A Lawyer s Guide to Converting Contracts for Deed

Transcription

1 2017 A Lawyer s Guide to Converting Contracts for Deed 0 Texas RioGrande Legal Aid 2017

2 A Lawyer s Guide to Converting Contracts for Deed Texas Community Building with Attorney Resources, a special project of Texas RioGrande Legal Aid, provides free legal counsel, pro bono referrals, community education, and legal resources to eligible nonprofits and small businesses in the State of Texas. Texas RioGrande Legal Aid provides free legal services and information to low-income individuals. Texas CBAR texascbar@trla.org 4920 N. IH-35, Austin, Texas phone: or (800) X 2760 fax: This publication was made possible by the generous support of the State Bar of Texas Real Estate, Probate, and Trust Law Section.

3 A Lawyer s Guide to Converting Contracts for Deed

4 A Lawyer s Guide to Converting Contracts for Deed Contents 1. OVERVIEW ANALYZING A CONTRACT FOR DEED... 2 Is it a Contract for Deed?... 2 Which Contracts for Deed Qualify for Protection?... 2 Evaluating a Purchaser s Options... 3 Common Contract for Deed Scenarios... 3 Should the Purchaser Record the Contract for Deed?... 5 Seller's Requirement to Record a Contract for Deed DEDUCTIONS FROM PAYMENTS RELATED TO CONTRACTS FOR DEED RIGHT TO CANCEL CONTRACT WITH FULL REFUND... 9 Seller s Failure to Properly Plat or Subdivide... 9 Seller s Failure to Provide Water and Sewer Service Seller s Failure to Disclose Property Condition Seller s Failure to Disclose Tax Payment and Insurance Coverage Oral Agreements Prohibited Seller s Failure to Maintain Fee Simple Title DECEPTIVE TRADE PRACTICES ACT VIOLATIONS Seller s Failure to Disclose Property Condition Seller s Failure to Disclose Tax Payment and Insurance Coverage Oral Agreements Prohibited Seller s Failure to Inform Insurer of Contract for Deed Seller s Failure to Maintain Fee Simple Title CIVIL AND CRIMINAL PENALTIES RELATED TO CONTRACTS FOR DEED Civil Penalties Criminal Penalties ADDITIONAL DISCLOSURE REQUIREMENTS Seller Must Deliver Spanish Language Documents Seller Must Notify of Right to Cancel Seller Must Disclose Financing Terms Other Disclosures Seller s Requirement to File Form

5 A Lawyer s Guide to Converting Contracts for Deed 8. PROCESS FOR AUTOMATIC CONVERSION UNDER TEXAS PROPERTY CODE SECTION Requirements Providing notice to the seller When to file the contract for deed PROCESS FOR MANDATORY CONVERSION UNDER HB Two Ways to Convert the Contract for Deed Process to Convert (See Appendices D-H for sample documents.) Checklist of Documents to Obtain from Client VOID CONTRACT TERMS RELEASE OF LIEN FOLLOWING CONVERSION OF A CONTRACT FOR DEED APPENDICES... 1 Appendix A- Example of Contract for Deed... 2 Appendix B Example of Wrap-around Mortgage... 4 Appendix C Affidavit to File with Contract for Deed... 7 Appendix D -- Sample Letter, Tex. Prop. Code Appendix E - Sample Letter - Tex. Prop. Code Appendix F - Sample Promissory Note Appendix G - Sample Deed of Trust Appendix H - Sample Warranty Deed with Vendor s Lien Appendix I - Sample Affidavit to Seller Appendix J Sample Release of Lien Appendix K - Questions for Contract for Deed Cases... 35

