Preferred Properties of Texas

The Preferred way to buy & sell property for over 25 years

What is a 1031 Exchange?

by Leave a Comment

When property is sold, the seller pays national tax on any gain or deducts for reductions. Section 1031 of the tax code provides citizens an opportunity to defer any gain on the sale of qualified property. Most trades are completed through a business which specializes in 1031 exchanges (an intermediary). The IRS has published rules (safe haven rules) to get an intermediary aided swap. If these principles are followed, the IRS won’t challenge the trade. This safe harbor is a main reason for using an intermediary to assist in the market.

The 1031 exchange provision is only for investment and business property, and that means you can not swap your main residence for another residence. There are ways that you can use a 1031 for swapping holiday homes, yet this loophole is a lot narrower than it was. Many 1031 exchanges involve real estate, nevertheless, some exchanges of personal property (say a painting) can be eligible. Notice , that exchanges of corporate stock or partnership interests don’t qualify. On the flip side, interests as a tenant in common in real estate perform.

Most exchanges should only be of”like-kind”, a term that does not mean exactly what you think it means. You can swap an apartment building for raw land, or even a ranch for a retail center. The principles are amazingly liberal. You may even exchange one company for a different but there are traps for the unwary.

When an intermediary is utilized, an exchange may convey the sold property (relinquished property) right to a purchaser with the proceeds of the sale paid directly to the intermediary. When the exchanger purchases the replacement property, the intermediary pays the exchange funds to the vendor of the replacement property. Title to the house usually does not pass through the intermediary.

Under Section 1031 tax on a gain is postponed, maybe not entirely forgiven. Finally when the replacement property is sold, the tax on the deferred gain must be compensated unless additional provisions of this tax code are used to completely eliminate the taxable gain.

Timing
There are two critical time intervals for exchanges: the identification period and the trade period. Both start on the date the relinquished property is sold and operate simultaneously.

The identification period is 45 days. During this 45-day phase replacement property must be designated or identified in writing. If the replacement land is not identified within this 45 day period, the exchange fails and all profit realized from the sale of the replacement home will be taxable.

The exchange must be completed within 180 days of the closing date to the relinquished property. This 180 day period runs concurrently with the 45-day designation period. It is not inserted to the end of the designation period. It is not feasible to extend either the identification period or the trade period.

If the exchanger records a tax return for the year of the trade, the exchange period is terminated. When an exchange has not yet been done by the date a tax return is expected, a request for an extension of time to file the tax return must be submitted in order to get the entire 180 day interval to complete an exchange.

Steps to Follow
After the sale of their relinquished property, the sales proceeds need to be sent to the qualified intermediary pending the purchase of the replacement house.
Identify replacement property within 45 days of the sale of their relinquished property. Following the 45-day identification interval, only real property identified as potential replacement property qualifies as replacement property.
Contract to Buy replacement property.
Notify the intermediary of the contract to purchase replacement property and supply information about the closing of the purchase.
Within 180 days of the date of sale of relinquished property, purchase the replacement property, using exchange proceeds held by the intermediary.
The 180-day purchase period runs concurrently with the 45 day identification period.

texas ranch land for sale

What to Look for in a Single-Family Investment Property

by Leave a Comment

Investing in real estate is a wise decision that can often help you enjoy a relaxing and full retirement. To ensure you purchase the best real estate, though, you need to know what qualities make for a good investment property.

While any property can ultimately turn out to be a good investment if you have enough determination, there are certain qualities that will make your life easier when it comes to the return on your investment. Here are some qualities to look for in an investment property:

Location

Since you can’t change the location of the home you choose to buy, it’s important to consider this quality carefully. One important aspect to consider is the rating of the local school district since many young families move into certain homes simply to further their child’s education. You should also consider factors such as the proximity to mass transportation options, expressways, stores and other amenities that will help set your home apart.

