In the video, Attorney Kari Lutringer talks about a contract for deed, as it is used for the purchase of a home or other real property in Texas. Ms. Lutringer is no longer with the Firm. If you’ve purchased property with a contract for deed and you’d like help converting it to a warranty deed, please call our office at 800-929-1725. Appointments can be in person, online, or by phone.
Summary of What Is a Contract for Deed in Texas
Hi there. My name is Kari Lutringer, and I’m an attorney at Wadler, Perches, Hundl & Kerlick.
I recently had a client come to me with concerns about a contract she had signed to purchase some real property. The deal that she had made with the seller was that she would pay a lump sum upfront as a down payment and then make monthly payments of principal and interest for some period after that. When the entire amount of the loan was repaid, including all accrued interest, at that point, the seller would convey the title from seller to buyer.
My client was concerned that if she fell behind in payments during the loan term or were to default otherwise or breach the terms of the contract that she had signed, she would be at risk of losing her interest in the property. This type of transaction is called a contract for deed, and it differs from the standard seller-financed transaction in a couple of different respects.
Differences Between a Contract for Deed and a Warranty Deed with a Vendor’s Lien
So with a traditional seller-financed model, the seller at the time of closing will convey title to the buyer by using a warranty deed or some version of a warranty deed. The warranty deed is a deed in which the seller makes certain representations and warranties about the quality of the title.
The seller will retain a vendor’s lien with this type of transaction. A vendor’s lien acts as a security interest in the property. The lien allows the property to serve as collateral for the loan between the buyer and the seller. Typically, in this arrangement, the buyer will also sign a promissory note and a deed of trust to further evidence the lien.
So if the buyer were to default or fall behind in payments, then the seller has an option to foreclose on its lien. But first, the seller has to comply with certain regulations promulgated under Texas Law, including providing specific notice and cure periods and making certain postings with the county clerk. There are several steps that need to be followed before the foreclosure process can be initiated and commenced. This is typically the preferred method for a buyer because the title is transferred upfront, and it’s subject to a security interest that the seller holds back.
With my client, this is not the arrangement that she had entered into, so her next question to me was, what can I do to protect my interest in the property? And the good news is there are a couple of things that my client can do.
What Can the Buyer Do to Improve Her Position
The first is to record the actual contract for deed in the real property records in the county in which the real property is located. This essentially converts the contract for deed into a warranty deed with a vendor’s lien. So if she were to fall behind in payments or default, then the seller would have to comply with all the foreclosure requirements that I previously described before he could potentially obtain title to the property again.
The other thing she can do is she can request an annual accounting. This is a requirement under Texas Law. If requested by the buyer, the seller has to provide certain information about the loan. For instance, the seller would have to report how many payments have been made, how much has been paid towards the loan balance, how much is remaining owed on the loan balance, and how many payments are still left to be made. In addition, the seller would have to provide other financial information regarding property taxes and the like.
With the contract for deed, if there’s a breach of contract, the seller still has to provide notice to the buyer either by registered or certified mail. The seller has to give the buyer notice of how to cure or remedy the breach and the amount of time the buyer would have to make these corrections based upon the actual status of the loan.
So if the buyer has made less than 48 total payments or paid less than 40% of the total outstanding purchase price and has not recorded the contract for deed in the real property records, then the buyer has 30 days to cure. If the buyer does not cure within that timeframe, then the seller can cancel the contract for deed and take back the property, and then initiate eviction proceedings to force the buyer to vacate the property. So essentially, the buyer is at risk of losing all of the equity paid up to that point.
If the buyer has made more than 48 payments or paid at least 40% of the total purchase price, or has recorded the contract for deed in the real property records no matter the payment status, then the buyer will have 60 days to cure. If the buyer does not cure, the seller will have to initiate the foreclosure process by providing all the required notices and posting requirements as I described before.
So for my client as a buyer, the contract for deed is probably not the type of structure that I would have recommended. In some situations, it may make sense to purchase property with a contract for deed. Perhaps it makes sense if traditional financing is not available, or the financing terms offered by the seller are particularly attractive.
Get Help to Determine if You Can Convert Your Contract for Deed
If you’ve got questions about this type of arrangement, or you’d like to discuss it in more detail, feel free to contact me or a colleague here at my firm. Call or text for an appointment at 800-929-1725. We have five offices in Wharton County, Matagorda County, and Fort Bend County. You can also schedule an appointment by filling out this form.