What’s
the issue?
Historically,
some builders required consumers to convey their lot (often without payment)
to the builder as a condition to building a new home on the lot. In 1997,
the Property Code was amended to prohibit this practice.
How
did this affect lenders?
Many
lenders and title companies would not make and insure loans to homebuilders
where the consumer’s lot was being conveyed to the builder. Instead,
the builder would place a mechanic’s lien on the lot and the builder
would pledge the mechanic’s lien to secure the construction financing.
What
has changed?
The
substance of the statute has not been amended, but in 1999 the title was changed
from "Conveyance to Contractor Prohibited" to "Conveyance to
Contractor not Required". It appears that the Texas Legislature went
to the unusual length of changing the title to show the distinction between
a contractor accepting a voluntary conveyance of the consumer’s lot
and a contractor requiring a conveyance as a condition to building the home.
So
can a builder accept a conveyance without violating the statute?
Apparently
so. It appears that if a builder gives the consumer an option of conveying
or not conveying, the builder can accept conveyance. It also appears that
the terms of the two options could vary, as the risk to the builder on a non-conveyance
would be greater and the expense in the event of default more costly.
What
do the title companies say?
Some
of the title companies have issued bulletins reversing earlier policy and
will now issue policies and binders to lenders if certain conditions are met.
What
are those conditions?
- Fair
cash consideration is paid by the builder for the conveyance, usually based
on an appraisal
- The
owner must sign an affidavit indicating that the lot was voluntarily conveyed
to the builder, and the builder did not require the conveyance
- The
owner does not claim the lot as his/her homestead
Is
there anything else a builder could do to evidence the voluntary nature of
the conveyance?
Yes,
the owner could be provided an election form at initial interview whereby
the owner elects either (i) to convey to the builder at a purchase price based
on an appraisal and have the builder provide the construction financing or
(ii) to retain title and the owner would provide construction financing.
Is
there any risk to lenders?
There
are no cases to date interpreting the statute. However, it appears that a
voluntary conveyance is possible. A lender should verify fair consideration
was paid for the lot and an affidavit was signed by the owner. If a title
underwriter insures title without exception for the conveyance, the risk to
the lender would be consistent with prudent underwriting standards.