In 2001, the Texas Legislature implemented protection for
purchasers under contract for deeds on a statewide basis.
This augmented earlier attempts in 1995 that limited pro-
tection to purchasers in counties along the border. In 2005, the
79th Texas Legislature again strengthened the safeguards for
purchasers, eliminating many of the problems that emerged
after the 2001 changes. Some of the measures became effective
Sept. 1, 2005, while others became effective Jan. 1, 2006.
The new rules govern both existing and newly executed
contracts for deed, which place greater burdens on residential
lenders and brokers. Failure to comply with the new provi-
sions subjects sellers who finance residential loans, lenders
and brokers to a Deceptive Trade Practices Act (DTPA) viola-
tion and in some cases as much as $500 per day in damages.
The first part of this article discusses the rules that apply
after Sept. 1, 2001, with noted exceptions. The second part
discusses the new rules that became effective either Sept. 1,
2005, or Jan. 1, 2006.
Two Types of Financial Arrangements
Owners or lenders can finance the sale of real estate and
retain a security interest two ways. The most common is a
real estate lien note secured by a deed of trust. The other is a
promissory note secured by a contract for deed. Both methods
have advantages and disadvantages for lenders and buyers.
Buyers prefer the deed of trust. At closing, the buyer re-
ceives both title and possession of the property. If a default oc-
curs, the lender may foreclose under strict statutory guidelines
to divest the buyer of both title and possession. If the foreclo-
sure sale generates a surplus, the excess goes to the buyer.
In the past, lenders preferred the contract for deed, some-
times referred to as a contract of sale or an executory con-
tract for conveyance, which was used frequently with seller
financing. At closing, the buyer took possession but not title
to the property. The seller retained title until all or part of the