Tierra Grande - July 2012 by Texas Real Estate Research Center

JULY 2012

JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY

NON-PROFIT ORG. U.S. POSTAGE PAID DALLAS, TEXAS PERMIT No. 70

TEXAS A&M UNIVERSITY COLLEGE STATION, TEXAS 77843-2115

In This Issue Housing Affordability Owned Homes vs. Rented Self-Proving Wills Texas Land Markets by Region Commercial Installment Sales New POA Restrictions First-Time Homebuyer Program Late Property Taxes Costly

JULY 2012

JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY

TIERRA GRANDE

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recenter.tamu.edu

JULY 2012

VOLUME 19, NUMBER 3

TIERRA GRANDE JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY

7 Rent or Own?

What Influences Decision

Director, GARY W. MALER

Trivia question: Other than the costs of owning or renting, what determines the proportion of owned homes and rental units in Texas metros? Answer: College enrollment rate.

Chief Economist, MARK G. DOTZOUR Senior Editor, DAVID S. JONES

BY ALI ANARI

Managing Editor, NANCY MCQUISTION Associate Editor, BRYAN POPE Assistant Editor, KAMMY BAUMANN Art Director, ROBERT P. BEALS II Graphic Specialist/Photographer, JP BEATO III Circulation Manager, MARK BAUMANN Lithography, MOTHERAL PRINTING, FORT WORTH

ADVISORY COMMITTEE: Joe Bob McCartt, Amarillo, chairman; Mario A. Arriaga, Spring, vice chairman; James Michael Boyd, Houston; Russell Cain, Port Lavaca; Jacquelyn K. Hawkins, Austin; Kathleen McKenzie Owen, Pipe Creek; Kimberly Shambley, Dallas; Ronald C. Wakefield, San Antonio; and Avis Wukasch, Georgetown, ex-officio repre senting the Texas Real Estate Commission. TIERRA GRANDE (ISSN 1070-0234) is published quarterly by the Real Estate Center at Texas A&M University, College Station, Texas 77843-2115. Telephone: 979-845-2031. SUBSCRIPTIONS free to Texas real estate licen sees. Other subscribers, $20 per year. Subscribe online at http://recenter.tamu.edu/store VIEWS EXPRESSED are those of the authors and do not imply endorsement by the Real Estate Center, Mays Business School or Texas A&M University. The Texas A&M University System serves people of all ages, regardless of socioeconomic level, race, color, sex, religion, disability or national origin. PHOTOGRAPHY/ILLUSTRATIONS: JP Beato III, pp. 1, 7, 8, 14–15 (photo), 20–21; Robert Beals II, pp. 2, 5, 14–15 (illustration), 16–17, 23, 24–25; Real Estate Center files, pp. 10, 13, 18, 26–27, 28. © 2012, Real Estate Center. All rights reserved.

2 State of Affordability

How much house can Texans afford? According to NAR’s and the Center’s affordability indexes, way more than residents of other states. BY JAMES P. GAINES

10 Self-Proving Wills

Wills are not all alike. Self-proving wills are simpler to probate because they do not require sworn testimony or an affidavit from someone who witnessed the will or knows the deceased’s handwriting. BY JUDON FAMBROUGH

14 Land Watch

Texas land markets encompass widely varying land types, including irrigated cropland, desert land, native rangeland and timber land. Here’s what’s selling and what isn’t. BY CHARLES E. GILLILAND, GERALD KLASSEN, J. GABRIEL GARCIA AND DAVID ADAME

ON THE COVER Hamilton Pool Nature Preserve, Travis County

PHOTOGRAPHER JP Beato III

18 Buying on Time

Commercial Installment Sales Buyers can defer payments and invest purchase money. Sellers can benefit from increased cash flow. There can be an upside to commercial installment sales. BY JERROLD J. STERN

JULY 2012

20 Reining in POAs

From political signs to solar panels to flagpoles, new state legislation mandates ways in which property owners’ associations can and cannot restrict property use. BY JUDON FAMBROUGH

24 Texas First-Time Homebuyer Program

Licensees, here’s a heads up for your first-time buyers. This state program offers loans with or without down payment and closing cost assistance. BY HAROLD D. HUNT

26 Through the Roof

Delinquent Property Taxes Prove Costly Think of a snowball rolling down a hill, getting bigger and bigger (fast). Now imagine that snowball is the penalties and interest you owe for paying your property taxes late. Get the picture? BY CHARLES E. GILLILAND AND SARAH WHITMORE

Residential Markets

By James P. Gaines

“H

ousing affordability” refers to the relationship between household income and housing prices. Because the majority of owner-occupant buyers rely on mortgage debt financing, they need to know how much income is necessary to qualify for a loan to buy a particular home.

Home Affordability Indexes General affordability indexes, such as the ones produced by the National Association of Realtors (NAR) and the Real Estate Center, look at the relationship between median family (or household) income and median home price. NAR’s national composite affordability index reached a record high in early 2012 based on a substantially lower median home price and mortgage interest rate and despite static-to-falling median household income (Figure 1). The Center’s Texas Housing Affordability Index (THAI) suggests that housing has been consistently more affordable in

Texas than for the United States and that the spread in affordability has increased during the recent housing downturn (Figure 2). The NAR index and the THAI reflect the ratio of the areawide median family income to the income needed to qualify for a mortgage to buy the median-priced home under a specified set of mortgage financing conditions [(Median Family Income ÷ Required Income) × 100]. If the required income to purchase the median-priced home is exactly equal to the median family income, the index value would be 100.0. Both indexes are computed in the same way but use different median family income estimates. NAR computes an estimated quarterly median family income based on Census Bureau decennial data. The THAI applies the annual median family income estimate provided by the Department of Housing and Urban Development (HUD) to compute each quarter’s index. Median home prices are estimated by each group according to TIERRA GRANDE

Increase of 107% from July 2006 to October 2011

200

JAN. 2012, 205.8

180 160

Average 1994–2003 = 132.4 FEB. 1999, 146.9

APRIL 2003, 145.4

140 120

JULY 2000, 122.8

100

JULY 2006, 99.6

80 1994

Drop of 31.5% from April 2003 to July 2006

1997

2000

2003

2006

2009

2012

Source: NAR Composite Index

sales data compiled by Figure 2 local Multiple Listing Texas Housing Services (MLS). Affordability Index Both measures com220 211.9 pute the annual income 197.0 200 a lender would require a borrower to earn to Texas 180 afford the monthly payments for an 80 percent, 160 30-year mortgage to purUnited States chase the median-priced 140 home at the “effective” mortgage interest rate 120 2012 reported by the Federal 100 Housing Finance Board. 2005 2007 2011 The requisite income for Source: Real Estate Center both indexes is based on at Texas A&M University an assumed, lender-mandated 25 percent qualifying ratio. That is, the monthly mortgage payment can be no more than 25 percent of the borrower’s gross monthly income. oth ratios ignore other monthly costs of homeownership as they vary significantly from one area to another. Including other monthly costs of ownership would be offset by increasing the applicable qualifying ratio, generally to 35 to 40 percent. Because information on the percentage of potential buyers who can put 20 percent down is not available, the affordability indexes no doubt overstate true affordability. As the requisite down payment declines, the amount financed increases and, therefore, the required income increases. Additionally, as the down payment declines, some lenders will charge a higher interest rate to reflect the greater risk of the loan, raising the monthly payment and decreasing overall affordability.

JULY 2012

NAR’s first quarter 2012 index of 225.9 indicates that the current median family income is more than twice as much as is required to buy the national median-priced home under the assumed financing. The THAI fourth quarter measure of 211.9 indicates that median family income in Texas is also more than twice the required income. The two main causes of the increase in affordability have been the changes in median home price and interest rates. The national median home price declined 25 percent between 2006 and 2011, while the Texas median home price increased a modest 4 percent over the same period (Figure 3). exas’ major markets are among the most affordable metropolitan areas in the country (see table, p. 6). Fort Worth shows the highest level of affordability based on the combination of local median Figure 3 family income and Texas and United States home prices. Austin Median Home Prices 250 is somewhat less affordable and has the highest median 200 home price in the United state. States Texas’ 2011 THAI 150 was 21 percent above the 2005–11 Texas 100 average, and the national index was nearly 56 percent 50 above average. 1989 1995 2001 2007 2011 Affordability in Source: Real Estate Center at Texas A&M 2012 will probably University be even better at the national level as interest rates and the median price stay steady at current levels. Texas’ affordability, however, may statistically decline slightly as prices begin to firm and rise faster than income in some areas. Since 1991, the Federal Home Loan Mortgage Corporation’s (FHLMC) 30-year, fixed rate mortgage averaged 6.8 percent, significantly above the current level of around 4 percent (Figure 4). The impact of lower interest rates on housing affordability is readily apparent. For example, to buy a $150,000 home with a 30-year, 80 percent loan at 9.64 percent (the rate in January 1991) the monthly mortgage payment would be $1,021.31. A buyer would have to have an annual income of $49,023 to qualify for a loan with a 25 percent qualifying ratio. The priceto-income ratio would be 3.06 ($150,000 ÷ $49,023). At the long-term average 6.8 percent rate, the monthly mortgage payment to buy a $150,000 home would be $782.31.

