Why Shouldn’t I Use a Contract for Deed to Owner Finance My Property?

What is a Contract for Deed?

In a traditional owner finance transaction, three documents are used to memorialize the sale/purchase- a Deed, a Deed of Trust and a Promissory Note. With these documents, the seller signs a deed to the buyer and the seller keeps a lien in the property to ensure the repayment of the loan from the buyer. The buyer becomes the legal title owner of the property. Yet, if the buyer fails to pay the loan, the seller can foreclose on it.


A Contract for Deed is a different form of owner finance where the seller keeps the title to the property and the buyer does not receive a deed until the loan is paid off. Although Contracts for Deed have been popular in the past, sellers have abused using the agreements. Texas Legislature found that Contracts for Deed were predatory to buyers because buyers did not have a deed showing property ownership and many times were left without proper legal recourse they could afford. To protect buyers, Texas strictly regulated these types of contracts with Chapter 5 of the Texas Property Code. The laws on these types of transactions are so thorough and complicated that with another avenue available to sellers to owner finance, the best advice is not to use Contracts for Deed at all if they can be avoided.


What are my obligations as a seller and rights as a buyer under a Contract for Deed?

Chapter 5 of the Texas Property Code has numerous requirements of documents and disclosures that a seller must provide. Requirements are extensive and include, but are not limited to:


1. If the Contract for Deed negotiations are not primarily in English, then the seller must provide a copy of all written documents in the transaction in the primary language used.

2. The seller must deliver to the buyer a new survey within the past year or a plat of the current survey; a copy of all liens, restrictive covenants, easements affecting title to the property; and a written notice informing the buyer of the condition of the property, executed by both parties.

3. The seller must deliver to the buyer a statutory disclosure addressing whether or not the property is in a recorded subdivision; if water, sewer, and electric power are available; if the property is in a floodplain; who is responsible for maintaining the road to the property and the like.

4. The seller must deliver to the buyer a tax certificate from the collector for each taxing unit that collects taxes due on the property.

5. The seller must deliver to the buyer a copy of any insurance policy, binder, or evidence that indicates the name of the insurer and insured; a description of the insured property; and the policy amount.

6. The seller must deliver to the buyer an annual accounting statement every January, which must include amounts paid, the remaining amount owed, the number of payments remaining, the amount paid in taxes, the amount paid for insurance, an accounting for any insurance payments by the insurer, and a copy of the current policy.

7. The seller must record the Contract for Deed and the disclosure statement on or before the 30th day after the date the contract is executed in the real property records of the county where the property is located.


The Texas Property Code also allows the buyer to cancel and rescind a Contract for Deed for any reason within 14 days of execution by delivering a signed written notice to the seller by certified or registered mail, return receipt requested, or in person.


The buyer also has an absolute right at any time and without paying penalties or charges of any kind to convert an executory contract to recorded, legal title under Section 5.081 of the Texas Property Code.


If the Contract for Deed is not recorded or converted by the buyer, the seller must instead transfer recorded, legal title to the buyer within 30 days of the date the seller receives the final payment due under the executory contract.


What happens if the requirements under the Texas Property Code Chapter 5 are not met?

Chapter 5 of the Texas Property Code provides significant penalties against sellers who fail to follow its requirements. Some of these include:


1. A penalty for the failure to record the Contract for Deed (up to $500.00 a year for noncompliance)

2. A penalty for the failure to provide an annual accounting statement ($100.00 per annual statement not provided)

3. A penalty for the failure to transfer legal and recorded title to the property within 30 days after receiving the buyer’s final payment ($250.00 a day for days 31-90 after receiving final payment and $500.00 a day thereafter)


Section 5.069(d)(1) also defines the failure to fulfill Chapter 5’s requirements as a false, misleading, or deceptive act or practice pursuant to Section 17.46 of the DTPA. Under Property Code Section 5.069(d)(2), a buyer can cancel and rescind the Contract for Deed and receive a full refund of all payments made to the seller including the down payment plus any money expended by the buyer on permanent improvements to the property. While the buyer remains entitled to a full refund of all payments made to the seller, cancellation and rescission of a contract also requires that the buyer restore to the seller the value of the buyer’s occupation of the property such as paying fair market rent for each month lived in the property.


As may be obvious by the end of this blog post, Chapter 5 of the Texas Property Code

places a large number of requirements on sellers and protections for buyers that many may not be aware of. If you, or someone you know, needs help looking at their transaction documentation to ensure compliance, or needs someone to help draft a Deed, Deed of Trust and/or a Promissory Note, we can help. Give us a call at 903-716-6668.

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