At some point in most people’s lives, the notion of purchasing the home of their parents or another family member has crossed their mind. Whether it is simply daydreaming about renovating your childhood home, or a more serious consideration such as purchasing your parents’ home so that you can move in to take care of them full time, the idea of keeping real estate in the family is a prevalent one.
However, using a bank loan to purchase a close relative’s homestead property creates an inherently risky situation for a title insurance company, and a strict set of guidelines must be followed for us to be able to insure the transaction.
Why this is the case:
To best explain the problem at hand, we have to circle back to Title 101. When a property is purchased with cash only, the title company issues a policy insuring that the owners own the property (an Owners Title Policy).
When a property is purchased using a loan, two policies are issued. The Owners Title Policy and one for the benefit of the lender (a Lenders Title Policy), insuring the lien claim of the lender to the property.
If only issuing an Owners Title Policy, Title Companies will typically be able to close the transaction without issue. However, if a Lender’s Title Policy is being issued, the threat of what is referred to as a “Pretended Sale” becomes a concern.
What is a Pretended Sale?
A pretended sale is an on-the-nose description of a specific type of loan fraud. It is exactly what its name implies – a fake sale, intended to funnel money from one party to another under false pretenses. In the case of a family transaction with a loan, the risk is that it is an attempt by the seller to get money out of the home without taking out a home equity loan and complying with the Texas Home Equity laws.
In Texas, all pretended sales of homesteads are void, meaning that the lender’s lien on the house is invalid. As the title company is insuring the validity of that lien claim, a pretended sale could result in a massive claim to the title company.
How is a Pretended Sale Avoided?
A crucial aspect of what makes a pretended sale void is the seller remaining in the property after closing. If their homestead was never abandoned, their homestead rights remain intact, and we all know how particular Texas is about their homestead rights.
Therefore, if the seller can provide sufficient evidence that they own another property in the state of Texas that they intend to move into, the title company and underwriter will usually be placated by the seller signing the appropriate affidavits. If they have purchased a new home outside of the state, the title company will likely seek underwriting approval.
If the seller intends to move to a retirement home or another type of rented property, the title company will likely need to obtain underwriting approval as well. Unfortunately, instances in which children take out a loan to purchase their parent’s property with the intent of moving in with them to care for them are usually uninsurable due to the threat of pretended sale.
Property passing on to the next generation or between family members is a common occurrence that can happen through many legal pathways. Despite a client’s intentions, Texas Homestead laws combined with the prevalence of real estate fraud have made it so transactions between close family members always fall under intense scrutiny by the title company.