Dollars (Thousands)

220

Figure 1 National Housing Affordability Index

The required income to buy the Texas Affordability Figure 4 same house falls to $37,351 or Pyramid FHLMC 30-Year Fixed Rate 23 percent less and the price-toOverall affordability can 11 income ratio rises to 3.99. To also be traced by translatbuy the same $150,000 home ing household income at the current 4 percent rate, data into the distribution 9 the monthly mortgage payment of homes by price that would only be $572.90 and the households can afford to required income would only be buy. This distribution 7 $27,499 or 27 percent less than results in what is called an for a 6.8 percent loan and 44 affordability pyramid. The percent less than for a 9.64 perpyramid shows the percent cent loan. The price-to-income 5 of households that can ratio rises to 5.45. afford to purchase a home April The home purchasing power at different price levels. 2012 of a dollar in income increases 3 The U.S. Census Bureau’s dramatically as interest rates 1990 1994 1998 2002 2006 2010 American Community fall. Assuming a buyer obtains Source: FHLMC Survey provides detailed an 80 percent loan, if the mortincome gage interest rate is around 10 distribution data for the Figure 5 percent, $1 of income would buy about $3 of houscountry, states and local Median Home Prices as a Multiple ing. At a 7 percent interest rate, $1 of income buys areas. The most recent year of Median Household Income about $4 of housing, and at a 4 percent rate, $1 of of data availability is 2010. 5.5 income buys nearly $5.50 of housing. In the previous U.S. New Homes One estimate of the 1975–2000 average 3.82 example, if a buyer had the $49,023 required income 5.0 Texas affordability pyramid U.S. Existing Homes to afford the total monthly payment at the highest 1975–2000 average 3.36 is based on conventional 4.5 rate, they could buy a house priced nearly $270,000 fi nancing with 10 percent at the lower rate. 4.0 down, a 4 percent fixed-rate Return to Historically Sound Levels mortgage for 30 years and 3.5 a qualifying ratio of 33 perf mortgage lenders tighten underwriting require3.0 cent based on total monthly ments by increasing the qualifying ratio, the ownership cost (Figure 6). effective price-to-income ratio goes down, and 2.5 Texas MLS Homes Other costs of ownership the home purchasing power of $1 in income falls. Of 1989–2010 average 2.89 are included based on an 2.0 course, if underwriting standards become looser, as 1975 1987 1999 2011 assumed annual effective they did during the mid-decade housing boom, the Sources: U.S. Census Bureau, NAR and Real rate of the home value. The ratio increases, and buyers can purchase more housEstate Center at Texas A&M University relatively low down paying for a given amount of income. This effect is clear ment means more required in tracing the effective price-to-income ratio for the income to qualify for the greater mortgage, making affordabilUnited States and Texas over the past 36 years. ity slightly less. As the data indicate, Texas’ price-to-income ratio stayed For purposes of analysis, additional monthly costs are based below 4.0 even during the housing boom whereas the national on an estimated annual effective percentage of a home’s value. ratio ballooned to unsustainable levels (Figure 5). The national The additional monthly costs include taxes at an effective ratio continues to trend toward the Texas rate as lenders annual rate of 3 percent of home value, property insurance at apply stricter mortgage underwriting, and the housing market returns to a more traditional and sustainable level. The current 0.8 percent, and utilities (water, sewer, gas and electricity) at a 2 percent annual rate. multiple is as high as it is because of historically low mortFor a $100,000 home, for example, property taxes would gage interest rates and a falling median price. If mortgage interequal $3,000 per year or an average of $250 per month; insurest rates were in the 6 percent to 7 percent range, the national ance would equal $800 per year or $66.67 per month; and rate would be approaching 3.0, and Texas’ rate might be in the utilities would be $2,000 per year or $166.67 per month. In 2.5 to 2.8 range.

TIERRA GRANDE

NEARLY 51 PERCENT OF TEXAS HOUSEHOLDS fall into the two lowest price ranges on the affordability scale ($100,000 to $150,000 and below $100,000). At the other end of the scale, only 3.9 percent of households earn enough to qualify for a $600,000 home (Figure 6).

Home Price Intervals (in thousandss)

this case, other homeownership costs total $5,800 per year or an average $483.33 per month, an amount 12.5 percent greater than the monthly mortgage payment of $429.67 per month under the assumed financing. Based on the qualifying ratio and a total monthly housing cost of $913.01 ($429.67 + $483.33), the required income to qualify for the loan would be $33,200 per year. As expected, the base of the Texas pyramid indicates a substantial number of low to modest income households that can afford relatively modest-priced homes. Based on the assumed

financing, nearly 35 percent or about 3.02 million Texas households cannot afford to buy a home priced more than $100,000. Of the remaining households that can afford to pay more than $100,000, around 16.3 percent or approximately 1.42 million Texas households can only afford to buy a home with a top price of $150,000 (the second step in the pyramid). This trend of fewer households being able to afford the maximum price continues in successive steps except for the $300,000 to $400,000 level. The distribution of Texas household incomes exhibits a bulge in the $60,000 Figure 6 to $125,000 income Texas Affordability Pyramid: intervals (approxiNumber of Housholds by Highest Affordable Price mately 28.5 percent with a 10 Percent Payment of Texas households fall in this interval). 338,179 >$600 3.9% 10% down; 4% interest; This explains how 33% qualifying ratio; 233,827 $500–600 2.7% more households can 5.8% taxes, insurance afford a home in this and utilities 359,254 $400–500 4.1% price interval than in $300–400 8.8% 772,801 the preceding one. The peak of the $250–300 7.6% 663,568 pyramid is somewhat larger, reflecting $200–250 9.4% 823,373 the open-end nature $150–200 12.6% 1,100,928 of higher priced properties, but is $100–150 16.3% 1,423,137 consistent with the <$100 34.6% 3,023,598 state’s household income distribution. Sources: U.S. Census Bureau 2010 American Community Survey and Real Estate Center at Texas A&M University The required annual

JULY 2012

Texas Housing Affordability Index by MLS Area

MLS Area Abilene Amarillo Arlington Austin Baytown Beaumont Brazoria Co. Brownsville Bryan/College Station Collin County Corpus Christi Dallas Denton El Paso Fort Bend Co. Fort Worth Galveston Garland Harlingen Houston Irving Kerrville Killeen Laredo Longview Lubbock Lufkin McAllen Midland Montgomery Co. Nacogdoches NE Tarrant Co. Odessa Palestine Paris Port Arthur San Angelo San Antonio San Marcos Sherman-Denison Temple Texarkana Tyler Victoria Waco Wichita Falls Texas United States

2005

2006

2007

2008

2009

2010

2011

Average

2011 Percent Greater than Average

2.32 2.01 2.13 1.80 1.90 2.03 2.52 1.30 1.80 2.36 1.62 1.83 2.05 1.50 2.14 2.43 1.60 2.55 1.87 2.33

1.92 1.83 2.00 1.64 1.70 1.77 2.23 1.25 1.57 2.13 1.50 1.70 1.90 1.26 1.91 2.22 1.29 2.43 1.43 1.67 2.16

1.78 1.70 1.91 1.53 1.52 1.62 2.10 1.06 1.50 1.28 1.37 1.59 1.54 1.13 1.32 2.10 1.34 2.37 1.40 1.54 1.83

2.01 1.84 2.11 1.56 1.67 1.68 2.16 1.44 1.64 2.08 1.46 1.77 1.98 1.17 1.92 2.35 1.33 2.71 1.55 1.72 1.88

2.03

1.80

1.74

2.05 2.06 2.09 1.27

1.77 1.95 1.88 1.10

1.57 1.91 1.83 1.00

1.89 2.66 1.72

1.71 1.92 2.04

1.37 1.47 1.51

3.12 2.23 2.73 2.18 1.63

2.47 2.16 2.25 1.93 1.50 1.68 2.24 1.72 1.44 1.97 1.90 2.09 2.29 1.54 1.10

2.06 2.28 1.92 1.88 1.47 2.02 2.23 1.71 1.72 1.55 1.66 1.78 2.06 1.45 1.11

1.88 1.75 1.71 1.93 1.95 1.34 1.39 1.72 1.56 1.69 1.63 2.05 2.32 1.91 1.85 1.58 1.71 2.61 1.81 2.19 1.68 1.71 1.84 2.19 1.59 1.33

2.20 2.14 2.40 1.88 1.99 1.96 2.67 1.76 1.79 2.41 1.78 2.09 2.25 1.35 2.06 2.74 2.09 3.14 1.84 2.00 2.39 1.53 2.17 2.05 2.00 2.25 2.03 1.55 1.69 1.90 1.84 1.98 1.78 2.50 2.47 2.06 2.20 1.86 1.95 3.12 2.12 2.15 1.99 2.01 2.21 2.35 1.88 1.77

2.38 2.26 2.61 1.93 2.08 1.96 2.88 1.75 1.79 2.43 1.87 2.15 2.56 1.51 2.23 2.94 1.89 3.82 2.03 2.11 2.67 1.66 2.15 2.21 2.14 2.35 1.94 1.63 1.78 2.15 1.84 2.62 2.07 2.80 2.88 2.59 2.15 1.89 2.42 3.10 2.40 2.50 2.08 2.17 2.00 2.60 1.96 1.80

2.23 2.30 2.77 1.99 2.18 2.26 3.16 1.84 1.93 2.53 2.01 2.21 2.71 1.60 2.36 3.13 2.03 3.82 1.94 2.19 2.61 1.82 2.30 2.27 2.12 2.37 2.35 1.64 1.81 2.18 1.87 2.70 2.02 2.94 2.83 2.72 2.28 2.00 2.30 3.42 2.19 2.51 2.14 2.21 2.27 2.93 2.02 1.91

