Illegal Subdivision Causes Nightmare for Many

Lawyer for Illegal SubdivisionUnplatted Subdivision Reveals Problems Associated with Contracts for Deed and Limited Land Use Oversight.

The Austin American Statesman recently published a series of articles that cast a chilling light on what happens when a landowner-turned-real-estate-developer fails to comply with land use laws. The articles about an illegal Texas subdivision were authored by investigative reporter Eric Dexheimer, and are well-written and insightful.

They can be read here:

Dexheimer’s articles focus on the Century Oaks Estates subdivision located in Caldwell County, Texas, and illustrate how a “perfect storm” of circumstances can allow what was once considered a “border problem” to exist in rural areas across the state. These circumstances are:

  •  An unsophisticated or unscrupulous developer;
  • Unsophisticated buyers who purchase property outside of the purview of traditional lenders; and
  • Lax regulatory oversight and enforcement by local government.

According to the articles, the developer of Century Oaks Estates informally carved-out 330 acres from a larger rural tract, and began selling lots.  These lots were most often sold to individual Buyers under an owner-financing mechanism called a Contract for Deed.

I have blogged on many occasions about Contract for Deed arrangements, and the pitfalls that often accompany them.  In short, these arrangements allow a Seller to retain legal title to real estate until such time as the Buyer has made all payments under an owner-financing note. Only after all payments have been made by the Buyer is the Seller compelled to convey title to the property by way of a deed.

While not illegal, Contracts for Deed are disfavored under Texas law. I share this sentiment of distaste.

In addition to the typical problems that Buyers face under Contracts for Deed (i.e.  Seller fabricates a default on the Buyer’s part, Seller encumbers the Property during the Buyer’s finance period, Seller dies before Buyer makes all payments, etc., etc.) these owner-financing arrangements bother me because key players and the protections that those players bring to the closing table are almost always absent.

Under “traditional” third-party financing, a lender (typically a mortgage company) seeks to minimize risk by ensuring that their collateral (the real estate made the subject of the loan) justifies the loan. This risk-mitigation is accomplished by, among other things, requiring a survey, a title policy and an appraisal prior to closing.  If the results of these diligence tools do not meet with lender approval (soften called “underwriting approval”), then the mortgage loan will be denied and the Buyer is usually unable to close on a purchase.

By contrast, most owner-finance / Contract for Deed purchases do not involve a title policy or any specific underwriting standards prior to closing. Rarely is a survey included, either.  Rather, “closing” under a Contract for Deed typically consists of the Buyer making a non-refundable down-payment and executing the Contract.

The absence of a title policy, survey and appraisal can be catastrophic — especially when the Seller is unscrupulous or just ignorant of applicable subdivision requirements.  This seems to be the case with Century Oaks Estates.

According to the articles, the developer not only failed to secure a survey of the individual lots that he sold, but also didn’t even bother to properly plat the subdivision or obtain County approval for creating individual lots. Whether intentional or merely negligent, that failure is significantly compounded by the fact that the  Century Oaks developer also lacks the legal capacity to provide water service to residents of the illegal subdivision.

Dexheimer and those quoted in his articles rightfully assign some of the blame for the Century Oaks Estates debacle on Caldwell County development regulators. A sad reality across rural Texas is that local governments are under-staffed, and ill-prepared to enforce land use and subdivision platting requirements. This results in real suffering for victims of illegal land subdivision.

I have handled cases where developers seemed to avert regulators for years. In these case the unscrupulous developers succeeded in selling lots (most-often under Contract for Deed) that were landlocked, contained illegal roadways (in one Texas Hill Country case the roadway  grade was so steep that emergency vehicles couldn’t access an entire Phase), were prevented from installing a septic system where wastewater service was otherwise unavailable, lacked ability to install a water well, or were of insufficient size for construction of a home.

The result is almost always the same:  Buyers are stuck with virtually worthless properties upon which they cannot build, and which they will very likely be prohibited from selling.  Yet, they often still owe a balance under the Note associated with a Contract for Deed.

If you are the victim of an unscrupulous developer or find yourself in an illegal subdivision, you should promptly involve an experienced real estate lawyer to explore possible remedies.