in other cases it can be much more complex, such as situations with a trust or a recently passed property owner, an incapacitated owner, or heirs that are dealing (or not) with a will and probate.

These situations take quite a bit of legal work to definitively determine ownership, administrators, and work with lenders who want to foreclose upon the property. An experienced lawyer will know how to best streamline the process and have a title company to get the proper sign offs on family agreements and court rulings.

Earnest Money Contract Cases

An earnest money contract is generally between a seller and a buyer for a property. The buyer will put down some earnest money and open up a title. The problem can come if both parties do not show up to closing because something has happened that caused one of them to change their mind.

Many people mistakenly consider an earnest money contract is a cocktail napkin type of agreement in that it is not serious. In reality, earnest money contracts are enforceable and can require an attorney to step in.

If one or more parties tries to break free of an earnest money contract, some in the industry may advise to simply release the property and sell it, allowing the buyer to move on to something else. However, in the case that a buyer wants the property and wants to enforce that earnest money contract, a lawyer’s assistance is needed. Although an agent or broker can assist with certain aspects of real estate, a dispute like this typically requires legal action and therefore the expertise of an attorney.

For more information about real estate law issues, consider going beyond the resources of a realtor to also include the proficiency of a high-quality real estate attorney.

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