2.12 2.01 2.27 1.76 1.86 1.90 2.53 1.49 1.72 2.17 1.66 1.91 2.14 1.36 1.99 2.56 1.65 2.98 1.70 1.87 2.27 1.67 2.01 2.07 1.91 2.12 2.01 1.36 1.67 1.85 1.88 2.04 1.87 2.56 2.45 2.31 2.07 1.71 2.01 2.73 2.09 2.08 1.88 1.99 2.01 2.37 1.73 1.46

5.0 14.2 21.7 12.6 16.9 19.2 24.9 23.8 12.1 16.4 21.3 16.0 26.6 17.8 18.5 22.2 22.8 28.1 14.1 17.0 15.1 8.9 14.3 9.4 11.2 11.9 16.8 20.3 8.8 18.2 -0.6 32.6 7.6 14.8 15.2 17.8 10.3 17.3 14.2 25.5 5.1 20.4 13.7 11.2 13.0 23.4 16.7 30.3

2.37 2.66 2.08 1.77 2.25 1.89 2.17 1.68 1.23

2011 Percent Greater than 2005 –4.1 14.3 30.0 10.0 14.4 11.1 25.5 41.6 6.7 7.2 24.0 20.7 32.3 6.9 10.2 28.4 27.1 49.6 16.9 11.9 13.1 3.4 15.0 12.3 29.5 15.4 -29.8 57.0 -5.8 26.7 -0.1 4.6 22.4 44.7 –17.7 20.9 21.0 -1.7 20.4 35.0 20.5 55.6

Source: Real Estate Center at Texas A&M University

income to purchase a $600,000 home is $200,000. According to 2010 Census data, 332,563 or 3.8 percent of all Texas households had incomes of $200,000 or more. By almost any measure, homeownership remains more affordable in Texas than for the United States overall. Texas’ median home price remains at a comparative advantage relative to the U.S. median although the gap between the two has narrowed substantially in the past couple of years. Dr. Gaines (jpgaines@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Falling home prices and the lowest mortgage interest rates in nearly 70 years make homeownership conceptually the most affordable it has ever been. Home prices have moved more in line with historical norms relative to income, even with tight mortgage credit. Texas and Texas’ major metro areas remain among the most affordable places in the country as measured by the Center’s Housing Affordability Index. TIERRA GRANDE

Residential Markets

Rent or Own?

What Influences Decision By Ali Anari

“Owner-occupied” and “renteroccupied” are the two largest segments of the U.S. residential housing market. The percentage of owners versus renters is influenced by the benefits and costs of owning versus renting, demographic trends, housing policies and the state of the economy. JULY 2012

enter research found that three factors explain more than 70 percent of the variation in shares of renter-occupied housing across Texas’ metro areas: (1) college enrollment rate, (2) housing costs as a percentage of household income and (3) gross rent as a percentage of household income.

Texas Versus United States In Texas, the percentage of housing units occupied by renters has been larger than the national average since 1984, the first year for which data are available (see figure). Rental units reached

Renter-Occupied Housing Units, Texas and United States

1992 41.7%

Texas

2010 34.7%

United States

2006 34%

34 2006 31.2%

32 30 1984

2010 33.1%

1989

1994

1999

2004

2009

Source: U.S. Census Bureau

an all-time high share of 41.7 percent of the state’s total housing units in 1992 and since then trended downward, falling to 34 percent in 2006. Since 2007, the trend has been slowly upward. The nation’s share of renter-occupied units increased from 31.2 percent in 2006 to 33.10 percent in 2010, partly because of the number of owned homes vacated through foreclosure. Because Texas’ residential markets were much less affected by the housing downturn, the share of rented units did not change significantly during that time. Shares of renter-occupied housing units in local housing markets varied across Texas metropolitan areas (see table). In 2010, College Station-Bryan had the largest share of renter-occupied housing units (48.2 percent), followed by Austin-Round Rock-San Marcos (42.6 percent), KilleenTemple-Fort Hood (42.1 percent), Waco (41 percent) and Lubbock (42 percent). Midland had the smallest share of renter-occupied units (30.9 percent) followed by Texarkana (31.6 percent), Beaumont-Port Arthur (32.4 percent), and Brownsville-Harlingen (32.4 percent). All the state’s metro areas except Midland, San Angelo, Texarkana, Victoria and Wichita Falls had increased shares of renter-occupied housing units from 2006 to 2010.

College Enrollment Effect

ollege Station-Bryan had the highest college enrollment rate and the largest share of tenantoccupied housing units in 2010. This research found a positive relationship between college enrollment rate and share of renter-occupied housing units. That is, the larger the rate of college enrollment as a percentage of population, the larger the share of renteroccupied units. Statistical analysis reveals that a 1 percent increase in college enrollment increases rental shares by 1 percent.

College enrollment varied from as high as 25.4 percent in College Station-Bryan to as low as 5 percent in Brownsville-Harlingen and Sherman-Denison (see table). College Station’s share was followed by Lubbock (15.4 percent), Waco (10.9 percent) and Austin-Round Rock-San Marcos (9.7 percent). Brownsville-Harlingen and Sherman-Denison had the lowest rates of college enrollment, followed by Midland (5.1 percent), Texarkana (5.2 percent), Beaumont-Port Arthur (5.4 percent) and Longview (5.8 percent). TIERRA GRANDE

Shares of Texas Renter-Occupied Housing Units With Explanatory Factors (in Percent) Share of Rented Housing Units

College Housing Enrollment Cost Share

Rent Share

2010

2006

Abilene Amarillo

37.3 36.2

33.6 35.2

8.4 7.3

2010 16.5 17.9

31.1 27.5

Austin-Round Rock-San Marcos Beaumont-Port Arthur Brownsville-Harlingen College Station-Bryan Corpus Christi Dallas-Fort Worth-Arlington El Paso Houston-Sugar Land-Baytown Killeen-Temple-Fort Hood Laredo Longview Lubbock McAllen-Edinburg-Mission Midland Odessa San Angelo San Antonio-New Braunfels Sherman-Denison Texarkana Tyler Victoria Waco Wichita Falls

42.6 32.4 32.4 48.2 39.2 38.3 37.0 37.2 42.1 40.2 29.9 42.0 32.0 30.9 37.6 32.6 36.6 32.2 31.6 32.9 32.3 41.0 34.2

39.8 30.4 30.6 46.7 37.5 36.4 35.8 36.5 40.2 34.8 29.3 41.1 29.1 31.5 28.2 33.5 33.2 27.8 34.3 28.5 34.3 37.9 35.6

9.7 5.4 5.0 25.4 6.6 6.8 8.8 6.3 8.1 6.6 5.8 15.4 6.2 5.1 6.0 8.5 7.3 5.0 5.2 7.6 3.3 10.9 6.4

21.6 16.3 18.0 17.9 19.3 21.2 19.7 20.4 18.4 21.3 16.1 18.2 18.0 18.0 15.8 18.1 19.2 19.0 `15.7 18.5 17.4 18.6 18.8

31.8 29.9 35.9 46.0 32.2 29.7 30.6 29.8 27.0 34.2 29.6 35.7 33.4 26.9 27.6 33.3 28.9 28.2 29.4 33.5 32.6 34.2 30.8

Sources: U.S. Census Bureau and Real Estate Center at Texas A&M University

Housing Costs and Household Income

omeowners’ housing costs as a percentage of household income are another factor that has a positive impact on the market share of renter-occupied housing units. These costs include mortgages, deeds of trust, debts on the property (including payments for the first mortgage, second or junior mortgages, and home equity loans); real estate taxes; insurance expenses for fire, hazard and flood insurance on the property; utilities (electricity, gas and water); and fuels (oil, coal, kerosene and wood). Owner costs also include, where appropriate, the monthly fee for condominiums and personal property taxes, site rent, registration fees and license fees for mobile homes. The share of housing costs as a percentage of household income in Texas varied from as high as 21.6 percent in the Austin-Round Rock-San Marcos metro area to as low as 15.7 percent in Texarkana. Center research found a positive relationship between the share of housing costs in median household income and the share of renter-occupied housing units in total housing JULY 2012

in the state’s metro areas. A 1 percent increase in the income share of owner costs leads to a 1.1 percent increase in the share of tenant-occupied units. ross rent as a percentage of household income also affects the distribution of owneroccupied and renter-occupied segments. According to the U.S. Census Bureau, gross rent is the monthly amount of rent plus the estimated average monthly cost of utilities (electricity, gas, water and sewer) and fuels (oil, coal, kerosene and wood). Gross rent as a percentage of income, often referred to as housing cost burden for renters, is the ratio of gross rent to household income. The share of gross rent varied across the state’s metro areas from as high as 46 percent in College Station-Bryan to as low as 26.9 percent in Midland. Center research found a negative relationship between gross rent as a percentage of median household income and share of renter-occupied housing. That is, the higher the share of rent in income, the smaller the share of renter-occupied housing units in total number of houses in the state’s metro areas. The research also found that an increase in the income share of rents by 1 percent reduces the share of renteroccupied units by 0.3 percent.

Dr. Anari (m-anari@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY The proportion of owned homes to rented housing units in Texas metro areas is influenced by three factors: college enrollment rate, housing costs as a percentage of household income, and gross rent as a percentage of household income.

