As the population of Austin continues to grow we are seeing more and more developers who want to maximize space on lots. A very popular way to do this is to tear down an existing single family residence and replace it with a two (or more) condominium project. You might also see someone that owns a duplex or other multi-family building convert these properties into condominiums.
Both of these options allow for the units to be sold separately to different buyers so that the seller can increase the number of units they have available to sell.
In order to complete this process the property owner must create a condominium regime which can be a complex legal process. Texas statutes govern Texas condominium regimes, and the condominium regime documents must be in strict compliance with the law or they may fail to create an insurable condominium.
Why does it matter if the condominium is “insurable?” Both the lender and the owner’s title policies typically require certain coverages that are not available if the condominium documents are lacking important details. This means a lender may not be willing to loan on that project and/or a buyer may have an out from their contract if the issue is discovered post-contract but pre-closing.
Due to the strict requirements of the Texas statutes governing condominium creation a property owner or investors seeking to create a condominium regime should consult with a real estate attorney. Once the documents have been prepared they should be sent to your closing team at Texas National Title immediately for review.
Note, these documents should be sent BEFORE they are signed or recorded because we often find that changes are necessary. Many times we find that the documents are not sufficient to create an insurable condominium. Some common examples that will create insurability issues are:
- The documents fail to include lienholder consent;
- The documents fail to adequately describe the units to be created;
- There is a restriction on the property that prohibits multiple units being built; and
- Failure to properly create an HOA or association bylaws.
Please also note that these documents, once approved, should be filed in the Official Public Records far enough before closing to allow the plant certification date to update and show the filed documents. This is an important step of updating the title commitment to show the land has converted from one lot to multiple condominium units. This can take anywhere from 7-10 days prior to closing.
Another item to consider for closing is how will the parties handle the tax prorations at closing. Unless taxes are out for the current year the county will have one tax bill that year for the whole parcel but now you have multiple purchasers. How does the seller tax proration credit get handled? Obviously this is an important detail to discuss with your client and your escrow officer because more than likely all buyers of those condominiums are going to get the same duplicate bill and all lenders will get the same bill for the entire tract. If your client is not prepared on how to handle this you can have a real mess after closing!
Creating a new condominium regime can be a real challenge! When you are representing a client that wants to create (or convert) into a condominium it is critical that you work closely with your Texas National Title escrow team. We can guide you through the steps that are necessary for your client to complete so that you can have a smooth transaction.