6 A Lawyer s Guide to Converting Contracts for Deed 1. OVERVIEW Since the 1950 s, contracts for deed have been a frequently used financing mechanism for the sale of real property to low-income families. The arrangement may also be referred to as a contract for sale or an executory contract for conveyance. Such transactions are common when the owner finances the sale of the property. Under this arrangement, the seller retains title to the land until the promissory note is paid. Unlike a real estate note secured by a deed of trust, if a purchaser is late with payments, the contract for deed allows the seller to accelerate the note, terminate the contract, retain all payments made by the purchaser, and take possession of the property. Typically, such contracts have very high interest rates. Because of the numerous problems experienced by unknowing purchasers of residential property, contracts for deed are highly regulated and subject to protections at each stage of the contract s negotiation and purchase. The laws relating to contracts for deed are located in the Texas Property Code and also in the Local Government Code. Some remedies vary depending on the property's distance from the border and the date of the contract. Some provisions do not apply to option-to-buy lease contracts. Various remedies are available for violations of contracts for deed laws. These remedies include allowing purchasers to cancel the contract and receive their payments back and allowing purchasers to sue for Deceptive Trade Practices Act violations. Knowledge of these remedies can be helpful to attorneys if a seller is hesitant about completing the deed documents. The purpose of this Guide is to introduce the volunteer attorney to the potential issues raised by contracts for deed, the various laws applicable to contracts for deed, and the multiple remedies available to purchasers and their attorneys. 1

7 A Lawyer s Guide to Converting Contracts for Deed 2. ANALYZING A CONTRACT FOR DEED On September 1, 2015, HB 311 became effective. The Act gives purchasers under a contract for deed new title protections and the immediate securing of their equity in the property if their contract for deed is recorded. The law mandates that a written contract for deed that is recorded in the real property records of the county in which the property is located must be treated as a warranty deed with vendor s lien. The treatment of the contract for deed as a warranty deed with vendor s lien transfer legal title immediately to the purchaser upon recording and must be honored by taxing jurisdictions, lenders, and title companies, among others. The new automatic conversion will require sellers to formally foreclose on a property in default rather than relying on contract for deed default provisions. The lien on the property is for the amount of the balance remaining on the contract minus allowable deductions as discussed in other sections of this Guide. If a purchaser uses the automatic conversion process, the seller is relieved of two obligations the obligation to maintain insurance on the property and the obligation to deliver a warranty deed to the purchaser after the completion of all purchase payments. HB 311 does not negate any other prior protections and remedies available to contract for deed purchasers. The strong protection and simplicity of the automatic conversion process might seem to indicate that recording a contract for deed is an immediate first step for all purchasers. However, a purchaser has most likely agreed to a contract for deed financing mechanism because the purchaser lacks access to more traditional forms of credit. Sellers also typically face challenges that preclude them from selling the real property under a traditional scheme. The individual purchase scenario should be carefully evaluated by attorneys working with a contract for deed purchaser. See Appendix J for an intake questionnaire. Is it a Contract for Deed? The form of the contract does not matter. However, to be considered an executory contract for the sale of real property, a contract should mention the sale rather than the leasing of a property. See Appendix A Which Contracts for Deed Qualify for Protection? Not all executory contracts for the sale of real property qualify for the statutory protections for the legal protections afforded by Subchapter D of the Texas property code. Section of the Texas Property Code sets out the following requirements: The property must be intended for residential use. 2

8 A Lawyer s Guide to Converting Contracts for Deed The agreement must state that delivery of the deed will occur more than 180 days after the execution of the contract. In order for a rent to own agreement or lease agreement to qualify as a contract for deed, it must have a purchase option or must be executed concurrently with one. Evaluating a Purchaser s Options With the help of an attorney, a purchaser may have the following options to consider: Record the contract for deed to activate the automatic conversion process and file the contract in the appropriate public records. Utilize the mandatory conversion process and attempt to renegotiate the agreement taking advantage of the DTPA claims as leverage for the negotiation. Cancel the contract for deed and request the return of all payments made to the Seller. The right choice for the purchasers will depend on several factors: Does the Seller have clear title? Are the financial terms favorable to the purchaser? How many payments remain under the contract? Did the sale involve a wrap-around mortgage? Did the Seller provide annual accounting statements? Did the Seller provide the required notices and disclosures at the time of sale? Is the property platted? Have water and sewer? When was the contract signed? Is the property located in proximity to the Texas-Mexico Border? Common Contract for Deed Scenarios The following scenarios present common issues when a purchaser has a contract for deed. Seller has clear title and the sale terms were favorable to purchaser: In this scenario, the best choice for the purchaser is usually to record the contract for deed in the property records. See Section 8 Seller does not have clear title: If the Seller co-owns property with others or if there is a cloud on the seller's title, the purchaser usually should still file the contract for deed to protect their interest in the property while considering whether to cancel the contract and demand the return of their funds or whether to try to force the seller to clear the title to the property. 3