Legal Issues

Self-Proving Wills

By Judon Fambrough

Historically, Texas recognized three types of wills. The first was an oral will, sometimes called a nuncupative will or deathbed wish. Because of their limited application, oral wills made (signed) after Sept. 1, 2007, are no longer valid in Texas. The two other types are still valid. A will written entirely in the deceasedâ&#x20AC;&#x2122;s handwriting is known as a holographic will. A will not entirely in the deceasedâ&#x20AC;&#x2122;s handwriting (typically a typewritten will) is known as an attested will.

TIERRA GRANDE

Figure 1. Self-Proving Afﬁdavit for Holographic Will THE STATE OF TEXAS COUNTY OF ____________________ (County where signed) Before me, the undersigned authority, on this day personally appeared ____________________, known to me to be the testator (testatrix), whose name is subscribed to the foregoing will, who first being by me duly sworn, declared to me that the said foregoing instrument is his (her) last will and testament, that he (she) had willingly made and executed it as his (her) free act and deed, that he (she) was at the time of execution eighteen years of age or over (or being under such age, was or had been lawfully married, or was a member of the armed forces of the United States or of an auxiliary thereof or of the Maritime Service), that he (she) was of sound mind at the time of execution and that he (she) has not revoked the will and testament. _______________________ Testator (Testatrix)

Subscribed and acknowledged before me by the said _______________________, testator (testatrix), this ________________________________ day of _________________ A.D. ____________. (Seal)

(Signed) ___________________________ (Official Capacity of Officer)

Before either can be admitted into probate, it must be proven as the deceased’s last will and testament. For holographic wills, the proof comes from the sworn testimony or an affidavit of two people familiar with the deceased’s handwriting. For attested wills, the proof springs from the testimony or an affidavit from at least two of the people who served as witnesses to the will. This procedure creates problems, especially when a witness predeceases the maker or can no longer be located. There is, however, an alternative that avoids these problems. It is known as a selfproving will. Self-proving wills can be admitted into probate without the need for sworn testimonies or affidavits. JULY 2012

ontrary to what the name implies, self-proving wills are not a separate and distinct type of will. Instead, they are either a holographic or attested will that needs no independent proof before being admitted into probate. The statutory requirements for making a will self-proving are outlined in Section 59 of the Texas Probate Code (TPC) for attested wills and Section 60 for holographic wills. After Sept. 1, 2014, the two sections merge into the newly enacted Texas Estate Code. Self-proving wills have the obvious advantage of being easier, quicker and less expensive to prove. But, as with other wills, they can still be contested, revoked or amended.

Self-Proving Holographic Wills

olographic wills need no witnesses to be valid. The law simply requires that the document be entirely in the deceased’s handwriting and signed. No date is required, but one should be included. A holographic will may be made selfproving either at the time it is signed or any time thereafter before the maker (testator, if a man, or a testatrix, if a woman) dies. To do so, the maker must swear to and sign an affidavit before a notary stating the instrument is the maker’s last will and testament, and that the maker: • was at least 18 years old when the will was executed (or, if younger than 18, the maker was lawfully married at the time or a member of the U.S. Armed Forces, an auxiliary thereof or the Maritime Service), • was of sound mind and • had not revoked the will. An officer authorized to administer oaths, which includes notaries and military officers among others, must then place his or her seal and signature on the affidavit (Figure 1 shows an example). The affidavit must then be attached to the will. One person can draft (write) and sign a valid holographic will. However, it takes two to make it self-proving: the testator (or testatrix) and a notary. The statute does not contain a recommended form for holographic wills, only the required contents of the self-proving affidavit.

Figure 2. Promulgated Form for Attested Wills THE STATE OF TEXAS COUNTY OF ___________________ (County where signed) Before me, the undersigned authority, on this day personally appeared _______________, _______________, and _______________, known to me to be the testator and the witnesses, respectively, whose names are subscribed to the annexed or foregoing instrument in their respective capacities, and, all of said persons being by me duly sworn, the said _______________, testator, declared to me and to the said witnesses in my presence that said instrument is [his/her] last will and testament, and that [he/she] had willingly made and executed it as [his/her] free act and deed; and the said witnesses, each on [his/ her] oath stated to me, in the presence and hearing of the said testator, that the said testator had declared to them that said instrument is [his/her] last will and testament, and that [he/she] executed same as such and wanted each of them to sign it as a witness; and upon their oaths each witness stated further that they did sign the same as witnesses in the presence of the said testator and at [his/her] request; that [he/she] was at that time eighteen years of age or over (or being under such age, was or had been lawfully married, or was then a member of the armed forces of the United States, or an auxiliary of the armed forces of the United States, or the United States Maritime Service) and was of sound mind; and that each of said witnesses was then at least fourteen years of age. _______________________________ Testator _______________________________ Witness _______________________________ Witness

New Procedure

Subscribed and sworn to before me by the said ___________, testator, and by the said _______________________ and __________________, witnesses, this ____ day of __________ A.D. ____________. (Seal)

(Signed) ______________________________ (Official Capacity of Officer)

Self-Proving Attested Wills A valid attested will requires the maker’s signature and the signature of two or more credible witnesses. A credible witness is a competent person older than 19 who is not a beneficiary of the will. The maker need not sign the will in the presence of the witnesses, but he

two of them) must sign the promulgated statutory affidavit (Figure 2) after taking an oath before a notary authorized to administer such oaths. The maker and the witnesses must sign the affidavit in each other’s presence and in the presence of the notary. The notary then places his or her seal and signature on the document, and the affidavit is then attached to the will. The statute makes no distinction in the sex of the maker. In fact, the Probate Code states that the masculine gender includes the feminine and neuter in its definitions. Consequently, the term “testator” as used in the promulgated form refers to either sex.

or she must sign prior to the witnesses signing. The witnesses must sign the will in the presence of the maker but not in the presence of each other. An attested will, as with a holographic will, may be made self-proving at the time it is signed, or anytime thereafter before the maker dies. To do so, the maker and all the witnesses (at least

he 82nd Texas Legislature added a new way to make attested wills self-proving after Sept. 1, 2011 (Figure 3). The new procedure requires the maker and the witnesses to sign only once. The prescribed statutory language of the self-proving affidavit is incorporated into the text at the end of the will, so no separate affidavit needs to be signed and attached. Under the new procedure, the maker must sign in the presence of the witnesses and notary, the witnesses must sign in each other’s presence and in the presence of the maker and notary, and the notary must sign and affix his or her seal in the presence of the maker and the witnesses. The new procedure changes the process in another way. Before, the attested will could be made self-proving at the time it is signed or anytime thereafter before the maker dies. Now, the attested TIERRA GRANDE

Figure 3. Alternative for Self-Proving Attested Wills After Sept. 1, 2011 I, ______________________, as testator, after being duly sworn, declare to the undersigned witnesses and to the undersigned authority that this instrument is my will, that I have willingly made and executed it in the presence of the undersigned witnesses, all of whom were present at the same time, as my free act and deed, and that I have requested each of the undersigned witnesses to sign this will in my presence and in the presence of each other. I now sign this will in the presence of the attesting witnesses and the undersigned authority on this _______ day of _____________, 20______________. _______________________________ Testator

will must be made self-proving at the time it is signed. That is not to say that the former option no longer exists. It does. However, the old option does not have the language of the self-proving affidavit incorporated into the text. The new statute applies only to attested wills. It does not affect the method by which holographic wills are made self-proving.

Wills with Codicils While the statutes outline the procedures for making wills self-proving, caution should be taken when amending or modifying a will with a codicil. The execution of a codicil, to be effective, must go through the same procedure of signing and being made selfproving as the original will. Otherwise, it may not be admitted to probate, or may not be admitted into probate without additional proof, depending on the circumstances.

Foreign Self-Proving Wills

rior to Sept. 1, 2011, wills executed in other states or foreign countries could not be recognized as self-proving in Texas. The 82nd Texas Legislature amended the statutes to recognize the validity of such wills. Now, a will executed in another state or a foreign country is considered self-proving if done (1) in conformity with Section 59 for attested wills or (2) in accordance with the laws of the state or foreign country of the testatorâ&#x20AC;&#x2122;s domicile at the time of the execution. The statute goes on to state that no matter the laws of the JULY 2012

The undersigned, __________ and __________, each being above fourteen years of age, after being duly sworn, declare to the testator and to the undersigned authority that the testator declared to us that this instrument is the testatorâ&#x20AC;&#x2122;s will and that the testator requested us to act as witnesses to the testatorâ&#x20AC;&#x2122;s will and signature. The testator then signed this will in our presence, all of us being present at the same time. The testator is eighteen years of age or over (or being under such age, is or has been lawfully married, or is a member of the armed forces of the United States or of an auxiliary thereof or of the Maritime Service), and we believe the testator to be of sound mind. We now sign our names as attesting witnesses in the presence of the testator, each other, and the undersigned authority on this _________ day of ______________, 20________. _______________________________ Witness _______________________________ Witness Subscribed and sworn to before me by the said _____________, testator, and by the said ________________ and ____________, witnesses, this ______ day of ___________ A.D. ____________. (Seal) (Signed) ______________________________ (Official Capacity of Officer)

other state or foreign country, the will is considered self-proving if it meets the requirements set forth in Section 59. This article is for information only. For specific legal advice, consult an attorney. Fambrough (judon@tamu.edu) is a member of the State Bar of Texas and a lawyer with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Texas residents have the unique opportunity to streamline the probate process by making their wills self-proving. A self-proving will avoids the necessity of having thirdparty verification.

