Best Practices Breakdown
Avoiding “Pretended Sales” Pitfalls in Texas Family Member Transactions
By Steve Kubik
As housing costs continue to rise, lenders are increasingly likely to encounter transactions involving and between family members. When these transactions involve homestead property in Texas, they may result in “pretended sale” exceptions to the Loan Policy of title insurance that are unacceptable to most lenders and loan investors. Simply put, it can be a “deal killer.” As such, early identification of these potential exceptions is critical to ensure the insurability and salability of your loan.
What is a Pretended Sale?
Under Texas law, “[a]ll pretended sales of the homestead involving any condition of defeasance [are] void.” Tex. Const. art. XVI, Sec. 50(c). A sale is “pretended” if the parties to the sale did not intend for title to vest in the purchaser. In re Perry, 345 F.3d 303 (5th Cir. 2003) (applying Texas law). A “condition of defeasance” permits the seller to reclaim the title to the property conveyed after the loan is repaid. Id.
It does not matter whether a condition of defeasance is expressed in the instrument or deed. Anglin v. Cisco Mortg. Loan Co., 135 Tex. 188, 141 S.W.2d 935 (1940). Therefore, even deeds purporting to convey homestead property appearing absolute on their face may be subject to claims that the conveyance is void by the purported buyer.
Title Exceptions for Pretended Sales of Homestead Property
Not every sale of homestead property between related persons is a pretended sale, but due to the increased risk, title companies are wary of insuring in scenarios with a higher likelihood of a potentially void conveyance. As such, title companies may add the following exceptions (or similar) where the buyer/seller are family members or where the seller does not intend to vacate the homestead property:
“Any failure of title by reason of: (i) any claim, assertion, or determination that the vesting of title in ___________________ by that deed recorded _____________________ was not a bona fide sale, but was instead a pretended sale; or (ii) any claim, assertion, or determination that the above referenced deed vesting title in _______________ constitutes a mortgage or other security device.”
“Any Claim to Homestead interest to property asserted by _____________________ (selling family member).”
“Any defect or invalidity of the lien insured herein, or claim of same, arising out of or resulting from the alleged or actual, pretended or sham sale or conveyance of the land described in Schedule A hereof, by and between _____________and _____________________________.”
As you can see, these exceptions are particularly problematic for lenders and loan investors. To the extent a transfer is found to constitute a pretended sale, it may void the lender’s lien and such exceptions would eliminate any related coverage under the Loan Policy.
Vesting Changes During Refinances May Result in Pretended Sale Exceptions
Importantly, in addition to purchase transactions between family members, vesting changes on refinance transactions may result in pretended sale title exceptions as well. Lenders should beware conveyances between family member owners or where the grantor/seller does not intend to vacate the homestead property.
Potential Solutions
If a title company has listed pretended sale/homestead exceptions on Schedule B of the title commitment (or intends to do so), inquire whether the title company is able to remove these exceptions and what requirements must be satisfied. In some cases, the exceptions may be removed if seller/grantors are able to execute an affidavit that, among other things, designates another property as their homestead. However, not every situation can be cured to the satisfaction of the insuring title company.
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