Owner Financing Part II – The Fine Print of Contracts for Deeds

With the real estate market picking up – especially in San Antonio – potential homebuyers may want to explore their options for financing mortgages.

However, the real estate crash several years ago made it harder for homebuyers to qualify for homes. Although banks have eased lending requirements a bit, buyers still need to have stellar credit to make it a smooth process. Further, interest rates have rebounded from historic lows, and the average buyer who may have some credit issues may find themselves effectively priced out of the market.

But ‘alternative’ options for purchase abound in San Antonio from ‘rent to own’ deals to the old fashioned ‘I’ll give you the deed after you pay 360, low, low monthly payments’ deals. So homebuyers should beware of deals that sound too good to be true, and they should know their rights in Texas.

Contracts for deeds, which are also known as executory contracts, are a popular option for many homebuyers and sellers to enter into when they want to avoid the traditional financing process. Contracts for deeds aren’t new – they’ve been used for years as an alternative means of purchasing a home, with a high concentration of use in counties along the Texas – Mexico border.

In the typical contract for deed transaction, a contract price is agreed, the purchaser pays a small down payment, and after the purchaser timely makes all payments to the seller/owner of the property, the seller will deliver the deed to the purchaser. Until that time, however, the purchaser doesn’t actually ‘own’ the property. Generally, any deal involving a lease for more than six months combined with a purchase option for the property (and especially if a down payment is given) will fall under the same laws that govern a contract deed (unless the agreement is for the use of a deed of trust and related security instruments). Often, the price of the property under the executor contract is above the fair market value of the property, and typically no closing company (title company) is used (this is not our advice, but rather what the average transaction often looks like).

However, these contracts were often easy to violate, and the end result under prior law could be the loss of the property even though the purchaser made 99 percent of the payments – technically, that last payment was a breach entitling the seller to take the property back and to do so without the usual foreclosure process. Texas recognized this potential for abuse, and has systematically reformed executor contract law. However, the law in this area is quite broad, and exceeds the scope of discussion of this brief post. It may be best to have an experienced real estate attorney to help you read the fine print if you seek to purchase a house this way. To read Part 1 of Owner Financing in Texas, click here.

If entering into a contract for deed, here are some things sellers must do to be in compliance with Texas Property Code, Subchapter D.

Disclosures: In contracts for deeds, sellers must provide documentation on the condition of the property, survey, copies of documents that could affect the title, insurance, conditions on utilities and the financing terms of the deal. By Jan. 31 of each year, a seller also must provide an annual accounting statement of the payments that have been made and the balance due. If the seller doesn’t provide some of the items listed above, the seller could be hit with a lawsuit under the Deceptive Trade Practices – Consumer Protection Act and the buyer could be entitled to cancel the contract and receive a full refund.

Unreasonable Contract Terms: Under Subchapter D, sellers can’t charge buyers pre-payment penalty fees and excessive late payment fees. Subchapter D also allows buyers to use their home equity to finance necessary home improvements even if the seller’s contract says the buyer is not allowed to do so. Once the buyer pays the contract in full, the seller must transfer the title within 30 days to avoid hefty penalties.

Default: If a buyer defaults on the contract, the seller must give the buyer 30 days to take care of the default if the contract was signed on Sept. 1, 2003 or after. If a person has made 48 monthly payments or paid at least 40 percent of the total amount due, the seller can’t cancel the contract or demand the full delinquent amount. Instead the house has to be sold at a public auction where the purchaser can recover some of its payments if the sales amount is higher than the debt owed on the contract.

As noted, this brief post was meant to introduce the topic, and doesn’t cover all issues such as the buyer’s ability to convert a contract for deed to a traditional promissory note and deed of trust.

If you need legal advice, schedule a meeting with Tiwari + Bell PLLC through our website or by calling (210) 417-4167