Residential Contracts for Deed
§ 13.1Removal from Manual; History of Seller Financing in Texas
The Real Estate Forms Committee has removed the chapter on residential contracts for deed. These transactions are heavily regulated, and in the majority of circumstances the risks and consequences of failure of compliance outweigh the usefulness of the transaction in light of the fact that the same result can be accomplished by a note, deed, and deed of trust. See, e.g., Morton v. Nguyen, 369 S.W.3d 659 (Tex. App.—Houston [14th Dist.] 2012), rev’d in part, 412 S.W.3d 506 (Tex. 2013).
Contracts for deed, sometimes referred to as “installment land contracts” or “rent-to-own” financing arrangements, are legal and have been used and litigated in Texas for seller-financed property sales for more than a hundred years. See Taber v. Dallas Co., 106 S.W. 332 (Tex. 1908). Contracts for deed are now, however, characterized by Texas Property Code section 5.062 as “executory contracts,” transactions that are incomplete or unfinished in a material respect, namely, the delivery of the deed.
The restrictions of the statute do not apply to a contract that provides for the seller to deliver a deed within 180 days, to commercial transactions, or to transactions in which the buyer is not going to use the property as his principal residence. See Tex. Prop. Code § 5.062.
The Code was amended in 1995, 2001, and 2005 to remedy what were perceived as seller abuses of contracts for deed, for example, collecting a large down payment and then, if the buyer fell behind, using the eviction process to repossess the property as if the buyer were no more than a tenant.
§ 13.2Recent Consumer Protections; Seller’s Risk
Because of this history, burdensome consumer protection rules and restrictions now apply, including the following: These contracts must now be recorded. A thorough financial disclosure and detailed calculations must be given to the buyer at closing. The seller must provide the buyer with a current survey and copies of documents from the chain of title. Many precontract and preclosing disclosures are required for which there are no standard forms. Certain statutory language must be included in the contract, or it can be canceled and rescinded by the buyer at any time, and the buyer will be entitled to a full refund of all sums paid to the seller. The seller must provide the buyer with tax and insurance information and copies of policies. Buyers also have a right to convert to a deed, note, and deed of trust. And the seller must provide a detailed accounting statement every January. See Tex. Prop. Code §§ 5.063–.085.
Failing to comply with the statutory requirements may constitute a deceptive trade practice and result in treble damages. Additionally, the seller can be assessed penalties of $250 per day for each day after January 31st that the annual accounting statement is not delivered. There are restrictions and prohibitions against selling under an executory contract if there is a mortgage on the property. See Tex. Prop. Code §§ 5.069, 5.070, 5.072, 5.077, 5.078, 5.085.
Accordingly, contracts for deed have fallen into disuse, which was exactly the legislature’s intent.
Note that even if a seller is willing to endure the various restrictions, risks, and potential liability involved in selling the property under a contract for deed, the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 licensing requirements may still apply. See sections 2.72 and 2.177 in this manual.
The 2005 amendment to the Code expanded the definition of “executory contract” to include lease-option agreements. See Tex. Prop. Code § 5.0621. Clever draftsmanship will not avoid section 5.061. The courts look to substance over form in interpreting these transactions.
For these reasons, before advising a client to sell property under an executory contract, all circumstances and alternatives should be thoroughly evaluated.