Surveys In Mortgage Lending

Texas Mortgage lenders have long recognized the need to include surveys as part of their due diligence investigation of the property which will be pledged to secure the mortgage loan. In underwriting a loan, the lender must ascertain the fair market value of the real property. This is accomplished primarily by use of an appraisal. However, the appraiser has made certain assumptions about title to the property and about the physical and legal characteristics of the land. If these assumptions are not valid as to a specific property, then the appraisal is ineffective in determining the value. For example, the appraiser assumes that the house is not built over a pipeline easement; if in fact the house is over a pipeline easement, that fact will have a material affect on the value of the property. In addition to valuation issues, mortgage lenders are cognizant of secondary market requirements relating to legal and physical property conditions. The primary documents used by the lender to assess the physical and legal conditions of the property are the title commitment and the survey.

On most mortgage loan transactions, the lender will require title insurance coverage on the property. Although it is beyond the scope of this chapter to discuss due diligence relating to title commitment review and title insurance, an understanding of some of the basics is required in order to understand issues relating to surveying. Initially, a title company issues a title commitment, which is a legal promise to provide title insurance on a particular tract. This commitment indicates to the prospective insured under what conditions the title company will issue insurance. Schedule "A" of the commitment sets out the dollar amount of proposed insurance, the name(s) of the proposed insured(s), and a sufficient legal description of the tract, the title of which is to be insured. Schedule "B" of the commitment contains the exceptions from coverage; Schedule "C" contains certain requirements or conditions which must be satisfied before the title policies (owner and mortgagee) will be issued. The items shown on Schedules B and C are typically referred to collectively as the "title exceptions".

On Schedule B of a current form title commitment, preprinted item 2 is commonly known as the "survey exception". It reads: "any discrepancies, conflicts, or shortages in area or boundary lines, or any encroachments, or any overlapping of improvements". With this exception in the final policy, the title company would not include coverage of these physical conditions of the property. However, Procedural Rule P-2 of the Basic Manual of Rules, Rates and Forms for Writing Title Insurance in the State of Texas allows a lender to obtain a deletion of this verbiage except for "shortages in area" (the title company is prohibited from insuring the actual size of the tract). By requesting and obtaining the P-2 deletion, the lender is obtaining insurance coverage as to the non-existence of an encroachment or protrusion, and as to boundary line disputes. A recent survey is required to obtain this endorsement (on a refinance a title company will use a survey several years old).

Generally, the initial title commitment will also contain a blanket exception on Schedule B for unrecorded easements, rights of ways and other matters which would have been discovered by a current survey or by physical inspection of the property. Once an adequate survey is provided, the title company will delete this exception from the title commitment.

Schedule C will contain an exception that states: "satisfactory evidence must be provided that there is legal access to and from the land". This condition will be met if a survey satisfactory to the title company verifies that legal access to a dedicated public street exists (either directly or through private legal agreements). Although title insurance does not insure "adequate" access for the purchaser’s proposed use, if a satisfactory survey is provided, the title company will insure legal access from the tract to a dedicated public street.

Finally, it would be a very difficult task for the lender to review the title exception documents without the benefit of a survey. The exact location of an easement, a set-back line or a drillsite is a fundamental consideration in determining whether the title exception in question will have a material adverse impact on the rights of the owner in the proposed use of the land, and thus, on the fair market value.

A survey is a graphic representation of certain physical and legal characteristics of a specific tract of real property. In Texas, surveying is governed by the Professional Land Surveying Act of 1979 (V.A.T.S. Article 5282C). This law requires surveyors to be registered with the Texas Board of Professional Land Surveying. Although this agency has promulgated some minimum standards covering precision in measurement, boundary monuments and other survey requirements, both the surveying industry and lending institutions look to two other standards. The Texas Surveyors Association (now known as the Texas Society of Professional Surveyors) has promulgated minimum survey standards for professional surveyors. The standards are in the Manual of Practice for Land Surveying in the State of Texas, Comprised of Standards for Land Surveys, Specifications for Categories of Surveying and ALTA/ACSM Surveying Standards (herein referred to as the "Manual of Practice"). The current version of the Manual of Practice is the 1991 Revised Eighth Edition approved November 23, 1991. It is available at Brown Book Shop at 1517 San Jacinto in Houston (1-800-423-1825) or directly from the Texas Society of Professional Surveyors, 2525 Wallingwood Drive, Suite 300, Austin, Texas 78746 (512-327-7871).