Community Amenities

If a home is located in a community that offers extra amenities, that can only serve to make your property more attractive to potential tenants. Whether it’s a community swimming pool, playground, walking path or other unique option, single-family homes in these communities usually sell very well. Just make sure the community is vibrant and actually takes care of these amenities so that you fully understand what you’re advertising.

Multiple Bathrooms

While people have different needs when it comes to bedrooms, almost everyone wants at least two bathrooms in the homes that they consider. Therefore, if you want to own a property that’s easy to rent, you need to look for one that’s built with multiple bathrooms. Once you own the home, make sure to update any out-of-date bathrooms, as this will be one of the qualities that people scrutinize most closely as they tour your house.

Easy Upkeep

Most renters aren’t looking to have much maintenance to do when they move into their rental home; so, if a home has a large yard, you can expect it to be a harder sell. Likewise, if you volunteer to take care of all the maintenance, you could find that you spend all your time on the upkeep of the home if it has anything more than a small patch of grass. Therefore, look for yards that are big enough to provide a functional outside space without having a lot of fast-growing plants or other hard-to-maintain elements.

The prospect of the income that an investment property can provide can be quite tantalizing. However, since you don’t personally need this home for shelter, it’s important to stay patient throughout the process. By being selective about your investment properties, you’ll be able to have a quality portfolio that you won’t have to shift around too much as the years pass.

Looking to start investing in property but don’t know where to start? Start by calling Preferred Properties today! We are here for all your Real Estate needs!

Seller Beware

by Leave a Comment

Understanding the General Warranty Deed

The sign reads “FOR SALE BY OWNER.”

A buyer calls, and an agreement is made to buy the property. The parties agree to leave the real estate brokers and lawyers out of this. It’s a simple transaction. There’s no need to pay commissions and attorney fees.

Of course the buyer wants a general warranty deed. The seller readily agrees. After all, the general warranty deed is what everyone uses. The contract forms promulgated by the Texas Real Estate Commission even require a general warranty deed. That’s how it’s done.

The seller does a quick Internet search and finds a form for a general warranty deed, quickly fills it out and signs it, delivers it to the buyer in exchange for a check, and deposits the check. On the way home, the seller congratulates himself for saving money.  Little thought is given to the legal mumbo jumbo contained in the deed.

This scenario plays out all over Texas, and countless buyers and sellers put themselves at risk of being left holding the bag. They are, of course, free to do so, and brokers and lawyers are not required.

Although the most common deed in use in real estate transactions is the general warranty deed, the parties to the transaction rarely know the legal ramifications of its use, especially when real estate professionals, lawyers, and title companies are not consulted. Participants in real estate transactions should know what it means to sign (and accept) a general warranty deed.

Implied Warranties

Generally speaking, a deed is an instrument that conveys an interest in property. While not all deeds contain warranty language, certain warranties are implied in almost every deed. The Texas Property Code provides that any time the words “grant” or “convey” are used in a deed, the grantor (seller) promises 1) that the grantor has not transferred any part of the property to anyone else, and 2) that the property is free from encumbrances (Section 5.023).

The implied warranties are made only to the grantee (buyer) in the deed. That is, they are not attached to the land. Only the immediate buyer may sue the grantor if the warranties are breached.

Express Warranties

Express warranties are stated specifically in a deed. They are similar to implied warranties, but they give greater protection to the grantee and subsequent grantees, and they expose the grantor to greater liability.

A general warranty deed contains a warranty that looks like this:

And grantor hereby binds grantor, grantor’s heirs, executors, and administrators to warrant and forever defend all and singular the said premises unto the said grantee, his heirs, and assigns, against every person whomsoever, lawfully claiming or to claim the same, or any part thereof.

What does this mean? It means that the seller is guaranteeing to compensate the buyer for any failure of title, all the way back to the time of the land patent from the sovereign. In Texas, that means the original grant from Spain, Mexico, the Republic of Texas, or the State of Texas. Additionally, this warranty is appurtenant to the land, meaning that it is attached to the land and “runs with” the land. In other words, the seller’s guarantee is made to the buyer and to all subsequent grantees, and includes all title defects, even if the seller had nothing to do with them and had no knowledge of them, and even if they originated over 180 years ago.

