A Contract for Deed in Houston, Texas used to be a favorite of Real Estate investors as a way to sell an investment property often to a current tenant, because they were easy to draft and execute, and also easy for an investor to evict the buyer after a default. Contract for deed homes, would be a tenant dreaming of owning their own home. Tenants believe they’re getting a good deal because now that rent payment was going towards the purchase of a home. The investor was able to keep the asset in their name, and if the buyer defaulted a simple eviction process and the investor owned the home in its entirety once again. This is why Contract for deed homes could be a benefit for both parties depending on objectives.  

Is Contract for Deed Dead ?

In 2005 Texas changed the law regarding “Executory Contracts,” and many people even believed the Contract for Deed to be dead as a method of transferring property. “Executory Contracts” include contract for deed, lease-purchases, and lease-options. Texas law did not outlaw these methods: contract for deed, lease-purchases, or lease-options, but it has made them perilous for those still interested in trying to use them.

Contract for Deed Changes

The changes in the law gave homebuyers that found themselves in this precarious scenario much more protection. The changes placed some serious burdens and liabilities on the real estate seller that does not follow the new regulations for “executory contracts.” If the proper procedures are not followed, then a home buyer can rescind the contract for deed as well as anything else under the “Executory Contract” deal and receive a full refund of all payments, as well as file suit under the Texas Deceptive Trade Practices Act, where penalties can be debilitating to a real estate investor. It is pretty clear that neither homebuyers nor serious real estate investors should ever use Contract for deed homes or  any of these essentially defunct “Executory Contract” methods for the transfer of real estate. The risks for real estate investors in Houston, Texas do not outweigh the perceived value of retaining the asset, especially when retention of an asset can be accomplished by other means.

Contract For Deed May Not Be Best Option For Real Estate Investors

What should the serious real estate investor in Houston, Texas use to sell their property, retain an asset, essentially get to play the bank, and eliminate some of the perils of that old contract for deed scenario. Owner financing is an excellent way for a real estate investor to flip properties, but still retain an asset in the form of a note and deed of trust, and they get the opportunity to play bank. To be sure there are still statutory requirements that must be met in order to properly transfer real estate by owner financing, and these requirements increase the more transactions you seller finance over a given period of time.

Owner financing also has the benefit of broadening the market for flipping a property, turning what may not be a great market into an excellent Seller’s market. Financing as an owner-seller allows a real estate investor to offer the property to buyers that may struggle getting approved for traditional financing or are just beginning to rebuild their credit. This scenario does not even touch upon hard money lending, which has it’s own issues, limitations, and requirements.

Things to Consider When Utilizing Contract For Deeds

There are numerous legal trip wires in the real estate investment world from Dodd-Frank, Texas SAFE Act, and the Texas Property Code. More in depth coverage of these laws and their impact on the real estate investors using methods outside of traditional finance may be covered in additional articles. However, real estate investors should consult a qualified real estate attorney when considering potential alternative methods for transferring real estate.

-Written by Brent Smith (Partner at Guerra | Days Law Group)