Monday, January 3, 2011

If You Live in Texas Read This

Just before Thanksgiving, I was asked by a client of mine for whom I have done a lot of work to refinance his second home in La Grange, Texas for a lower interest rate.  Although I expressed some concern to this borrower that he already had a low interest rate, and that going from a fifteen year mortgage to a thirty year one might not be to his best advantage, he explained that he really wanted a lower monthly payment.  Since I have financed this ranch style home on twenty acres twice before, I was not at all concerned about the property or about the borrower qualifying.

Fast forward about one month.  We have an approved appraisal for more than we needed.  Our income and assets have all been verified.  We are on our way to the closing department.  We have arranged a courtesy close with a title company in El Paso so that he does not have to travel back to La Grange to close.  Then, two days before we are scheduled to close, I get an email and a phone call from the lender, Suntrust, and the lender's attorney.  The second home on twenty acres in Fayette County has an agricultural exemption on it to reduce the property taxes.  This will have to be removed before the loan can close. 

I was horrified.  Because of Texas Equity laws and homestead laws, I am well aware that a property with an agricultural exemption cannot get a cash out refinance.  However, our transaction was a rate and term refinance--not a cash out.  The agricultural exemption has never been an issue on a rate and term refinance.

It turns out that Texas is now enforcing a statute that prevents title companies from issuing a particular title endorsement (T30 coverage) on properties with agricultural exemptions. The lender requires the T30 endorsement for the loan, but the title company will not issue the endorsement as long as the property has an agricultural exemption. 

I spoke to the branch manager at Suntrust, and to both the title company in La Grange and the title company doing the courtesy close in El Paso.  Apparently, this issue has become a widespread problem.  Professionals buy "gentlemen's ranches" to relax from their stressful jobs.  To reduce the property taxes, they file an agricultural exemption on the property which greatly reduces the property taxes.  But if they want to refinance those properties, they have to remove the exemption.  In El Paso county, this would have been a huge problem, because properties with agricultural exemptions are subject to three years of rollback taxes when the exemption is removed.  That means that if the property is worth $200,000, and the assessed rate without the exemption would be $5084, the owner has to pay three years of taxes, or $15240.00 as the penalty for removing the exemption.  In most cases, that is a deal breaker.

Fortunately, Fayette County does not charge rollback taxes if the property remains agricultural.  So, while my borrower had to pay the $2000.00 difference between the exempt and the non-exempt taxes, that is all he had to pay.  In El Paso, he would have had to pay three times that amount.

The title officer told me that this new rule regarding agricultural exemptions applies to purchases also.  The exemption has to be removed before the transaction can close and either the buyer or the seller has to escrow for the back taxes on the property. 

So before you get too far into your transactions in 2011, check out the exemptions on the property taxes. Knowing what exemptions are in place and how much it will cost to remove them can save you and your clients a lot of stress and headaches in the new year.
Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. For more information, visit her website at


  1. Can you put the property back in ag the following year? Or will you have to continue paying the higher tax rate permanently?

  2. This is an excellent question. The title company will tell you that the exemption has to stay off for the life of the loan. However, as the president of one lender explained to me, "They are not going to follow you around for the rest of your life checking to see if you have renewed the Ag exemption." Basically, as I understand it, if you put it back on after a year there really isn't anything anybody can do about it. But if, you ever have to sell or refinance the property you will have to go through this process all over again.

  3. Is it possible to resurvey the property into two separate parcels (i.e., the house and one acre without an AG exemption; and the rest of the nine acres kept for AG use)? How would that affect a future sale of the full ten acres? Would a refi with cash out on only the house and one acre then be possible?

    1. Not as far as I know. If the AG exemption comes off, the tax structure changes. You probably need to ask your specific county tax office if the property can be surveyed out and the AG removed since state law does prohibit a cash-out refinance (Texas A6 loan) on a residential homestead with an AG exemption.

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