9 A Lawyer s Guide to Converting Contracts for Deed The contract for deed includes a wrap-around mortgage: A wrap-around mortgage is when an underlying superior mortgage has not been paid off and is extended by the Seller to the contract for deed purchaser. Some transactions involve a document that incorporates the prior mortgage into the contract for deed. See Appendix B. Other transactions do not reference a prior mortgage and instead function as informal assumptions with the purchaser making payments directly to the original mortgage lender or directly to the seller with the expectation that the seller will continue to make payments on the underlying mortgage. If the transaction is completed without the approval of the lender because the seller has a cloud on the title, the purchaser is at risk of losing their home. The risk of recording is the first analysis to make. If only a few payments remain, the Purchaser's best option may be to finish making all payments and then record the contract for deed. If the balance on the contract for deed remains significant, the attorney should discuss remedies available under the Texas Property Code with the Purchaser. See Sections 4-7 of this Guide. The Seller did not receive property disclosures but has made many payments under the contract: In this situation, even though the purchaser may have the right to rescind the contract, if the purchaser is deeply invested in the contract and the seller does not have the funds to repay under a rescission, the purchaser may be able to renegotiate the amount owing under the contract. In this situation, using the automatic conversion process is the cleanest way to document the new amount owed. The property does not have the required live on conditions and/or is not platted: The attorney should investigate the likelihood of platting and future services for the property. If the Seller does not have the funds to pay for these subdivision requirements, the best option for the purchaser may be to cancel the contract and demand a return of all funds paid under the contract. See Section 4 of this Guide. If the attorney believes that the Seller has the resources to plat the property and provide the required services, the attorney may sue the Seller and may be able to make use of the special enumerated sections of the Texas Deceptive Trade Practices Act. See Section 5 of this Guide. In addition to the options discussed above, when the Seller sold more than one property, the purchaser has additional rights. The attorney may also be able to enlist the assistance of a local county attorney or local attorney general's office. See Section 6 of this Guide. A seller may face additional civil penalties based on the location of the property and its proximity to the international border. If the Property is located within the statutory proximity of the border, the Local Government Code provides for criminal 4

10 A Lawyer s Guide to Converting Contracts for Deed penalties against the Seller. These actions must be brought by the attorney general. In these situations, there may be multiple purchasers in the same situation as your client. Enlisting the attorney general s office may be the best way to achieve your client s goals. See Section 6 of this Guide. Should the Purchaser Record the Contract for Deed? The ability to automatically convert the contract for deed into a warranty deed with vendor s lien raises an immediate issue for the purchaser of whether to record or not to record. The most important factor in this decision is whether the Seller has clear title. If the Seller has clear title the answer will be to record in most situations. If the Seller does not have clear title, the purchaser must evaluate the risk of recording the contract for deed. If the seller's title is clouded by a lien securing a deed of trust and that lien is not extinguished prior to the contract for deed sale, in most situations, the deed of trust securing the mortgage makes resale of the property a default event. The lender may exercise the option to foreclose on the property. If the lender forecloses on the property, the purchaser s only recourse will be damages from the Seller. By recording the contract, a purchaser runs the risk of alerting a lender to the underlying resale. In some circumstances, the wrap has actually operated as an informal assumption with the lienholder receiving payments directly from the purchaser. However, if the contract for deed is recorded, the lender will be alerted to the fact that another claim, although junior, exists on the property. An attorney should counsel their client thoroughly regarding this decision. Seller's Requirement to Record a Contract for Deed Both the Local Government Code and the Texas Property Code include a requirement that the seller record the contract for deed. Local Government Code Section requires the seller to record all sales contracts within 30 days after the date a lot is sold. Texas Property Code Section requires that a seller record a contract for deed on or before the 30 th day after the contract for deed is executed. Effective September 2015, a seller's failure to record the contract for deed subject the seller to a liquidated damages penalty in the amount of $500 per year for each year of noncompliance and reasonable attorney's fees. 5

11 A Lawyer s Guide to Converting Contracts for Deed An important note is that a contract for deed with a legal property description that references an unplatted or unrecorded subdivision may still be recorded in the real property records. See Texas Property Code, 5.076(b). 6