The Manual of Practice contains two parts, (i) an introduction with general statement regarding standards and definitions and applications of terminology and (ii) specifications for Categories of Surveying, The categories are numbered 1 through 9 and describe the primary use for which the survey is being prepared. Mortgage lenders almost exclusively require Category 1A surveys, prepared for purposes of insuring title. Each category is divided into four separate "conditions", which describe the primary land use in the immediately vicinity (Urban Central Business District, Urban, Suburban and Rural). Thus, if the mortgage lender is requiring a survey to meet the standards of the Manual of Practice, the surveys used would be Category 1A, Condition II (Urban), Category 1A, Condition III (Suburban), and Category 1A, Condition IV (rural).

In addition to the above standards, and as the second alternative available to lenders, the American Land Title Association, in conjunction with the American Congress on Surveying and Mapping, has promulgated Minimum Standard Detail Requirements and Classifications for ALTA/ACSM Land Title Surveys (herein referred to as the "ALTA/ACSM Minimum Standards"). The title insurance industry has taken the position that because title companies are expected to insure the existence or nonexistence of certain physical conditions on the ground which cannot be ascertained except from a survey or inspection, the title insurance industry has an interest in setting forth minimum standards for surveys used for title insurance purposes. ALTA/ACSM Land Title Surveys are classified as Urban, Suburban, Rural or Mountain, and Marshland. The ALTA/ACSM Minimum Standards contain a very specific certification requirement on the survey and specific tolerances for accuracy of measurement. The ALTA/ACSM minium standards are not Texas specific standards as are the standards under the Manual of Practice.

The standard single family earnest money contracts used in Texas generally provide that a survey will be undertaken by a Registered Professional Land Surveyor acceptable to the title company and the lender. Typically, the surveyor will be chosen by the buyer or the title company. The lender may require that the surveyor be on its approved list. The surveyor selected should have ample recent experience in the type of surveying being requested; the existence of professional liability insurance coverage may be another important factor in approving a surveyor. Pricing and timeliness are also major considerations in selecting a surveyor.

The most comprehensive yet readable article on a practical approach to reviewing and analyzing surveys is "Survey Checklist: A Practical Guide to Review and Analysis of Land Surveys". This article, written by J. Richard White, an attorney in Dallas and Harlan J. Onsrud, an engineer at the University of Maine, is an excellent primer on all aspects of reviewing a survey. The article also contains a survey review checklist, which has been reproduced with permission at the end of this article. The specific areas in reviewing a survey include the legend, the legal description, the map, the north arrow, the general notes and symbols, access and the certificate.

The legend contains descriptive information which allows for the unique identification of the survey. The legend should contain the surveyor’s name, address, telephone and telecopier number, the job identification number, the date of the survey (the date the field work was completed), and any revision dates. The legend should also contain a general description of the property which is the subject of the survey. On a property in a platted subdivision, this information would be a complete legal description, with lot, block, subdivision name and phase information and plat recording information. On a nonplatted property, the information would include the approximate acreage or square footage, survey tract name, and the county and state in which the property is located. The scale to which the survey is drawn is usually contained in the legend area of the survey, occasionally it will be found in the general notes section or near the north arrow.

As noted above, in the case of an entire lot or reserve in a platted subdivision, the entire legal description will be contained in the legend. An example would be: "Lot One (1), Block One (1) of BLACK ACRE SUBDIVISION, SECTION ONE, a subdivision in Harris County, Texas according to the map or plat thereof recorded in Volume 193, Page 76 of the Map Records of Harris County, Texas." If the legal description is a portion of a platted lot or reserve, or the tract is not within a platted subdivision, the survey will typically include a legal description composed of courses and bearings, commonly known as a "metes and bounds" description. This description should be included on the survey map itself. Most surveyors will also include separate copies of the metes and bounds description on 8 ½ x 11 paper, to be copied for use with the transaction documents. It is a good practice to use a copy of the original, surveyor-provided legal description whenever possible (rather than retyping), to avoid errors in the legal description from data entry. The metes and bounds description may run for several pages; it nearly always will begin with a caption specifying the state, county, city (if applicable) and the general survey tract out of which the surveyed tract is located. After the lead-in caption, the legal description will note the point of commencement, which describes the monument at which the surveyor began the field measurements. The description will then specify the courses and distances used by the surveyor to get to the point of beginning, which is the initial monument on the surveyed tract. The survey will also indicate the basis of the bearings used in the field measurements, whether such bearings use true north, grid north or assumed north. From the first monument of the surveyed tract, the point of beginning, the calls will usually proceed clockwise around the perimeter of the surveyed tract and will always return to the "point of beginning", and will usually describe the acreage or square footage contained in the tract, qualified by "more or less." The sides of the property should be described by giving the courses and distances of each side. Curved sides should be described by using length of arc, central angle (usually designated by the delta symbol), the radius of the circle for the arc, and chord distance and the bearing.

