MUD/Water District Disclosure Importance

The MUD Notice

Here is a list of Mud Disclosures

Here is a TAR notice about water districts, MUDs and CCNs:

https://www.texasrealestate.com/members/legal-and-ethics/forms/mud-and-ccn-notices/

http://www.austintexas.gov/edims/document.cfm?id=233893

http://www.statutes.legis.state.tx.us/SOTWDocs/LG/htm/LG.372.htm

Much of the information I’ve gathered and sometime quoted below comes from the book entitled Texas Real Estate Contracts 2008-2009 by James Wiedemer, page 321, a copy of which is in Curtis’s office. This book is a great resource and I encourage everyone to become familiar with its content.

Paragraph 6-E-3 of the main contract states:

“If the Property is situated in a utility or other statutorily created district providing water, sewer, drainage, or flood control facilities and services, Chapter 49 or the Texas Water Code requires Seller to deliver and Buyer to sign the statutory notice relating to the tax rate, bonded indebtedness, or standby fee of the district prior to final execution of this contract”

I remember back in the 80’s when Rob Roy on the Lake was developed, the developer got approval for form a water district and sell bonds to raise money to construct the water treatment plant, water storage facility, and the water distribution lines. The tax rate was modeled upon the notion that once homes were constructed on all of the lots that the appraised value of the homes would be great enough to cover the debt service on the issued bonds.

When the real estate crash of the late 80’s hit, only a fraction of the lots were built on and the result was much higher property taxes on the homes that were built.

In this instance, we are talking about a Water District but the same held true for Municipal Utility Districts as well. In some instances, the districts have the authority to levy Standby Fees on undeveloped lots as well.

From Wiedemer (and I have paraphrased some here):

“Prospective home-buyers who want to buy a home in a MUD District need to be made aware of the any abnormally high MUD property taxes. Therefore, the Legislature passed a law, found in Chapter 49 of the Water Code which requires the Seller to deliver, and Buyer to sign the statutory notice relating to the MUD tax rate, the MUD District’s bonded indebtedness and any standby fees upon BEFORE signing the main contract……Anytime a Broker writes a contract in MUD district, the notice must be signed by the buyer. In practice, the MUD notice is signed at the same time as the contract. If the MUD notice is not signed by the buyer, then the contract is no good and may be terminated at the election of the buyer. However, if the notice is signed at the closing then no further liability results. If the notice is not signed at all, either as part of the contract, or as part of the closing then there may be liability on the part of the seller and the broker for damages….”

I just had a transaction, representing the seller of a home in Water District #18. I called the title company that we were using and asked them to provide the notice, which they happily did. The notice provided the name of the taxing entity, the legal description of the property, the current tax rate ($.2081 per $100 of valuation), the amount of potential or approved amount of bonds that could be issued ($4,500,000) and the actual amount of bonds that had in fact been issued ($4,500,000). The amount of Standby fees was zero. So no biggy here since twenty cents is not incredibly high, but the notice is required anyway!

Additionally I attached to the contract form TREC NO. OP-C, entitled “Notice to Prospective Buyer”!

I happened to know that the property was in a water district, but another way I could have found out was to look at the property tax record to see if there was a taxing entity beyond those for which no notice is required. I think this is a very important place to check!

These kinds of taxing authorities, as noted before, can include MUDs and Water Districts, but could include drainage and flood control facilities as well as entities that provide sewer service as well.

There is another kind of statutory district that might be included although Wiedemer did not discuss it. When Southwest Parkway was constructed in the 80’s, the funds for construction came from the issuance of bonds, again with the plan that as land adjacent to the new road was developed and homes were built that the tax base would be sufficient to cover the debt service on the bonds. It was called something like the Southwest Parkway Road District. The 80’s real estate fiasco hit. That, along with large portions of the land out there being deemed prime habitat for the Golden Cheek Warbler. The Road District’s ability to develop enough tax base to service the debt was weakened. But that’s another story. Just be aware that there may be reasons to give the notice beyond the ones mentioned by Wiedemer.

What if the taxing authority fails to report their tax rate or potential indebtedness or reports it inaccurately? Or what if the information changes during the year? So the State of Texas passed some more laws.

Part of the new law protects us somewhat: (again from Wiedemer) “…the salesperson’s and broker’s liability for failure to give the buyer a MUD form is now limited to $5,000, “plus reasonable attorney’s fees”, but only if the lawsuit is brought within 90 days of receiving a tax notice or four years from the sale, (whichever comes first),…..”

So what is the takeaway from all this?

Find out if your new listing is within one of the taxing districts and if so, provide the notice along with the Seller’s Disclosure and get it signed by the buyer. Otherwise, there is the potential for the contract being terminated for an unexpected reason or the possibility of paying $5,000 plus attorney’s fees!

Jeffrey Dochen,

Broker Assocoiate, Sky Realty, Inc.

License Number 187734 and 558229

512-328-2500