Land Markets

By Charles E. Gilliland, Gerald Klassen, J. Gabriel Garcia and David Adame

Texas regional land market price trends in 2011 reflected variations in market dynamics. The Panhandle, West Texas and Wichita Falls areas posted price improvements, while northeast and Central Texas prices lagged behind 2010 levels. Demand for transitional and development tracts weakened and recreational land buyers were scarce. 14

TIERRA GRANDE

Land Market Regions

1 Panhandle and South Plains

Price Per Acre (Dollars)

West Texas

2,500

Northeast Texas

Statewide Size-Adjusted Price Per Acre 1966–2011

2,000 Nominal Real

1,500

Austin-WacoHill Country

Far West Texas

5 Gulf CoastBrazos Bottom

1,000 500 0 1966

1974

1982

1990

1998

2006 2012

South Texas

Source: Real Estate Center at Texas A&M University

Region 1—Panhandle and South Plains SHERMAN

HANSFORD OCHILTREE

LIPSCOMB

HARTLEY

MOORE

HUTCHINSON ROBERTS

HEMPHILL

OLDHAM

POTTER

CASTRO

BAILEY

LAMB

COCHRAN HOCKLEY

YOAKUM

TERRY

GAINES

ANDREWS

ECTOR

JULY 2012

GRAY

North Panhandle

RANDALL ARMSTRONG

DEAF SMITH

PARMER

CARSON

SWISHER

BRISCOE

HALE

FLOYD

LUBBOCK

CROSBY

LYNN

GARZA

DAWSON

BORDEN

MARTIN

HOWARD

MIDLAND

South Plains: Amarillo to Lubbock

South Plains: South of Lubbock

ore than any other region in Texas, the Panhandle and South Plains is dominated by farming. It encompasses the greatest concentration of cropland, accounting Region 1 Size-Adjusted Price Per Acre for 62 percent of irrigated acres and 41 1,500 percent of dryland acres statewide. 1,200 Activity in farmland markets made Nominal 900 2011 a remarkable year for both buyers Real and sellers. Specifically, the continuing 600 robust demand for cropland boosted 300 regionwide land prices to an all-time high of $946 per acre in 2011, an enor0 1966 1974 1982 1990 1998 2006 2012 mous 20 percent increase from 2010 Source: Real Estate Center at Texas A&M University price levels. However, that price measured in real 1966 dollars settled in at $174 per acre, falling to top price levels seen from 1974 to 1982. At 472 reported sales, volume of activity lagged below the long-term average. However, the slow pace of sales occurred partly because high commodity prices prompted many current owners to refrain from selling. That left would-be buyers to compete for limited available supplies. Price Per Acre (Dollars)

DALLAM

Region 2—Far West Texas

EL PASO

With vast expanses of arid land, this region typically books few sales and has large price variaWARD Region 2 Size-Adjusted Price Per Acre CRANE Trans-Pecos tions. Desert rangeland 400 REEVES normally sells at low prices per acre in large 300 Nominal PECOS tracts while the availReal 200 able irrigated farmland commands relatively TERRELL 100 high per-acre prices. BREWSTER The small number of 0 1966 1974 1982 1990 1998 2006 2012 sales reported in this region Source: Real Estate Center at Texas A&M University means the data are not a strong indicator of land prices in the area.

LOVING

HUDSPETH

CULBERSON

JEFF DAVIS

PRESIDIO

Big Bend

WINKLER

Price Per Acre (Dollars)

Far West Texas

WHEELER

COLLINGSWORTH

DONLEY

Region 3—West Texas

HARDEMAN MOTLEY

Price Per Acre (Dollars)

Native range dominates Region 3 Size-Adjusted Price Per Acre this region, accounting for 1,500 nearly 77 percent of the total 1,200 acreage. In addition, the area Nominal 900 contains a substantial farmReal ing presence (16 percent of 600 total acreage) mostly focused 300 on dryland cropland. 0 Interest in cropland and 1966 1974 1982 1990 1998 2006 2012 rangeland provided a lift Source: Real Estate Center at Texas A&M University to regional land prices, raising the average price 7 percent to $1,230 per acre. That increase followed two years of declining prices. The recovery was narrowly focused, however, with only 568 sales posted, the lowest volume since 1997. Typical tract size remained steady at 160 acres.

REAGAN

FOARD

WILBARGER

WICHITA

DICKENS

KING

KNOX

BAYLOR

ARCHER

CLAY

KENT

STONEWALL

HASKELL

THROCKMORTON

YOUNG

JACK

SCURRY

FISHER

JONES

MITCHELL

NOLAN

TAYLOR

GLASSCOCK STERLING

UPTON

COTTLE

IRION

COKE

SHACKLEFORD

STEPHENS

Central Texas

RUNNELS

TOM GREEN CONCHO

SCHLEICHER CROCKETT

South Central Texas

SUTTON

VAL VERDE

Region 4—Northeast Texas

North Texas

CHILDRESS

HALL

EDWARDS

Rural land markets in this KINNEY region refl ect infl uences 4,000 from its sizable and North Texas North East Texas growing urban 3,000 Nominal areas. Demand RED RIVER MONTAGUE COOKE LAMAR FANNIN GRAYSON Real 2,000 for recreational BOWIE DELTA use competes DENTON COLLIN WISE HUNT TITUS HOPKINS 1,000 CASS LL with timber CAMP WA CK O RAINS WOOD R MARION UPSHUR production. PALO PINTO PARKER DALLAS TARRANT 0 KAUFMAN VAN ZANDT 1966 1974 1982 1990 1998 2006 2012 More than HARRISON GREGG HOOD JOHNSON Source: Real Estate Center at Texas A&M University ELLIS SMITH 57 percent of ELL HENDERSON ERV PANOLA RUSK SOM the area is used for grazing, while 33 percent is dedicated to timber production. ANDERSON SHELBY NACOGDOCHES After suffering a sizable drop in price per acre in 2009 as recession Piney Woods North plagued the economy, the trend seemed to ease in 2010 only to drop HOUSTON ANGELINA back to $2,979 per acre in 2011. In real terms, that average price matches the TRINITY price posted in 2005. POLK TYLER Sales activity expanded to 816 sales from the meager volume of 606 sales in 2009 but remained well below 2004–06 volumes, which exceeded 1,000 sales. The 3 percent price decline suggests that recessionary forces continue to dampen demand in this region. Piney Woods South MORRIS

FRANKLIN

Price Per Acre (Dollars)

Region 4 Size-Adjusted Price Per Acre

CHEROKEE

SABINE

SAN AUGUSTINE

JASPER

NEWTON

TIERRA GRANDE

Region 5—Gulf Coast–Brazos Bottom

Landowners in this region maintain 58 percent of rural land Brazos Bottom LEON Nominal in its native range state with 3,000 Real ROBERTSON an added 14 percent dediMADISON Southwest Piney Woods 2,000 WALKER cated to improved pasture. BRAZOS SAN 1,000 Although pockets of JACINTO BURLESON BellvilleHARDIN timber and cropland dot 0 MONTGOMERY Brenham Area WASHINGTON ORANGE East 1966 1974 1982 1990 1998 2006 2012 the region, urban develLIBERTY JEFFERSON AUSTIN Coastal Source: Real Estate Center at Texas A&M University FAYETTE HARRIS opment and expanding CHAMBERS Prairie and COLORADO Southeast population centers drive much of the demand in this area. Coastal FORT BEND Piney Woods GALVESTON Prairie GONZALES LAVACA The strong energy market contributed to growing incomes, North WHARTON BRAZORIA supporting demand, especially adjacent to Houston, the dominant DE WITT economic engine. Still, the market managed only a 4 percent increase JACKSON Houston Area MATAGORDA VICTORIA to $4,837 per acre and a muted sales volume of 781 for the year. Sales CALHOUN concentrated on small properties, registering a median size of 33 acres. The Central Coastal Prairie past three years have recorded similar size and volume trends. 4,000

GRIMES

Price Per Acre (Dollars)

Region 5 Size-Adjusted Price Per Acre

5,000

WALLER

Region 6—South Texas This region is composed of the fringe of the Region 6 Size-Adjusted Price Per Acre Edwards Plateau, South Texas brush COMAL 4,000 country, the coastal plains and Lower Rio GUADALUPE BEXAR Grande Valley. It encompasses large areas 3,000 UVALDE MEDINA Nominal WILSON of sparsely populated ranches as Real 2,000 Coastal well as large metropolitan areas. FRIO ZAVALA KARNES ATASCOSA Plains The region is well-known GOLIAD 1,000 for an abundance of superior MCDIMMIT LA SALLE LIVE BEE MULLEN REFUGIO OAK quality wildlife. Ranchers and 0 ARAN1966 1974 1982 1990 1998 2006 2012 SAN SAS recreational users keep nearly Upper to PATRICIO Source: Real Estate Center at Texas A&M University Mid Brush 68 percent of its acreage in native WEBB NUECES DUVAL Country rangeland. Sizable expanses of cropland make up about 20 percent of the KLEBERG Coastal acreage, evenly split between irrigated and dryland cropland. BROOKS Markets in this region began to slow early in the recession. At $3,040 Bend ZAPATA JIM HOGG per acre, real prices are about the same as in 2007. Sales volume dropped KENEDY Lower Brush in the past three years, with 498 sales posted in 2011. This volume matched STARR Country WILLACY 1990-era markets. Development of the Eagle Ford Shale oil and gas play HIDALGO promises to permanently change this area. The influx of people and capital CAMERON will likely impact land markets for years to come. MAVERICK

