Op-ed: Contract for Deed: Buyer Beware

By: Clinical Professor Genevieve Hebert Fajardo

For years, we have read stories about the mortgage crisis – homeowners in foreclosure, subprime lending, and banks in distress. But in South Texas, there is another major mortgage problem that gets little attention: the contract for deed.

If you are a low-income homebuyer in Texas, you may have had difficulty getting a bank loan, and turned to a contract for deed to finance your home. Sometimes these deals are also called “lease-to-own.” With a contract for deed, you make monthly payments to the seller, and the seller keeps legal title until you pay off the home. It’s different than a traditional mortgage, where the bank gives you title, but keeps a lien on the home while you pay off the debt.

Reputable real estate lawyers will tell you: “just say no” to contracts for deed. For sellers, there are complicated rules to follow under Texas law, and you may pay stiff fines if you miss one of the requirements. For buyers, a contract for deed can put you at the mercy of dishonest sellers.

For example, you may pay for years under a contract for deed, and then find out that the seller has sold the house to a third party. You may pay off your contract for deed, but the seller disappears with your title. You may find out the seller took out her own mortgage, creating liens on your property that you didn’t know about. At the Center for Legal and Social Justice, these are only a few examples of contract for deed cases we have litigated.

These problems are rare in the world of middle-class mortgage financing, where buyers are protected by formal processes like appraisals, title insurance, closings and deed recordings. But for low-income communities in Texas, the risks of contract for deed are all too common.

If all the experts agree contracts for deed are a problem, then why do they still exist? To be sure, seller-financing fills an important gap in the mortgage marketplace. A family with $4,000 and no credit history may be able to find a home for $20,000. Buyers and sellers can complete a deal quickly – really, just as long as it takes to make a down payment and sign a short contract. A seller may be able to sell property that is low value or in need of repair, without the expenses of a title company or real estate broker.

Although contracts for deed are very common, there are better alternatives to contracts for deed that are still simple and low cost. For example, a deed and deed of trust give more protection to the buyer, and don’t subject the seller to so many technical disclosure requirements and penalties.

Before you sign a contract for deed, you should know that there are laws that protect your purchase, such as:

• The contract must be recorded in the county property records.
• The seller must give the buyer an annual accounting of payments, including the balance due, the amount paid so far and amounts paid for taxes and insurance.
• The seller must have clear title, meaning she cannot sell a property that has a mortgage or other liens on it (there are some exceptions, but they almost never apply).

If you have a contract for deed, or are thinking of buying or selling a home with a contract for deed, please contact an attorney for advice. There are often free legal services, or lawyers who can review your papers at a low cost. If you call St. Mary’s Civil Justice Clinic at 210-431-5716, we can refer you to an attorney or legal aid office in your area. Protect your home and your family by knowing how a contract for deed works, and getting help before you have a serious legal problem.