What Is a Contract for Deed in Texas?

If a homeowner in Texas wants to sell property, a contract for deed is a financing tool the homeowner can use to provide financing for the sale. This process is not the same as obtaining a mortgage on the property. A contract for deed can represent a simple transaction but typically involves significant risks for both parties.

General Process

In a contact for deed sale, the seller and buyer first must to come to an agreement on the sale price and the terms of the contract. Although the specific terms can vary from contract to contract, typically a contract for deed will require a down payment and set monthly payments. Additionally, a contract for deed requires the buyer to make payments to the seller without the use of a mortgage loan. During the transaction, the seller must provide the buyer with a warranty deed demonstrating that the seller owns the property and holds clear title.

Property Titles in Texas

In Texas, one of the primary differences between buying a property with a traditional mortgage and purchasing a property through a contract for deed is the time frame for the property title transfer. Traditionally, with a mortgage loan, the purchaser of the property will obtain title to the property at the closing of the sale. In Texas, until the purchaser pays off the mortgage, the mortgage company will hold a lien against the property and the purchaser will retain title to the property. On the other hand, a contract for deed in Texas impedes the transfer of a property's title. The titles will only transfer with the contract for deed after the buyer completes the terms of the contract.

A Complex Process

When establishing a contract for deed in Texas, the seller and buyer have to document and record the transaction. The contract should specify the full obligations and responsibilities of both parties. After signing the contract for deed, the seller of the property should record the contract at the county clerk’s office. A lawyer can create the contract of deed contract or a standard form can be purchased. If you do not have experience with contracts for deed and real estate laws in Texas, you should hire an attorney to assist you with the preparation and proper recording of this type of document.

Equity

Equity is the ownership interest you have in a property. For example, if a property has a market value of $300,000 and you owe $150,000 on the property, you hold $150,000 in equity. With a traditional mortgage in an appreciating real estate market, the buyer normally starts to build equity immediately. However, with a contract for deed, the buyer will not immediately hold any equity. In Texas, with a contract for deed, the buyer will only begin to hold equity after paying off 40 percent of the loan or making 48 consecutive monthly payments.

References

  • "Real Estate Principles"; Charles Floyd and Marcus Allen; 2002
  • "The Complete Guide to Investing in Real Estate Tax Liens & Deeds"; Jamaine Burrell; 2006

About the Author

Brian Bass has written about accountancy-related topics and accounting trends for "Account Today." He works as a senior auditor specializing in manufacturing and financial services companies for one of the Big 5 accounting firms. Bass hold a master's degree in accounting from the University of Utah.