Contracts for Deed in Texas
A contract for deed, more properly called an executory contract for conveyance of real property, is one method to selling real estate. Historically sellers have favored executory contracts over traditional seller financed mortgages because an executory contract allows the seller to retain title until the purchaser has paid the full purchase price. Accordingly, if the buyer defaults in payment the seller simply terminates the contract and evicts the buyer, thereby avoiding the expense of a foreclosure. For years the Legislature has expressed concern about abusive tactics on the part of sellers, particularly in the colonias in south Texas, and has responded by extensively regulating the use of executory contracts. An executory contract covering property to be used as a residence must now satisfy numerous requirements, including:
- It must be in writing
- The seller must provide a current survey or plat
- The seller must provide copies of current liens, restrictions and easements
- The seller must provide a property condition disclosure
- The seller must provide tax certificates and insurance information
- The seller must provide specific financial disclosures
- The seller must allow the buyer to cancel the contract and receive a full refund up to 14 days after the contract is signed
- If the property is subject to a mortgage the seller must notify the lender of the sale
- Certain late fees, prepayment penalties, and other contract terms are prohibited
- The contract must be recorded
- The seller must provide an accounting each January of payments, taxes and insurance
- The buyer has the right at any time to convert the contract to a conventional mortgage without charge
- Depending on how much of the sales price the buyer has paid, the buyer must be given a lengthy period to cure a default before the seller may terminate the contract, and even then the seller may have to foreclose to recover the property
- Depending on the specific circumstances, additional notices or disclosures may be required
Failure to strictly comply with these burdensome requirements can subject the seller to severe penalties, even for innocent mistakes. For example, the buyer may have the right to sue for triple damages, interest and attorney's fees under the Deceptive Trade Practices-Consumer Protection Act. The buyer may also have the right to collect liquidated damages of up to $250 per day, and to cancel the contract and receive a refund of the purchase price. These provisions can be financially ruinous for a seller because a buyer may not assert a claim until years after the contract is signed.
A Trap for Landlords
Tenants often request a purchase option, or "rent to own" arrangement. Residential landlords in particular should avoid such terms, because an option to purchase real property that includes or is combined with a residential lease is considered an executory contract for conveyance of real property, subject to all the requirements discussed above.
The Legislature has succeeded in making it nearly impossible for residential sellers and landlords to comply with the laws applicable to executory contracts. The penalties for even technical violations can be both harsh and unyielding. Even if everything is done correctly the buyer has the right at any time to convert the transaction to an ordinary sale and seller-financed mortgage at the seller's expense, thereby defeating the seller's primary motivation for doing an executory contract in the first place. For these reasons our firm no longer prepares residential executory contracts, and we strongly urge the sellers and landlords that we represent to avoid them.