In addition to the legal description of the surveyed tract, if there is an easement or right-of-way which provides vehicular, pedestrian or utility access to the property, the legal description of the easement or right of way should be provided as part of the survey (this legal description should also be made part of the legal description shown on Schedule A of the mortgage title policy as part of the insured tract).

The map is the portion of the survey which depicts the aerial view of the tract and includes a representation of the physical matters discovered by the surveyor. The map also depicts the boundary lines with the course and distance calls. The map will also show fences, easements, set-back lines, drillsites, improvements, all recorded title exception matters and physical aspects not shown in the title exceptions. The map will also show the names of the owners of record of adjoining tracts and will refer to applicable recording information and adjoining public and private streets and roadways. The map of a nonplatted tract will usually show the gross and net acreage or square footage. The map will show any areas within the 100 year flood plan or in a flood way. If the survey shows any encroachment of improvements into easements or set-back lines, the dimensions of the encroachment will be specified and likewise for protrusions of the improvements across property boundary lines. The map will also delineate any conflicts in boundaries, or strips or gores. If the property is made up of multiple tracts, the survey will indicate that no gaps exist and that a common boundary line is commonly called.

Notes are items which the surveyor wants to point out to the parties. The surveyor may include a note about the basis of bearings. The surveyor may want to disclaim certain matters the survey does not cover, such as wetlands, fault lines, hazardous waste and like matters. The surveyor may want to note existing physical matters not shown in recorded documents, such as a easement by usage or a plyon sign. Most surveyors will include the F.E.M.A. Insurance Rate map information and flood zone in a separate note. If there are any potential discrepancies between prior legal descriptions and the results of the current field work, these conflicts will be addressed in the notes. All notes should be read and analyzed carefully to determine the probable impact on the proposed use of the land. The survey should always contain a north arrow and should indicate what it represents, whether true north, magnetic north, grid north, or assumed north.

One of the most important lender requirements is adequate access of the tract to one or more dedicated public streets. Both the map and the legal description should show that the tract abuts a dedicated public street, or has access via private easement or roadway. Please note that there is a difference between street dedication, which is typically done by plat or deed, and acceptance by the governmental authority for maintenance. The surveyor typically will warrant to the former but not the latter. Once a street is dedicated to the public, anyone may use the street; however, the governmental authority is not responsible for its maintenance until after its political body has formally accepted the street for maintenance. This distinction may be important to the lender. If access is by private easement, the practitioner must review the easement documents to ensure that the rights run with the surveyed tract and is perpetual. Such rights in an easement tract should be covered by the contract, the deed of conveyance, and the deed of trust and should be insured under the title policy. In a platted subdivision with private streets, the law implies that all owners of land in the subdivision have the right to use the private streets.

The Certificate

This is the portion of the survey wherein the surveyor makes legally binding representations and warranties as to what the scope of the survey covers, and the degree or precision of measurement used in the survey, and various other matters on which third parties are going to rely. The certificate basically is the measure of the duty of care of the surveyor and the standard of liability which may be imposed upon the surveyor. This is the most negotiated aspect of the survey. Surveyors do not want to warrant matters outside of the scope of their expertise and the scope of their employment (and compensation) on a particularly survey. Lenders and title companies would like the certificate to be as broad as possible.

There are two basic forms of certificates: one which attempts to list all matters on which the parties are relying; and the other is one which incorporates by reference a set of criteria or standards, most commonly, one of the categories and conditions of the Manual of Practice or the ALTA/ALSM minimum standards. In addition to the matters warranted in the certification, surveyors are also bound by the standards established by the professional associations to which the surveyor is a member and by state statutes and regulations. Despite the wide variety in form and content of surveyor’s certificates, the following area should always be addressed in the certificate:

1. Addressee - The survey should be addressed to all parties on which their reliance on the survey is contemplated. This would include the purchaser, the lender and the title company.
   
   
2. "On the Ground" - A representation should be made in the certificate that the survey is the result of an on-the-ground staked survey.
   
   
3. Signature and Seal - It is imperative that the certificate be signed and the surveyor’s seal be attached. These are now required by the Texas Board of Professional Land Surveying administrative rules.
   
   
4. Access - The certificate should warrant access to a dedicated public street and contain any qualifications to such warranty.
   
   
5. Encroachments - The certificate should warrant that there are no conflicts, shortages in area, encroachments, overlapping of improvements, set-back lines, easements or roadways, except as otherwise shown.
   
   
6. Boundaries True and Correct - The certificate should warrant that all monuments shown actually exist and the location and size shown are true and correct.

This presentation is intended to assist the mortgage lender in understanding the importance of requiring a survey and reviewing that survey as part of the due diligence process in finance transactions on real property. The survey is a fundamental component of the due diligence process in allowing the mortgage lender to assess the legal and physical impediments to the owner’s intended use of the property.