Residential Contracts for Deed
§ 13.1Removal from Manual; Use of Contracts for Deed in Texas
The Real Estate Forms Committee has removed the chapter on residential contracts for deed. For decades, these transactions have been subject to legislative scrutiny as reflected by the many amendments to Texas Property Code title 2, chapter 5, subchapter D. The legislative intent behind the amendments was to remedy what were perceived as seller abuses of contracts for deed. For example, a seller might collect a large down payment and then, if the buyer fell behind, use the eviction process to repossess the property as if the buyer were merely a tenant.
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, 335 (Tex. 1908). As set out below, the risks associated with the use of contracts for deed outweigh their usefulness. This is especially true since a deed, note, and deed of trust can be used to document the transaction and protect the interests of seller and buyer. See, e.g., Smith v. Davis, 462 S.W.3d 604 (Tex. App.—Tyler 2015, pet. denied); Morton v. Nguyen, 369 S.W.3d 659 (Tex. App.—Houston [14th Dist.] 2012), rev’d on other grounds, Morton v. Nguyen, 412 S.W.3d 506 (Tex. 2013).
Texas Property Code title 2, chapter 5, subchapter D, “Executory Contract for Conveyance,” sections 5.061 through 5.087, refers to contracts for deed as “executory contracts,” which evidence transactions that are incomplete or unfinished in a material respect, namely, the delivery of the deed. This statute applies to the “conveyance of real property used or to be used as the purchaser’s residence or as the residence of a person related to the purchaser within the second degree by consanguinity or affinity, as determined under Chapter 573, Government Code.” Tex. Prop. Code § 5.062(a). “[A] lot measuring one acre or less is presumed to be residential property.” Tex. Prop. Code § 5.062(a)(1). An option to purchase real property that includes a residential lease agreement is considered to be an executory contract for conveyance of real property. See Tex. Prop. Code § 5.062(a)(2). In 2005, section 5.0621 was enacted to clarify that this statute and Texas Property Code chapter 92, “Residential Tenancies,” apply to the residential lease agreement referenced in Tex. Prop. Code § 5.062(a)(2). See Tex. Prop. Code § 5.0621.
The statute sets out specific transactions that are excluded, including transactions where the seller delivers a deed within 180 days or where the purchaser is related to the seller within the second degree by consanguinity or affinity, as determined under chapter 573 of the Government Code. See Tex. Prop. Code § 5.062(c), (d).
§ 13.2Seller’s Risks Associated with Contracts for Deed
Texas Property Code title 2, chapter 5, subchapter D, sets out many rules creating burdens and risks for the seller, including the following provisions. A contract for deed must be recorded. See Tex. Prop. Code § 5.076. Before a contract for deed is signed by a buyer, a seller must provide the buyer with a survey or plat of a current survey, copies of documents encumbering the title to the property, a statement of the condition of the property as outlined in the statute, a tax certificate and legible copies of any insurance policies, and a written statement setting out the financial terms. See Tex. Prop. Code §§ 5.069–.071. A violation of these disclosure requirements is a “false, misleading, or deceptive act or practice within the meaning of Section 17.46, Business & Commerce Code.” Tex. Prop. Code § 5.070(b)(1). A contract for deed must contain certain statutory language, or the buyer can rescind the contract at any time and be entitled to a full refund of all sums paid to seller. See Tex. Prop. Code § 5.074. A buyer also has a right to convert a contract for deed to a deed, note, and deed of trust. See Tex. Prop. Code § 5.081.
A seller must provide a buyer with an annual accounting statement by January 31 including the amount paid and the remaining amount owed under the contract. See Tex. Prop. Code § 5.077(a), (b). A seller who conducts only one transaction in a twelve-month period and fails to comply with the annual accounting requirements can be assessed penalties of $100 for each annual accounting statement that is not delivered, plus attorney’s fees. See Tex. Prop. Code § 5.077(c). A seller who conducts two or more transactions in a twelve-month period and fails to comply with the annual accounting requirements can be assessed penalties of $250 per day for each day after January 31 that the annual accounting statement is not delivered, not to exceed the fair market value of the property, plus reasonable attorney’s fees. See Tex. Prop. Code § 5.077(d).
There are additional restrictions and prohibitions against selling under an executory contract if there is a mortgage on the property. See Tex. Prop. Code § 5.085. A violation of Tex. Prop. Code § 5.085 is a “false, misleading, or deceptive act or practice within the meaning of Section 17.46, Business & Commerce Code.” Tex. Prop. Code § 5.085(c)(1).
When a client presents the opportunity to sell or buy real property under an executory contract, all circumstances and alternatives should be considered and evaluated. A client should be provided with not only the statutory requirements applicable to contracts for deed, but also the benefits of structuring the transaction with a deed, note, and deed of trust.
McGarvey, Cassie. “Contracts for Deed and Wraparound Mortgages: Navigating High-Risk Financing.” In Real Estate Law 101 Course, 2022. Austin: State Bar of Texas, 2022.
Orozco, Francisco J., Jr. “Contracts for Deed Strategies and Pitfalls.” In Soaking Up Some CLE Course, 2022. Austin: State Bar of Texas, 2022.