12 A Lawyer s Guide to Converting Contracts for Deed 3. DEDUCTIONS FROM PAYMENTS RELATED TO CONTRACTS FOR DEED The seller must provide an annual accounting statement to the purchaser; a seller's failure to deliver the statement will result in penalties that provide a self-help remedy to the purchaser. The Texas Property Code provides a simple process to obtain liquidated damages. The Local Government Code provides a process that is slightly more complicated but which may provide a higher deduction amount for a purchaser when the seller is only selling the one lot. Texas Property Code requires the seller to provide an annual accounting statement in January of each year. If the statement is mailed, it must be postmarked by January 31 st. The following information must be included in the annual accounting statement: (1) The amount paid under the contract; (2) The remaining amount owed under the contract; (3) The number of payments remaining under the contract; (4) The amounts paid to taxing authorities on the purchaser's behalf if collected by the seller; (5) The amounts paid to insure the property on the purchaser's behalf if collected by the seller; (6) If the property has been damaged and the seller has received insurance proceeds, an accounting of the proceeds applied to the property; and (7) if the seller has changed insurance coverage, a legible copy of the current policy, binder, or other evidence that satisfies the requirements of Section 5.070(a)(2). The following penalties will apply for failure to comply with the requirement: (1) A seller of only one property at a time is liable for liquidated damages of $100 for each annual statement he fails to timely provide and attorney s fees. (2) A seller of two or more properties is liable for $250 a day for each day after January 1 not to exceed the fair market value of the property as well as reasonable attorney s fees. Texas Property Code allows a purchaser without taking judicial action, to deduct the penalties that a seller owes to the purchaser from any amounts owed to the seller under the contract. Local Government Code Sec requires an annual accounting statement of all amounts paid and balances due by January 31 st of each year. If the seller does not send a statement, the purchaser may notify the seller of his intent to deduct 15 % of each monthly payment until the purchaser receives the statement. Twenty-five days after 7

13 A Lawyer s Guide to Converting Contracts for Deed the seller receives notice, the purchaser may begin the deductions, and the seller is not entitled to reimbursement for the amount deducted. 8

14 A Lawyer s Guide to Converting Contracts for Deed 4. RIGHT TO CANCEL CONTRACT WITH FULL REFUND A purchaser has the right to cancel and rescind a contract for deed for any reason by providing written notice by the 14 th day after the date of the contract. Section of the Texas Property Code sets out the manner of providing notice and the seller's obligations upon receiving notice. This section also requires the seller to provide a notice of cancellation form to the purchaser at the time the purchaser signs the contract for deed. In addition to the cancellation provision within 14 days for signing the contract, the purchaser may be entitled to cancel the contract using the provisions below. Seller s Failure to Properly Plat or Subdivide Section of the Texas Property Code grants purchasers the right to cancel and rescind a contract at any time if the purchaser learns that the seller has failed to properly subdivide or plat the property according to state and local law. Under Section (c) of the Texas Local Government Code, the purchaser under a contract for deed may make a written request to the proper authorities to determine whether a plat is required for the land in question. If a plat is required, the authorities must disclose if one has been prepared, reviewed, and approved. To cancel and rescind the contract, the purchaser delivers written notice to the seller in one of three ways: (1) Personally; (2) by telegram; or (3) by certified or registered mail, return receipt requested. Within ten days after receiving the notice, the seller must deliver to the purchaser: a signed, written notice that seller intends to subdivide or plat the property within 90 days after receiving the notice to cancel and rescind, or return all payments of any kind received from the purchaser, refund any amounts paid for property taxes he or she paid during the contact, and reimburse for the value of any improvements added to the property. Until all the payments and expenses have been returned and reimbursed, the seller may not terminate the purchaser s right of possession. If the seller provides the purchaser written evidence that the platting was completed in accordance with state and local law before the end of the 90 days, the purchaser may not cancel and rescind the contract. The written evidence must be delivered in one of the three ways mentioned above. 9

