Introduction
Many Texans assume that buying real estate means signing a deed at closing and obtaining legal title immediately. However, a less common arrangement known as a contract for deed, or executory contract, allows a buyer to take possession of property and make payments over time before receiving a deed.
Historically, these arrangements were prone to abuse. Buyers could spend years making payments, improving property, and paying taxes, only to lose everything after a default. In response, the Texas Legislature enacted extensive protections within Chapter 5 of the Texas Property Code.
Understanding these rules is important for both sellers and buyers because noncompliance can result in significant statutory liability.
What Is an Executory Contract?
The Texas Property Code defines an executory contract as a transaction in which a purchaser acquires possession of real property but the seller does not immediately convey title.
Section 5.062(a) provides:
"An executory contract is a transaction involving the sale of real property in which a person finances the purchase of the property for another person and retains title to the property as security for the purchaser's obligation."
In simple terms, the seller acts somewhat like a bank. The buyer makes payments over time while the seller retains legal title until the purchase price is paid.
Why Contracts for Deed Became Controversial
For decades, contracts for deed were frequently used in rural and lower-income markets.
Under older arrangements, a buyer could make payments for years yet lose all equity after a relatively minor default. Because title remained in the seller's name, purchasers often had fewer protections than traditional mortgage borrowers.
The Texas Legislature responded by imposing extensive disclosure and notice requirements designed to protect purchasers.
Seller Disclosure Requirements
Chapter 5 requires sellers using executory contracts to provide substantial information before closing.
For example, Texas Property Code § 5.069 requires various disclosures concerning:
- Existing liens and encumbrances;
- Property condition issues;
- Utility service availability;
- Tax obligations; and
- Insurance matters.
The purpose is straightforward: purchasers should know exactly what they are buying before entering a long-term payment arrangement.
Failure to comply can expose a seller to statutory damages and attorneys' fees.
Annual Accounting Requirements
One of the most overlooked requirements appears in Texas Property Code § 5.077.
The statute requires the seller to provide an annual accounting statement that includes information such as:
- Amount paid under the contract;
- Amount still owed;
- Taxes collected and paid;
- Insurance payments; and
- Remaining balance.
The statute provides:
"The seller shall provide the purchaser with an annual statement in January of each year for the term of the executory contract."
Many sellers mistakenly assume that because they are not traditional lenders, these reporting obligations do not apply. Chapter 5 says otherwise.
What Happens If the Buyer Defaults?
Default procedures depend heavily on how much of the purchase price has been paid and how long the purchaser has been in possession.
Texas Property Code § 5.066 establishes significant protections for certain purchasers who have made substantial payments or occupied the property for extended periods.
In many situations, sellers must provide formal notices and opportunities to cure before exercising remedies.
The law intentionally makes forfeiture more difficult than it once was.
Converting the Arrangement into a Traditional Closing
One practical consequence of Chapter 5 is that many real estate professionals prefer traditional financing transactions whenever possible.
A conventional deed and deed of trust often create clearer rights and responsibilities than an executory contract.
For sellers, traditional financing may reduce compliance burdens.
For purchasers, traditional financing generally provides stronger equity protections and a more familiar foreclosure process.
Common Mistakes Made by Sellers
Several recurring errors appear in Texas executory contract disputes:
- Failing to provide required statutory disclosures.
- Failing to provide annual accounting statements.
- Misunderstanding default notice requirements.
- Continuing to use outdated contract forms.
- Ignoring Chapter 5's strict compliance requirements.
These mistakes can transform what appeared to be a simple seller-financed transaction into expensive litigation.
Why Chapter 5 Matters Today
Although contracts for deed are less common than they once were, they continue to appear in rural property transactions, owner-financed sales, inherited property sales, and situations where buyers cannot obtain conventional financing.
Texas Property Code Chapter 5 reflects a legislative judgment that purchasers under executory contracts deserve protections similar to those available in traditional mortgage transactions.
Both buyers and sellers should understand these requirements before entering such an arrangement.
Conclusion
Contracts for deed may appear simple, but Texas law treats them as highly regulated transactions. Chapter 5 of the Texas Property Code imposes detailed disclosure, accounting, and notice requirements designed to protect purchasers from losing years of investment through unfair forfeitures.
Whether you are considering buying property through owner financing or selling property through an executory contract, understanding these statutory obligations before signing can prevent significant legal and financial problems later.
Disclaimer: This article is for educational purposes only and does not constitute legal advice. Consult a qualified Texas attorney regarding your specific situation.
At David C. Barsalou, Attorney at Law, PLLC, we help clients navigate business, family, tax, estate planning, and real estate matters ranging from document drafting to litigation with clarity and confidence. If you’d like guidance on your situation, schedule a consultation today. Call us at (713) 397-4678, email barsalou.law@gmail.com, or reach us through our Contact Page. We’re here to help you take the next step.