When a general warranty deed is given, the grantor promises that 1) the grantor will defend and protect the grantee against the rightful claims of third parties to the property (warranty of title), and 2) the property is free of encumbrances (covenant against encumbrances).

An encumbrance is any impediment to the title that does not change the ownership of the land, but that diminishes the value or use of the land. Examples include liens, tax assessments, leases, and easements.

Note the similarities and differences in the implied and express warranties. The implied warranty extends only to the immediate grantee and only says that the grantor has not previously conveyed the property to a third person. The express warranty goes much further. It extends to all subsequent grantees and covers every potential defect in the title.

A warranty does not strengthen or enlarge the title conveyed. It does not even guarantee that the grantor owns the property. It simply promises to compensate the grantee in the case of a failure of title.

Breach of Warranty of Title

A breach of the warranty of title occurs when a third party has a valid claim to the property—a failure of title. For example:

  • The seller may have previously conveyed part or all of the property to a third party.
  • A previous owner may have previously conveyed part or all of the property to a third party.
  • A third party may have adversely possessed the property prior to the date of the transfer of the property.
  • A third party may have obtained title through a separate chain of title.

A failure of title may be total or partial. A total failure of title occurs when no interest in the property passes to the grantee as a result of the deed. A partial failure occurs when only part of the property interest passes to the grantee.

In the event of a total failure of title, damages are the purchase price paid the grantor, with interest.

In the event of a partial failure, the damages depend on the circumstances. If title fails as to a certain part of the land, then the damages are calculated by determining the value of the part to which title fails in proportion to the value of the entire tract, and then multiplying the resulting fraction by the purchase price.

If title fails as to an undivided interest, damages are calculated by dividing the price paid to the grantor for the entire tract by the number of acres in the entire tract at the time of the conveyance to obtain a price per acre and then multiplying by the percentage of undivided interest for which title failed, unless the value of the failed interest is affected because it is an undivided interest.

If the grantee obtains full title by purchasing the outstanding interest from a third party who is the lawful owner, the buyer may recover the price paid for the outstanding interest, but these damages are capped at the price paid to the grantor for the entire tract.

A grantee may also recover other costs, taxes paid, and attorney fees.

Breach of Covenant Against Encumbrances

Encumbrances include liens and tax assessments. Easements or restrictions on use may also be encumbrances. However, easements and restrictions are often excepted from the warranty.

An example of a breach of the covenant against encumbrances is the existence of a lien on the property. The breach technically occurs at the time the covenant is made. However, the buyer may not sue until 1) the lienholder forecloses and takes the property from the buyer, or 2) the buyer pays to discharge the lien. In this event, the grantor may be sued for the cost necessary to discharge the lien or encumbrance.

If the breach is based on an impediment, such as an easement or restriction, the damages are the difference in the value of the property without the impediment and the value of the property with the impediment. These values are calculated at the time of the transfer of the property.

Allocating Risk

There are several common ways the parties to the transaction may allocate the risk involved.

Limit or eliminate the warranty. If the parties agree, a special warranty deed may be used. In a special warranty deed, the seller reduces his risk by limiting the warranty. The covenant of warranty in a special warranty deed looks like this:

And grantor hereby binds grantor, grantor’s heirs, executors, and administrators to warrant and forever defend all and singular the said premises unto the said grantee, his heirs, and assigns, against every person whomsoever, lawfully claiming or to claim the same, or any part thereof, by, through, or under grantor, but not otherwise.

The effect of this warranty is that the seller is liable only for claims that arise through him. Of course, this shifts the risk to the buyer should some other failure of title occur, so a buyer may be reluctant to accept a special warranty deed. Another type of deed, called a deed without warranty, eliminates the express warranties altogether. Implied warranties still exist unless the deed expressly disclaims them. Deeds without warranty are uncommon in real estate sales.