15 A Lawyer s Guide to Converting Contracts for Deed Seller s Failure to Provide Water and Sewer Service If a person bought a lot that does not have water or sewer services after July 1, 1995 or September 1, 2005 (depending on the location), the purchaser may file suit to declare the sale of the property void and recover the market value from the subdivider of any permanent improvements, actual expenses as a result of the failure to provide adequate water and sewer facilities, court costs, and reasonable attorney s fees. Local Government Code Section Seller s Failure to Disclose Property Condition Before a contract is signed, the seller shall provide the purchaser with a current survey and any documents describing liens on the title and the condition of the property in a particular form. The required disclosure of the condition is very detailed. Texas Property Code Section Seller s Failure to Disclose Tax Payment and Insurance Coverage Before a contract is signed the seller shall provide the purchaser with a tax certificate for each taxing unit that collects taxes on the property and a legible copy of any insurance policy on the property. Texas Property Code Section Oral Agreements Prohibited A contract is not enforceable unless it is in writing and signed. The seller shall include in a separate document or in the contract a statement the prohibition on oral agreements in 14 point boldfaced type. Texas Property Code Section Seller s Failure to Maintain Fee Simple Title A seller must maintain title free from any liens or other encumbrances to a property. Texas Property Code Section

16 A Lawyer s Guide to Converting Contracts for Deed 5. DECEPTIVE TRADE PRACTICES ACT VIOLATIONS Subchapter D of the Texas Property Code provides extensive protection for purchasers under contract for deed in the form of disclosures required by the seller. The failure to make several of these required disclosures are specifically enumerated violations of the Deceptive Trade Practices Act and provide for treble damages. In addition to providing a strong remedy, the applicability of the DTPA may offer negotiation leverage to a purchaser. As with other DTPA claims, suit must be brought within 2 years of the seller's failure to disclose or the purchaser's discovery of the failure. Texas Business and Commerce Code Section Seller s Failure to Disclose Property Condition Before a contract is signed, the seller shall provide the purchaser with a current survey and any documents describing liens on the title and the condition of the property in a particular form. The required disclosure of the condition is very detailed. Texas Property Code Section Seller s Failure to Disclose Tax Payment and Insurance Coverage Before a contract is signed the seller shall provide the purchaser with a tax certificate for each taxing unit that collects taxes on the property and a legible copy of any insurance policy on the property. Texas Property Code Section Oral Agreements Prohibited A contract is not enforceable unless it is in writing and signed. The seller shall include in a separate document or in the contract a statement to regarding the prohibition of oral agreements in 14 point boldfaced type. Texas Property Code Section Seller s Failure to Inform Insurer of Contract for Deed If proceeds under an insurance policy are disbursed, both the purchaser and seller must insure proceeds are used to repair the property. Texas Property Code Seller s Failure to Maintain Fee Simple Title A seller must maintain title free from any liens or other encumbrances to a property. Texas Property Code Section

17 A Lawyer s Guide to Converting Contracts for Deed 6. CIVIL AND CRIMINAL PENALTIES RELATED TO CONTRACTS FOR DEED Government attorneys are authorized to bring additional enforcement actions against certain sellers. Enlisting the assistance of the local attorney general or county attorney may be an effective tool. Civil Penalties Local Government Code Section provides a civil penalty for the following violations in counties within 50 miles of the International Border or counties within 100 miles of the International Border that contain the majority part of a city with a population of 250,000 or greater: A person who allows a sale of a lot that has not been properly platted; A subdivider or agent who allows a subdivision or ingress or egress to become a public health nuisance; or A subdivider who fails to provide the water or sewer facilities described on the plat. The penalties may not be less than $500 or more than $1000 for each violation and for each day of a continuing violation, and may not exceed $5,000 a day. Penalties also include court costs, investigative costs, and attorney s fees for the governmental unit bringing the suit. If the conveyance of the lot becomes a nuisance, the penalty increases to an amount not less than $10,000 or more than $15,000. Local Government Code Sections and provide civil penalties and other enforcement remedies for failure to plat in a subdivision that is located in a county located more than 100 miles from the International Border and that either 1) lies outside of the limits of a municipality or 2) lies in a political subdivision that is eligible for and has applied for financial assistance under Section , Water Code, or Subchapter K, Chapter 17, Water Code. Applicable penalties apply to: A person who allows a sale of a lot that has not been properly platted; A subdivider or agent who allows a subdivision or ingress or egress to become a public health nuisance; or A subdivider who fails to provide the water or sewer facilities described on the plat. The penalties may not be less than $500 or more than $1000 for each violation and for each day of a continuing violation, and may not exceed $5,000 a day. Penalties also 12