Price Per Acre (Dollars)

Transition Zone

JIM WELLS

Rio Grande Valley

South Grand Prairie

Price Per Acre (Dollars)

Dr. Gilliland (c-gilliland@tamu.edu) is a research economist, Klassen (gklassen@tamu. edu) is a research analyst, and Garcia and Adame are research assistants with the Real Estate Center at Texas A&M University. JULY 2012

ERATH

COLEMAN

BROWN

MCCULLOCH SAN SABA

West Hill Country

FREESTONE

HAMILTON MCLENNAN

MILLS

Central Basin

CORYELL

LAMPASAS

FALLS

BELL

MENARD MASON

LLANO

BURNET

KIMBLE GILLESPIE

KERR REAL

KENDALL

BANDERA

NAVARRO

HILL

BOSQUE

COMANCHE

BLANCO

Land use in this Region 7 Size-Adjusted Price Per Acre region is dominated 4,000 by grazing, which accounts for more 3,000 Nominal than 82 percent of Real 2,000 acreage. Prices have been stagnant since 1,000 2007 with a low of $3,041 per acre in 0 1966 1974 1982 1990 1998 2006 2012 2009 and the 2011 Source: Real Estate Center at Texas A&M University price at $3,109 per acre. Sales volume continued at a depressed level with 1,371 transactions recorded. The median 65 acres per transaction continued a fouryear sales trend toward small properties.

EASTLAND

CALLAHAN

Region 7—Austin–Waco–Hill Country

Waco Area

MILAM WILLIAMSON TRAVIS

HAYS

LIMESTONE

LEE BASTROP

CALDWELL

Austin Area

East Hill Country

THE TAKEAWAY Texas’ Gulf Coast–Brazos Bottom region registered the highest price per acre at $4,837 in 2011. Sales volume remained low throughout the state.

Commercial Markets

ne way to purchase or sell commercial real estate is through an installment approach. Installment sales can be attractive to both buyers and sellers. Buyers can defer their payments and benefit from leverage. Sellers can increase their cash flow. Moreover, if there is an impasse in negotiating the deal, an installment sale could produce a favorable outcome. Characteristics of the transaction, such as the interest rate and purchase price, can be manipulated to the benefit of both the buyer and seller. Years ago, Seller purchased land for $600,000. Its current fair market value is $2 million. Buyer offers Seller an installment sale arrangement comprising a $200,000 down payment and a nine-year purchase money mortgage for the $1.8 million balance at a 6 percent interest rate. Buyer has a 35 percent marginal tax rate. Assume Buyer can earn 4 percent interest on an alternative (lower risk) investment. The table illustrates the computations for a comparison between a cash sale and an installment sale. The computations demonstrate that, for Year 1, Seller is better off by 61 percent ($74,854 compared with $46,540) with an installment sale. Sellerâ&#x20AC;&#x2122;s extra return is almost entirely due to the higher interest rate on the purchase money mortgage.

TIERRA GRANDE

Seller’s returns decline over time as the mortgage is paid off, which could dampen Seller’s enthusiasm about the installment sale. In that case, Buyer could offer a higher purchase price, a higher down payment and/or a higher interest rate. Of course, Buyer needs to be cognizant of the effect of these changes on his/her after-tax return. Other issues to consider are summarized below.

Cash Sale vs. Installment Sale

Real Estate Dealers Dealers cannot sell (inventory) property using the installment method. Thus, even though payments may be received over time, dealers must pay tax on all of the gain at ordinary tax rates in the year of sale. An exception in the law does allow installment sale treatment on dealer sales of unimproved residential lots.

CASH

Related Party Sales Installment sale treatment is not available for sales between related parties — spouses, children, grandchildren, parents of the seller and certain businesses owned or partially owned by the seller. This rule is necessary to prevent a seller from deferring tax while the related party sells the property to a third party at its fair market value, generating a zero taxable gain. The zero gain is due to the tax basis of the property becoming equal to fair market value when the installment sale occurs.

INSTALLMENT

$2,000,000

sale price

$2,000,000

$600,000

tax basis

$600,000

$1,400,000

$2,000,000

gain

$1,400,000

cash payment received by Seller

$200,000

Imputed Interest Rate The seller may want to dramatically lower the mortgage interest rate and raise the purchase price. This would benefit the seller by converting ordinary interest income (taxed at ordinary tax rates) to capital gain income (taxed at 15 percent). (A higher purchase price would increase the amount of capital gain.) This strategy will work as long as the interest rate is not below the “applicable Federal rate” (AFR). If so, the AFR becomes the effective interest rate for tax purposes. Currently, the AFR for loans with terms of three to nine years is only 1.07 percent. For loans with terms over nine years, the AFR is 2.64 percent. Installment sales can provide benefits to both buyers and sellers, but assistance from a competent tax accountant or tax attorney is advised.

–$210,000

THE TAKEAWAY

JULY 2012

less Year 1 tax on 2 installment sale at 15%

–$21,000

$1,790,000

“immediate after-tax cash flow”

$179,000

$46,540

after-tax profit from investing “immediate after-tax cash flow” 3 at 2.6%

$4,654

after-tax interest on $1,800,000 ($2 million – $200,000) 4 mortgage principal at 3.9%

Dr. Stern (stern@indiana.edu) is a research fellow with the Real Estate Center at Texas A&M University and a professor of accounting in the Kelley School of Business at Indiana University.

Installment sales of commercial real estate can provide significant advantages for both buyers and sellers. Adjustments of contract terms such as interest rate, down payment and sales price can help close the deal.

less tax on cash sale: $1,400,000 × 15%

$46,540

year 1 after-tax cash earnings

$70,200

$74,854

The new Texas rules regarding seller financing do not pertain to commercial real estate sales. (200,000/2,000,000) × 1,400,000 × 15% = 21,000 [Additional computations would apply to sales over $5 million] Assumed 4% pretax interest rate from an alternative investment – (tax: 35% × 4%) = 2.6% 4 Assumed 6% pretax interest rate on mortgage – (tax: 35% × 6%) = 3.9% 1 2 3

Legal Issues

Reining in

POAs By Judon Fambrough

Subdivision property owners frequently complain about abuses by property owner associations (POAs). Serious complaints garner legislative attention. The 82nd Texas Legislature passed ten bills limiting the powers and procedures of POAs. 20

Foreclosure Procedure Changes

ollowing POA foreclosure abuses in the early 2000s, the 78th and 79th Texas Legislatures changed the way POAs foreclose liens. The changes occurred in 2002 and again in 2005 (see Center publication 1548, “Legislature Limits POA Power”). The latest legislation made even more changes to the foreclosure process. Prior to Jan. 1, 2012, POAs could foreclose on liens nonjudicially. Now, the law requires judicial foreclosure except when the property owner waives the requirement in writing. Before Jan. 1, 2012, POAs could not foreclose on liens when the debt securing the lien consisted (1) solely of fines and assessments or (2) of attorney fees associated solely with the fines and assessments. A third element was added effective Jan. 1, 2012. Now, POAs may not foreclose to recover any costs for compiling, producing or reproducing requested information regarding materials contained in the POA’s books and records when the costs are added to an owner’s account as an assessment. TIERRA GRANDE

The guidelines, known as the alternative payment schedule or simply “the plan,” require POAs to give delinquent property owners the option of making partial payments over a three- to 18-month period starting from the time the property owner makes the request. The plan must be free of any “monetary penalties,” but may include interest and reasonable administrative costs. The association may deny the plan to anyone who has defaulted on a previous one during the last two years. The plan must be filed in each county where the subdivision is located. However, failure to file does not disqualify the association from offering the plan to anyone in default. The new statute mandates that payments collected under the plan be applied in the following order to: • delinquent assessments, • current assessments, • attorney fees or third-party collections costs incurred solely with assessments or other charges that could be the basis for foreclosure, • all other attorney fees that cannot be the basis for foreclosure, • assessed fines and • other amounts owed the association. owever, the allocation does not apply if the property owner is in default under the plan when the payment is received. An assessed fine, when collected, can never be applied to a higher category than the one listed. The new law addresses the association’s use of “collection agents” as defined in the Federal Fair Debt Collection Practices Act (15 United States Code, Section 1692a). There are three limitations. First, the property owner cannot be held liable for a collection agent’s fees unless written notice is first given to the owner by certified mail, return receipt requested. The notice must contain: • the amount in default and the total needed to bring the account current, • the options available to the owner to avoid having the account turned over to a collection agent, including the availability of the alternative payment plan discussed earlier and • a 30-day opportunity to cure the amount in default before any action will be taken to collect the delinquency. Second, the property owner can never be liable for a collection agent’s fees when: • the obligation to pay the collection agent is dependent or contingent, in any way, on the amounts recovered or • the entire amount collected goes to the collection agent for his or her services. Third, although no remedies are specified in the statute, the arrangement between the association and the collection agent may not prohibit the property owner from contacting the association’s board or the association’s managing agent directly regarding the delinquency. In a related matter, the POA may not sell or otherwise transfer an interest in the association’s accounts receivable except as collateral for a loan.

