LEGISLATIVE PROTECTIONS FOR RESIDENTIAL PURCHASERS OF REAL ESTATE IN TEXAS
THE POSITIVE AND NEGATIVE ASPECTS OF INSTALLMENT LAND CONTRACTS
In tough economic times such as these, buyers and sellers of real property often look to alternatives to conventional financing. The installment land contract is one such alternative. In Texas, installment land contracts are also known as “contracts for deed.” A contract for deed is a contract for the sale of real estate in which the buyer makes periodic payments to the seller and receives title to the property only after all, or a substantial part, of the purchase price has been paid, or regular payments have been made for one year or longer.
Once the requirements of the contract have been met by the buyer, the seller of the property will pass the title by recording the deed in the buyer’s name. In a nutshell, the seller retains legal title as well as the deed, and the buyer retains only equitable title until all of the buyer’s contractual requirements are satisfied.
The contract for deed is attractive to buyers who cannot obtain conventional financing, and who have a steady stream of income but not a lot of money to put down. Down payments under a contract for deed are usually small. However, the interest rates are often high, and the contract can contain an acceleration clause. An acceleration clause allows the seller to declare the entire amount of the principal and accrued interest due and payable immediately in the event of a default. Such a clause would surely lead to the loss of the property for the buyer, as well as the loss of any equity in the property that the buyer has accumulated up to that point.
The seller reaps many benefits under a contract for deed. Sellers who would have otherwise been unable to sell certain types of property are able to do so by using a contract for deed. Additionally, there are tax benefits, since the capital gains taxes can be distributed over the period of the contract instead of reported all at once. This results in substantial tax savings for the seller. However, if the seller is looking for a chunk of cash up-front at closing, the contract for deed would not be an attractive option. The most valuable benefit for the seller is that upon default by the buyer, the seller does not have to resort to foreclosure, which can be costly and time-consuming. Instead, since the seller already retains legal title as well as the deed, the seller may enforce a forfeiture of the purchaser’s interest.
Historically, contracts for deed have been ripe for abuse by predatory lenders. Therefore, the Texas legislature has added some statutory protections for buyers under the contract for deed (installment land contract), which aim to protect buyers of real property to be used as a residence from deceptive practices on the part of sellers. The protections include:
1. The seller may enforce the remedy of forfeiture and acceleration against a purchaser in default only if the seller gives the purchaser notice.
2. The purchaser has a right to cure the default within 30 days.
3. If the purchaser defaults after payment of 40% or more of the amount due or the equivalent of 48 monthly payments, the seller must proceed under a statutory power of sale through a trustee designated by the seller and may not enforce the remedy of possession or forfeiture and acceleration.
[see Tex. Prop. Code Ann. Sections 5.064, .065, .066]
Remember, regardless of whether you are using conventional financing or an alternative, purchasing a home may be the biggest investment you will ever make. Therefore, it is essential that you obtain the advice of an attorney-you will be happy that you did!
*Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.