18 A Lawyer s Guide to Converting Contracts for Deed include court costs, investigative costs, and attorney s fees for the governmental unit bringing the suit. The Attorney General, the District Attorney, the County Attorney, or the Criminal District Attorney of the County in which the subdivision is located may bring the following enforcement actions: Enjoin the violation or threatened violation of model subdivision rules adopted under Section of the Water Code; Enjoin the violation or threatened violation of a requirement or rule adopted by a commissioners court under Subchapter C of the Local Government Code; Recover civil and criminal penalties, attorney s fees, litigation costs, and investigation costs related to the injunctive action discussed above; and Compel platting as required by Subchapter C of the Local Government Code. Local Government Code Sections establishes a process by which residents of lots affected by enforcement actions may continue to receive services from public utilities during the continuation of the action. Criminal Penalties Local Government Code Section subjects a seller to a Class A misdemeanor charge if the seller or agent makes any false statement in advertising a property for sale or lease, including statements about utility availability and pre-sale disclosures about property conditions. Local Government Code Section subjects a subdivider to a Class A misdemeanor charge if the subdivider knowingly fails to file a plat, fails to timely provide for the construction or installation of water, sewer, electric or gas service in a timely manner, or conveys land without such utilities. If the subdivider affects five or more residences, the offense is a state jail felony. 13

19 A Lawyer s Guide to Converting Contracts for Deed 7. ADDITIONAL DISCLOSURE REQUIREMENTS Subchapter D of the Texas Property Code requires the following additional disclosures regarding the contract for deed. A seller who violates these sections may be liable for a general DTPA violation as well as actions for common law fraud. Seller Must Deliver Spanish Language Documents Local Government Code Section requires the seller deliver Spanish language versions of all documents if requested or when Spanish is used during the negotiations. See also, Texas Property Code Section Seller Must Notify of Right to Cancel Texas Property Code Section requires seller to notify purchasers in writing of right to cancel within 14 days after signing contract. Seller Must Disclose Financing Terms Before a contract is signed the seller shall provide the purchaser with a written statement that provides the purchase price of the property, the interest rate, the dollar amount if the interest rate is variable, the total amount of principal and interest to be paid under the contract, the late charge that may be assessed and the fact that the seller may not charge a prepayment penalty. Texas Property Code Section Other Disclosures Texas Property Code disclosure regarding possible annexations, and Texas Property Code disclosure of under-surface conditions. Seller s Requirement to File Form 1098 Sellers in the home selling or lending business are required to file IRS Form 1098 if they receive $600 or more in mortgage interest in a year from an individual. However, sellers who are not in these businesses are not required to file Form 1098; purchasers report their interest payments on schedule A. 14

20 A Lawyer s Guide to Converting Contracts for Deed 8. PROCESS FOR AUTOMATIC CONVERSION UNDER TEXAS PROPERTY CODE SECTION Requirements To use the process for automatic conversion, Section requires the following: 1) the contract for deed must be written, and 2) the contract must be recorded. Section does not require that contract for deed to be notarized; however, instruments dealing with real property are required to be notarized by Texas Property Code Section A workaround for a purchaser whose contract for deed is not notarized is to execute an affidavit describing the sale and attaching the contract for deed as an exhibit. The affidavit should identify the parties and include a legal property description. The affidavit should also state the amount owing under the contract at the time of execution of the affidavit, especially if the purchaser is using deductions for seller's failure to provide annual accounting statements as discussion above. See Appendix C. This section applies to all written contracts for deed no matter when they were signed. Any form of written contract will meet the legal requirements of the law. If the contract for deed is unclear or spotty in the details of the transaction, an affidavit reciting the terms of the agreement may be helpful. Providing notice to the seller The code does not require the purchaser to provide notice to the seller either prior to or after recording the contract for deed. However, the circumstances may suggest providing the notice, especially if the purchaser is able to take advantage of the statutory deductions allowed by the Property Code. When to file the contract for deed A contract for deed should be filed by the purchaser as soon as possible to achieve the benefits of the law. In addition, the law allows the purchaser to file a written contract for deed even after the seller has begun the contract for deed default process; filing the contract for deed will trigger the formal foreclosure procedure. 15