Prior to Jan. 1, 2012, POAs were required to give delinquent owners details of the amount due and a 30-day opportunity to cure the delinquency before any collection procedures began. Owners had to be informed of their right to request a hearing. Now, the notices also must include any special rights active duty military owners may have under the Federal Service Members Civil Relief Act. After Jan. 1, 2012, POAs must send notices to all subordinate lienholders as well as to the delinquent owners noted previously. The notice, indicating the total amount of the lien, must be sent by certified mail, return receipt requested, to the address shown in the deed records. The inferior or subordinate lienholder(s) has 61 days after receiving the notice to cure the delinquency and avoid foreclosure.

Alternative Payment Plans The Texas Property Code (TPC) now requires all POAs consisting of more than 14 lots to adopt reasonable guidelines for collecting delinquent assessments or other amounts owed. JULY 2012

Flags and Flagpoles

ffective May 23, 2011, POAs may not adopt or enforce dedicatory instrument provisions (deed restrictions) that prohibit, restrict or affect an owner’s right to display the U.S. flag, the Texas state flag or an official or replica flag of any branch of the U.S. Armed Forces. However, the POAs may require: • the U.S. flag be displayed in accordance with the federal rules found in 4 United States Code Annotated, Sections 5–10, • the Texas state flag be displayed in accordance with the rules found in Chapter 3100 of the Texas Government Code, • the flagpole be constructed of permanent, long-lasting materials with a finish appropriate and harmonious with the dwelling, • the display of the flag or the location and construction of the flagpole comply with applicable zoning ordinances, easements and setback requirements and • the displayed flag and flagpole be maintained in good condition. Any deteriorated flag or deteriorated or structurally unsafe flagpole must be repaired, replaced or removed. Likewise, POAs may regulate: • the size, number and location of flagpoles (POAs must allow the installation and erection of at least one 20-foot or shorter flagpole per property; • the size of a displayed flag; • the size, location and intensity of lights used to illuminate the flag; and • the noise caused by an external halyard on the flagpole. POAs may prohibit property owners from locating a flag or flagpole on property owned or maintained by the POA or on land owned in common by the members of the association.

• are located anywhere other than on the homeowner’s roof or on the roof of a permitted structure on the property or in an area other than a fenced yard or patio maintained by the property owner, • are installed without prior approval by the POA or a committee created to make such decisions or • void material warranties when installed. The statute expands regulation of solar energy devices installed on roofs. The top edge of the device must be parallel to and no higher than the roofline. The device must conform to the slope of the roof. The color of the frame, support brackets and visible piping or wiring must be silver, bronze or black tones. Solar energy devices installed on the roofs may be located in an area other than the one designated by the POA if the estimated annual energy produced at the alternate location increases production by more than 10 percent. The estimate must be based on modeling tools provided by the National Renewable Energy Laboratory. Solar energy devices located in fenced yards or on patios cannot exceed the height of the fence. The POA or the association’s architectural committee may not withhold approval of installation of any solar energy device that conforms to these statutory guidelines, with two exceptions. (1) The POA or the committee may prohibit or restrict a property owner from installing a solar device during the “development period.” This is the time during which the declarant (developer) reserves the right to (a) facilitate the development, construction and marketing of the subdivision and (b) direct the size, shape and composition of the subdivision. (2) The POA or the committee may determine in writing that proposed placement of the device (in conformity with the statute) “substantially interferes with the use and enjoyment of land by causing unreasonable discomfort or annoyance to persons of ordinary sensibilities.” However, this determination can be overridden by all adjoining property owners giving written approval for the proposed placement.

Solar energy devices installed on the roofs may be located in an area other than the one designated by the POA if the estimated annual energy produced at the alternate location increases production by more than 10 percent.

Solar Panel Installation Effective May 29, 2011, POAs may not include or enforce provisions that prohibit or restrict property owners from installing a “solar energy device.” The term is defined as a system or series of mechanisms designed primarily to provide heating or cooling or to produce electrical or mechanical power by collecting and transferring solar-generated energy (Section 171.107, Texas Tax Code). This includes a mechanical or chemical device that can store solar-generated energy for use in heating or cooling or in the production of power. There are exceptions. The new law allows POAs to include and enforce provisions that prohibit solar energy devices that: • threaten the public health or safety or are in violation of the law as adjudicated by a court, • are located on property owned or maintained by the POA or owned in common by the members of the association,

Roofing Materials Effective May 29, 2011, POAs may not include or enforce provisions that prohibit or restrict property owners, who are otherwise authorized to install shingles on their roofs, from installing shingles that are designed primarily to: • be wind and hail resistant, • provide heating and cooling efficiencies greater than those provided by customary composite shingles or • provide solar generation capabilities. Shingles meeting the above requirement must, when installed: • resemble the shingles used or authorized for use on the property, TIERRA GRANDE

• be more durable than and of equal or superior quality to those authorized for use on the property and • match the aesthetics of the surrounding property.

Displaying Religious Items Effective May 23, 2011, POAs may not adopt or enforce restrictive covenants that prohibit a property owner or resident from displaying or affixing one or more religious items on the owner’s or resident’s dwelling. The display must be motivated by the person’s sincere religious belief. However, POAs may prohibit the display or affixing of religious items in the exterior entry of the dwelling even when permitted by the Texas and U.S. Constitutions, if they: • threaten public health or safety; • violate the law; • contain language, graphic or a display that patently offends a passerby; • extend beyond the outer edge of the door frame of the dwelling or • contain more than 25 square inches measured individually or in conjunction with other religious items displayed on the entry door or door frame. Likewise, the owner or resident may not, in the name of religion, use a material or color for an entry door or door frame, or make alterations to the entry door or door frame that are not authorized by the restrictive covenants. Finally, the POA has the authority to remove any item displayed in violation of a deed restriction permitted by the new JULY 2012

law. It is unclear if this “removal” is a self-help remedy or one of specific performance stemming from a lawsuit.

Political Signs

hile not a new law, effective Sept. 1, 2005, Section 202.009 of the TPC was amended to limit how POAs regulated the display of political signs. Basically, POAs cannot adopt or enforce restrictive covenants that prohibit owners from displaying signs advertising political candidates or ballot items in an election. Reasonable limitations are allowed. For example, signs cannot appear more than 90 days before an election and ten days thereafter and must be ground-mounted. Only one sign per candidate is permitted (see Center publication 1548, “Legislature Limits POA Power”). Fambrough (judon@tamu.edu) is a member of the State Bar of Texas and a lawyer with the Real Estate Center at Texas A&M University.

THE TAKEAWAY The 82nd Texas Legislature implemented a number of changes to the way POAs regulate the use of property within a subdivision. Most of the changes became effective Jan. 1, 2012. To a great extent, POAs may still regulate use of the owner’s property, but only in a reasonable manner as described by the statutes.

Homebuying

Texas First-Time Homebuyer Program By Harold D. Hunt

Licensees with clients who are looking for their first homes should be familiar with the Texas First-Time Homebuyer Program. Administered through the Texas Department of Housing and Community Affairs (TDHCA), the program is tailored for ﬁrst-time homebuyers with low to moderate incomes. When the program was announced in May 2010, $500 million in funding was available.

Who May Apply? Homebuyers who: • have not owned a home within past three years, • meet program income guidelines and • do not exceed the program purchase price limits. “Combined Income and Purchase Price Limits Table” offering additional information at http://www.tdhca. state.tx.us/homeownership/fthb/docs/limits.pdf. 24

How to Apply • Contact a Texas First-Time Homebuyer Program lender: http://www.tdhca.state.tx.us/homeownership/fthb/ fthb-lenders.htm. • Lenders complete paperwork and help coordinate loan closing with real estate agent and closing agent. • Homebuyers should consider prequalifying for loan before shopping.

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Assisted Loans • First lien mortgage loan. • Down payment and closing cost assistance up to 4 percent of the mortgage amount is provided. • Interest rate slightly higher than current market interest rate because of added assistance. • 30-year fixed interest rate available. • Assistance funds are through a second lien, 30-year, zero percent loan. • Repayment of assistance funds deferred until first lien mortgage is fully paid. • Assistance funds due and payable in full if home is sold or refinanced. • Available to borrowers earning as much as 115 percent of the area median family income (depending on family size). • If home is within a “targeted area,” loan amount may be increased to 140 percent. Definition of targeted area and list of designated targeted areas in Texas by census tract at http://www.tdhca.state.tx.us/ homeownership/fthb/downloads.htm.

What Homes Qualify? • Any new or existing home in Texas that does not exceed maximum purchase price limits, • manufactured homes permanently afﬁxed to a foundation and meeting FHA guidelines, • homes meeting certain quality standards and • must be a buyer’s primary residence and cannot be rented.

Homebuyer Education Requirement All borrowers must complete one of two homebuyer education programs: • a prepurchase counseling course provided through the department’s network of certiﬁed Texas Statewide Homebuyer Education Providers or • online counseling offered through the program’s participating lender network. Providers: http://www. tdhca.state.tx.us/homeownership/fthb/docs/TSHEPProviders.pdf.

Unassisted Loans • First lien mortgage loan. • No down payment and closing cost assistance. • Interest rate slightly less than current market interest rate. • 30-year ﬁxed interest rate available. • Fees and closing costs charged, but TDHCA limits lenders’ fees.