Usually, a deed has a section entitled, “exceptions to conveyance and warranty.” Known and existing encumbrances are listed here and specifically excluded from the warranties made in the deed.

Title Insurance. A real estate broker or salesperson is required to advise each buyer that the buyer should 1) have the abstract of title examined by the buyer’s attorney, or 2) obtain a title insurance policy. Buyers would do well to listen to this advice.

Title insurance may be purchased to protect the buyer from defects and encumbrances. When purchasing title insurance, it is important to remember a few things.

First, even though the title policy is often paid for by the seller, title insurance typically protects the buyer (an owner’s policy) or the lender, if any (a loan policy). The buyer (or lender) is the insured, and if a valid claim is made, the insured gets paid. This is much better for the insured than suing for breach of warranty. After all, the seller could be nowhere to be found or judgment-proof (broke).

No legal protection is provided to the seller. In fact, if a claim is paid, the title company is subrogated to the insured’s rights, meaning it could seek to recover from the seller. However, as a practical matter, title insurance is good for everybody, including the seller.

Second, the title policy only covers the property for as long as the buyer owns it. Once it changes hands, the general warranty still applies (runs with the land), and the original seller is still on the hook.

Third, title policies come with numerous exceptions, which help the title company avoid liability. Many of these exceptions may be changed or deleted by paying an additional premium for an endorsement. Ask your title company or lawyer about other options for additional protection.

One pleasant side effect of title insurance is that defects may be discovered (and often corrected) during the title examination process, significantly reducing the likelihood of a claim. However, one should remember that the title company examines the records to protect itself. It does not have a duty to inform of defects. If a defect occurs, the title insurer’s duty is to compensate for loss or damage, up to the face value of the policy. The insurer also has a duty to defend as set forth in the policy.

THE TAKEAWAY

The general warranty deed is the most commonly used deed in Texas. It’s important for a seller to be aware of the potential liabilities created when real property is conveyed by general warranty deed. Parties to real estate transactions can reduce their risk by obtaining effective legal counsel and by purchasing title insurance.

For specific warranty deed advice, an attorney should be consulted.

Episode 1 of our Preferred Properties Real Estate Radio Show

by Leave a Comment

https://soundcloud.com/e-case-horton/preferred-properties-of-texas-real-estate-show

 

Buying or Selling Rural Real Estate? Know the Lending Lingo

by Leave a Comment

In May 1917, W.S. and Mary Smith of Grayson County, Texas, became the first Farm Credit borrowers in the state when they refinanced a $10,000 farm loan at 5 percent interest with the newly formed Van Alstyne National Farm Loan Association – now a part of Lone Star Ag Credit.

Their new interest rate was a vast improvement over the 8 percent they had been paying on a bank note. Back then, lenders didn’t offer a choice of rates and terms. Until banking laws were changed and the Farm Credit System was established in 1916, long-term land loans were not available.

Rural real estate financing has changed dramatically since then. Today, as the Farm Credit System marks its 100th anniversary of supporting agriculture and rural communities, country home and land buyers have dozens of financing options. Whether you are purchasing or selling property, it helps to know the lending lingo. Following are a few terms used in rural financing today.

Appraisal – A written opinion of a property’s current market value prepared by a qualified appraiser.

Balloon Note – A long-term loan, often a mortgage, that has one large payment (the balloon payment) due upon maturity. A bal-loon note often has the advantage of low payments, thus requiring very little capital outlay during the life of the loan.

Basis Point – Basis points measure the movement of interest rates or yields in hundredths of a percent. One basis point is 0.01 per-cent, thus 100 basis points equal one percent.

Closing Costs – Costs for services required to close a mortgage loan, such as title insurance, inspections, appraisals, loan closing fees and attorney’s fees.

