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Homeowners to be better protected under legislation by Rep. Canales that is approved by House committee

By DAVID A. DÍAZ

Legislativemedia@aol.com

Legislation filed by Rep. Terry Canales, D-Edinburg, would help protect thousands of Texans who purchase their homes through contracts for deed from losing their investments.  Contracts for deed oftentimes are used when traditional financing is not available. 

Rep. Armando Walle, D-Houston, is a joint author of the measure, known as House Bill 2091. 

The House Committee on Business and Industry on Thursday, April 11, unanimously approved HB 2091. HB 2091 is awaiting action by the House Committee on Calendars, which decides which major bills are scheduled for debate and vote by the full House of Representatives. 

HB 2091 would automatically require contracts for deed to convey (transfer) the title to the homebuyer, and would encourage these contracts to be legally recorded, which establishes ownership of the residence. 

“Contracts for deed, also known as executory contracts, are contracts for the sale of land – usually residential property – where the seller keeps title to the property until the buyer has paid the full contract price. Most of these contracts are long-term arrangements, lasting eight to 10 years on average,” Canales, an attorney, explained.  “In that time, lots of things can go wrong.  Sellers die, get divorced, or just disappear. Buyers have a difficult time getting homestead exemptions for their taxes, buying insurance, refinancing, or doing other things property owners with a deed can do.” 

A deed is a written instrument that, when executed and delivered, convey (transfer) title to or an interest in real estate.

 Canales said HB 2091 would help improve “an outdated system of property transactions.” 

“Unfortunately, contracts for deed are structured in a way that allows for abusive practices to arise. Buyers who complete their payment are not guaranteed the conveyance of title, and if the buyer defaults, they may lose any payment that they have already paid. When not recorded, buyers face less protection and risk losing their property,” Canales said. 

Over the past 25 years, the Legislature has enacted many consumer protections for contracts for deed buyers. However, a 2012 study commissioned by the Texas Department of Housing and Community Affairs (TDHCA) found that despite these reforms, contracts for deed continue to be problematic transactions for consumers, the South Texas legislator noted. 

Canales noted TDHCA data – he described those statistics as “alarming facts” – about contracts for deed. 

“Approximately 20 percent of homestead owners purchased property with an unrecorded contract for deed, and an estimated 6,597 homestead owners still use unrecorded contracts as of 2012,” Canales said. “Additionally, TDHCA reported that 47 percent of homeowners who use contracts for deed have not obtained a homestead tax exemption.” 

Homestead exemptions remove part of a home’s value from taxation, so they lower the homeowner’s property taxes. 

Colonia contracts 

Problems caused by contracts for deed, especially in colonias in Texas, were highlighted in a feature article, Colonia Contracts, published by UTLaw Magazine in its December 2012 edition  (www.utexas.edu/law/magazine/2012/12/10/colonias-contracts/

Key excerpts from Colonia Contracts follow: 

Many of Texas’ poorest residents, perhaps half a million according to some studies, live in colonias – a Spanish term referring to informal housing settlements located near the Texas-Mexico border. Similar communities, known as “informal homestead subdivisions,” exist on the outskirts of cities in the interior of Texas. Residents of these communities often endure difficult conditions such as the lack of reliable plumbing or electricity and shoddy housing construction. 

But they also often endure the risks and financial dangers that come with a lack of a bank-financed mortgage on their property. Many colonia residents buy their land through “contracts for deed,” which are often issued by the original property owners as “pay to own” contracts, and may be as informal as a handwritten deal written on notebook paper. 

In 2011, the Texas Sunset Advisory Commission requested that the Texas Department of Housing and Community Affairs commission a study to assess the prevalence of contracts for deed in colonias. Peter M. Ward, C.B. Smith Sr. Centennial Chair in US-Mexico Relations at the LBJSchool; Heather Way, ’96, director of the LawSchool’s Community Development Clinic; and Lucille Wood, 2011–2012 Research Fellow at the WilliamWayneJusticeCenter for Public Interest Law, were contracted to direct the study. 

The informality of contracts for deed means that colonia residents are often at risk of unclear title to their homes, which can complicate sales immensely and put property owners at great risk. 

“Buyers risk losing their properties, their homes, and all of the money they’ve put into those properties and homes,” said Wood. “Everything.” 

Bill Analysis 

In a separate accounting, the House Research Organization, which is the research arm of the House of Representatives, provided the following background and highlights of the Canales/Walle legislation: 

Background 

Executory contracts for the sale of residential property have long been disfavored by the Legislature, as they are often-abusive transactions that are poorly understood by consumers and withhold legal title to homestead property until many years after the buyer has built a home and made other expensive improvements. 

To discourage the use of these instruments, various consumer protections and penalties have been enacted over the past two decades. Past reforms aimed to protect buyers’ equity by requiring sellers to record contracts, to provide buyers with annual accounting statements, and to conduct an equity-protection sale much like a traditional foreclosure if the buyer defaulted after paying more than forty percent of the purchase price.  

Still, significant misunderstandings about the nature of executory contracts remain among sellers, buyers, and even judges and attorneys.  

Problems arising from their use, such as eviction of purchasers whose contractual rights have not been legally terminated, and sellers who die or disappear without delivering title, also persist. 

 The absence of any penalty for a seller’s failure to record the contract also has severely limited the effectiveness of that requirement. 

Because of persistent abuse of purchasers under executory contracts and misunderstanding by sellers of their own rights, the time has come to end the use of these instruments. But since property owners are unlikely to stop using them, the best way to eliminate executory contracts for deed is to redefine the legal relationships of the parties by statute to reflect that legal title is conveyed upon recording of the contract.  

Purpose 

HB 2091 amends the Property Code to change the remedies available to a seller when the buyer defaults, so that once a contract has been recorded, the only remedy available is an equity- protection sale, currently required only when the purchaser has paid more than forty percent of the contract price.  

The bill also provides the same penalty for a seller’s failure to record the contract as current law provides for failure to deliver recorded title after the buyer completes a purchase.  The penalty is capped at the value of the property.   

HB 2091 also changes the nature of executory contracts to a conveyance of title subject to a lien retained by the seller for the purchase price stated in the contract.  Because many contracts inadvertently leave out a full legal description, the bill explicitly allows parties to supply that information later. Because it will still be the case that not all executory contracts will be recorded, and because the statute does not operate retroactively, the bill retains existing law allowing a buyer to unilaterally convert an executory contract to legal title.  

HB 2091 explicitly retains all other legal and equitable rights available to a purchaser under other law. 

EDITORS NOTE: 

Contracts for Deed are/were commonly used here in the Valley.

 

 

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