Interest Rates and Program Funds Remaining Rates change periodically, depending on market rates when loan is registered with TDHCA. Go to http://www.tdhca.state.tx.us/homeownership/fthb/ available_funds.htm. JULY 2012

Federal Recapture Tax Participants may be subject to federal recapture tax if three criteria are met: • home is sold within first nine years, • borrower earns “significantly more” income than when home was purchased and • there is a gain or profit from sale of the home. Recapture tax will not exceed one-half of the gain on sale of the home or 6.25 percent of original mortgage, whichever is less. Buyers should contact a tax advisor or the Internal Revenue Service for more information on recapture tax. Dr. Hunt (hhunt@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

Property Taxes

THROUGH

THE

ROOF DELINQUENT

PROPERTY

TAXES PROVE COSTLY BY CHARLES E. GILLILAND AND SARAH WHITMORE

Most property owners know that they will incur some penalties and interest if they do not pay their property taxes on time. However, many have little understanding of the magnitude of financial expense they face when delinquent tax provisions in the Texas Property Tax Code kick in.

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Pricey Penalties, Interest

he formula specified in the code mandates a sizable initial penalty plus interest charges with monthly increases in both for five months. After that, the penalty remains at 12 percent, but interest continues to grow each month. Section 33.01a states: A delinquent tax incurs a penalty of 6 percent of the amount of the tax for the first calendar month it is delinquent plus 1 percent for each additional month or portion of a month the tax remains unpaid prior to July 1 of the year in which it becomes delinquent. However, a tax delinquent on July 1 incurs a total penalty of 12 percent of the amount of the delinquent tax without regard to the number of months the tax has been delinquent. Typical property taxes unpaid on Feb. 1 immediately increase by 7 percent (6 percent penalty and 1 percent interest). By July 1, those unpaid taxes incur the maximum penalty of 12 percent plus 6 percent interest. Beginning Aug. 1, the penalty remains 12 percent while interest continues to increase by 1 percent each added month. For a property with a $10,000 tax liability, the February payment would be $10,700; the July amount would increase to $11,800. Determining the true cost of those added charges in annualized compound interest reveals that a February payment incurs combined added amounts that actually equate to an 84 percent annual interest cost. The July payment annual equivalent amounts to 33.56 percent in annualized cost. In addition to those charges, the code also allows taxing units to contract with law firms for collection of delinquent taxes with compensation potentially

JULY 2012

adding another 20 percent of the total of delinquent tax plus penalty and interest (Section 630). Taxing units using attorneys for delinquent tax collection often refer accounts for collection on July 1. Adding 20 percent attorneyâ&#x20AC;&#x2122;s fees boosts that July payment to $14,160 for the original $10,000 tax liability. That drives the annualized cost of the July payment to 71.62 percent annual compound cost. Clearly, allowing taxes to become delinquent imposes onerous costs on the property owner.

Property Tax Lender Role An increasing number of those delinquent on their property taxes have discovered special lenders that will pay the taxes, thus stopping the increases in tax plus penalty and interest costs. In return, a loan is secured by transfer of the property tax lien from the taxing unit to the lender. Used frequently in the

If the owner fails to pay his or her property taxes on time, a taxing unit can foreclose and sell the property to recover the liability. Customarily, the local taxing unit holds the lien while attempting to obtain payment from the owner. However, the code allows for the transfer of the property tax lien from the taxing unit to a private entity lender that has paid the taxes. oan funds can apply only to delinquent property tax payments and associated fees. They cannot cover current taxes. Traditionally, the loan amount covers past due property taxes, penalties, interest and attorneyâ&#x20AC;&#x2122;s fees plus closing costs and origination fees associated with the loan. State law protects the property owner by limiting tax lien transferee interest charges to 18 percent. The annual interest on these loans typically ranges from 12 percent to 18 percent.

Typical property taxes unpaid on Feb. 1 immediately increase by 7 percent (6 percent penalty and 1 percent interest). By July 1, those unpaid taxes incur the maximum penalty of 12 percent plus 6 percent interest. 1930s, these private party loans all but vanished for eight decades. Now they have re-emerged as an option for cashstrapped owners. Although Texas property taxes are legally a personal obligation of the owner on Jan. 1 of the tax year, they are secured by a lien on the property. The property tax lien is superior to all other liens, meaning in the event of foreclosure, the property tax lienholder gets paid first.

Most property tax lenders base loan decisions on property features, loan amount and the borrowerâ&#x20AC;&#x2122;s creditworthiness. Borrowers cannot be involved in a bankruptcy proceeding and must be sole titleholder of the property. The Texas Property Tax Lender License Act requires all property tax lenders to be licensed by the state and requires a separate license for each office a lender operates. Lenders are regulated by the Office of Consumer Credit Commissioner (OCCC) and the Texas Finance Commission. A list of property tax lenders who belong to the Texas Property Tax Lienholders Association is at http:// www.tptla.org/.

Doing the Math This table shows the annual compound cost for delinquent tax payments including penalty, interest and attorneyâ&#x20AC;&#x2122;s collection fees. A 2011 tax paid in February 2012 incurs an 84 percent annualized cost. A payment in September 2012 on $10,000 in delinquent tax would amount to $14,400 with an annualized cost of 55.96 percent. A February 2012 payment of tax delinquent since 2008 amounts to $17,880, a 19 percent annual compound cost.

Annual Compound Percentage Cost Delinquent Property Taxes, Penalty, Interest and Percent Attorneyâ&#x20AC;&#x2122;s Fees Month of Payment Year of Tax Liability

Oct 2011

Nov 2011

Dec 2011

Jan 2012

Feb 2012

Mar 2012

Apr 2012

May 2012

Jun 2012

Jul 2012

Aug 2012

Sept 2012

2008

20.31%

19.96%

19.62%

19.30%

19.00%

18.71%

18.43%

18.17%

17.92%

17.67%

17.44%

17.22%

2009

27.01%

26.19%

25.44%

24.74%

24.10%

23.51%

22.96%

22.44%

21.96%

21.51%

21.09%

20.69%

2010

50.77%

46.62%

43.23%

40.41%

38.02%

35.97%

34.18%

32.62%

31.24%

30.01%

28.91%

27.92%

84.00%

52.84%

42.48%

37.23%

34.02%

71.62%

62.66%

55.96%

2011

Pros, Cons of Tax Loans A property tax loan can benefit owners in a number of ways. The primary benefit is that it ends the compounding of penalties and interest. It also affords the owner a way to overcome temporary financial difficulties. By resolving the delinquency, it eliminates the threat of immediate foreclosure. And it consolidates all taxes, interest, and fees into a lump sum amortized in manageable monthly payments. The public taxing unit benefits from a property tax lien transfer because it no longer needs to take action to collect on the account, saving the unit time, effort and administrative costs. Plus, the entire delinquent property tax balance, including penalties and interest, is immediately available to the taxing unit. he benefits come with potential problems, however. While a property tax loan initially buys time for an owner, private lenders may be more likely to foreclose quickly if the owner falls behind on payments, defaults on the loan or violates provisions in the loan contract. Indeed, the private lender may prefer to own the property rather than continuing to collect payments. Local taxing authorities, on the other hand, do not routinely own and manage

T 28

real estate and may be more reluctant to foreclose. In fact, property owners with delinquent taxes may find it beneficial to approach the taxing unit and ask to set up installment payments. Once an installment agreement is executed, foreclosure is barred as long as the owner makes payments on time, pays current taxes and does not violate any provision of the agreement. Interest and penalties continue to accrue on the unpaid balance. ollectors for taxing units can create escrow accounts that work like the accounts most mortgage servicers maintain for homebuyers. Buyers prepay taxes in installments designed to cover the amount of property tax owed when tax bills become due. Executing an escrow agreement should ensure that most or all taxes are paid before the delinquency date. For some homeowners, property tax lien transfers are not the only solution to property tax delinquency. Disabled homeowners or those over 65 can opt to participate in the Property Tax Deferral Program. Participants postpone paying taxes on their homesteads as long as they continue to both own and reside in the homestead. The program allows participants to defer payment but does not eliminate the liability.

long with the deferred property taxes, participants are responsible for interest, which accrues at 8 percent annually. If the owner moves from or sells the property, he or she is responsible for paying all deferred taxes, interest and penalties in a lump sum payment by the 180th day. This program should be used with caution because excessive property tax deferrals could erode all of the ownerâ&#x20AC;&#x2122;s equity. Property tax lien transfers and installment payments are effective methods of dealing with delinquent tax liabilities. However, owners should strive to avoid the costly consequences of paying taxes late. Dr. Gilliland (c-gilliland@tamu.edu) is a research economist and Whitmore a research assistant with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Failing to pay property taxes on time is costly. The Texas Property Tax Code ensures that penalties and interest start high and keep going up. Some lenders offer property tax loans to owners, but those may take a big bite out of equity. TIERRA GRANDE

th Annual Legal Seminar on

DTaxation Valorem August 29–31, 2012 Hyatt Regency San Antonio Riverwalk San Antonio, Texas

The 26th Annual Legal Seminar on Ad Valorem Taxation provides a wealth of information on a variety of legal, economic and other relevant issues. Benefits of Attending • learn about the latest legal issues in ad valorem taxation • understand current economic trends • gain insight into how public policies are developed • examine appraisal practices Who Should Attend • real estate licensees • appraisers • policy makers • lenders • attorneys

• investors • land buyers • land sellers • consultants

Sponsored by the State Bar of Texas Property Tax Committee and the Real Estate Center at Texas A&M University JULY 2012