Closing Disclosure – A five-page form that provides final details about the mortgage loan that the applicant has selected. It explains loan terms, projected monthly payments and total closing costs. The lender must provide the closing disclosure to the applicant  at least three business days before the loan closing date.

Cooperative Lender – A lender that is owned and controlled by its customers. Each member has one vote. An example is a Farm Credit financing cooperative.

EIR (Effective Interest Rate) – Similar to the consumer APR, or annual percentage rate, the effective interest rate is an expres-sion of a customer’s total cost of borrowing in the first 12 months of a loan, including stock purchase, origination fees and interest, expressed as an interest rate.

Fixed-Rate Loan – A loan in which the interest rate is fixed for a pre-established time frame. The fixed-rate period can run for the full term of the loan, or for a period shorter than the full term.

Flood Determination – A process whereby a lending institution determines whether flood insurance is required and available for  a loan secured by a building or mobile home.

Inspection – An inspection of a prospective home or structure done by a professional to establish the structural and mechanical integrity of the building.

LIBOR (London Interbank Offered Rate) – The interest rate  that international banks charge each other for short-term inter-bank loans. It is usually quoted for one-, three- and six-month periods, and is a key reference rate used throughout the world financial markets. LIBOR is typically used as the base index for short-term loans and adjustable-rate mortgages. LIBOR rates are published daily in the Wall Street Journal.

Loan Estimate – A three-page form that the lender is required to provide to the loan applicant within three business days of receiving the mortgage application. It explains the important details about the loan requested, including estimated interest  rate, monthly payment and total closing costs.

Lot Loan – A lot loan is designed for people who wish to finance an unimproved property on which they intend to build a home in the future. Limited agricultural activity may occur on the property, but no intensive farming.

One-Time Close – Saves closing costs by combining your land loan, interim construction financing and permanent mortgage loan into one package.

Patronage – The portion of a cooperative’s annual earnings, after payment of all operating expenses, that are distributed to the cooperative’s members on a pro rata basis. Patronage dividends are a unique economic feature of cooperatives. They are paid in cash, allocated equities, stock or any combination of these, and effec-tively lower the cost of borrowing from a cooperative.

Preapproval – A general term that means a borrower has com-pleted a loan application and has provided his or her debt, income and savings information, which an underwriter has reviewed and approved prior to an actual transaction.

Prequalification – A preliminary step in the loan application pro-cess, a prequalification is a lender’s written opinion of the ability of the borrower to qualify for a particular loan amount. The amount prequalified by the lender is determined based on inquiries into the borrower’s credit history, debt, income and savings.

Prime Rate – A short-term, variable interest rate quoted by com-mercial banks as an indication of the rate being charged on loans to its best commercial customers. Even though banks frequently charge more and sometimes less than the quoted prime rate, it is  a benchmark against which other variable rates are measured.

Rate Lock – An option exercised by the borrower, at the time of the loan application or later, to “lock in” the rates and points prevailing in the market at that time. The lender and borrower are committed to those terms, regardless of what happens between that point and the established closing date.

Stock – Each Farm Credit co-op borrower becomes an owner of the cooperative through the purchase of stock equal to 2 percent  of his or her loan amount, not to exceed $1,000. In most cases, funds for the stock can be included in the loan. Ownership of this stock gives borrowers voting rights in the co-op. The stock invest-ment is repaid to the borrower when the loan is paid in full.

Variable-Rate Loan – Refers to any type of loan that does not have a fixed rate of interest over the life of the loan. Such a loan is adjusted periodically, usually according to changes in a standard index rate outside the control of the lender, such as the prime  rate, LIBOR or Treasury bonds or notes.

Preferred Properties of Texas have been helping buyers and sellers with their real estate transactions for over 25 years. Our Realtors have the expertise to assist you with your next property transaction. Don’t wait and let’s get started! Call today!

Preferred Properties of Texas

(254) 965-7775|Contact Preferred Properties of Texas