21 A Lawyer s Guide to Converting Contracts for Deed 9. PROCESS FOR MANDATORY CONVERSION UNDER HB 1823 Two Ways to Convert the Contract for Deed Texas Property Code Section (not applicable to option contracts) provides for the delivery of legal recordable title to the purchaser upon one of the following two conversion methods: 1. Payment in full of the entire amount remaining under the contract, or 2. Conversion of the contract interest into title and mortgage lien upon delivery from the purchaser to the seller of a promissory note for the full amount remaining on the contract, containing the same interest rates, late fees and due dates as the contract. Process to Convert (See Appendices D-H for sample documents.) Determine the balance remaining on the contract using receipts and the annual accounting statement to create payment history. Be sure to include all late fees and interest that may have accrued. If purchaser has not received an annual accounting statement or is unsure of the balance, request the balance under Texas Property Code Section If the balance is known, prepare a promissory note pursuant to Texas Property Code Section Draft a letter to seller indicating intent to convert under Texas Property Code Section and tender Promissory Note. Also request the name and address of the seller s desired trustee for the deed of trust pursuant to Texas Property Code Section Send letter and promissory note, certified, return receipt requested. The Promissory Note must contain the same terms as the contract regarding the duties of the purchaser and seller, including the same monthly payment amount, due date, interest rate, and applicable late fees and penalties. (But see, void contract terms above.) The Deed of Trust must contain any warranties required by the contract and convey recordable legal title, secure the purchaser s payment and performance under the note and deed of trust, convey the property to the trustee, in trust, and confer on the trustee the power of sale in the event of default. Indicate that Seller must do one of the following within ten days of receiving the Promissory Note: deliver to the purchaser a written explanation containing a legally justifiable reason for the seller s refusal to convert the purchaser s interest into a recorded, legal title; or 16

22 A Lawyer s Guide to Converting Contracts for Deed contact the purchaser to schedule a day and time to execute a deed and deed of trust. The day must be acceptable to both parties. Thirty days after receiving the Promissory Note, the seller will face liquidated damages of $250-$500 a day and reasonable attorney s fees for failure to comply with Section Note that the Property Code authorizes the purchaser to deduct penalties from amounts owed and plan to deduct penalties accrued against Seller from future scheduled monthly payments if Seller fails to comply with request to convert. If the parties cannot agree on an amount or seller cannot deliver clear title, litigation may be necessary to resolve the conflict. If the balance is unknown, purchaser should request the information under Texas Property Code Section Send a letter to the seller by certified mail, return receipt requested for the amount owed as of a date at least 60 days in the future and the name and address of the desired trustee for the deed of trust. Within ten days after seller receives the written request, the seller shall provide to the purchaser a written statement of the requested information. If the purchaser does not receive the information, the purchaser may determine the amount owed unilaterally and select a trustee that lives or has a place of business in the county where the property is located. The purchaser should send this determination of amount and the name and address of the trustee by certified mail, return receipt requested along with the Promissory Note and Deed of Trust. Within twenty days after receipt of amount owed under the contract by the purchaser, the seller may contest the amount by sending a written objection to the purchaser by regular and certified mail. The response must include the amount the seller claims is owed under the contact and be based on written records kept by the seller or an agent that were maintained and regularly updated for the entire term of the contract. However, thirty days after receiving the Promissory Note, the seller will face liquidated damages of $250-$500 a day and reasonable attorney s fees for failure to comply with Section Note that Property Code authorizes purchaser to deduct penalties from amounts owed and plan to deduct penalties accrued against Seller from future scheduled monthly payments if Seller fails to comply with request to convert. If there is no response from the seller, the parties cannot agree on an amount owed, or the seller cannot deliver clear title, litigation may be necessary to resolve the conflict. Additional Documents The following documents should be signed at an agreed closing: 17

23 A Lawyer s Guide to Converting Contracts for Deed Affidavit of Seller stipulating no liens after original sale pursuant to Texas Property Code Section (b) See Appendix I; Homestead Tax Exemption Form, example at: ; and Change of Name on property tax account form, example at: Address-Correction.pdf. Checklist of Documents to Obtain from Client Information relating to the purchaser(s): Final decree of divorce, if applicable Identification documents Information relating to the executory contract: Contract for deed Legal property description (review contract, tax notices, or deed records) Promissory Note or other loan documents relating the contract for deed Payment history, including annual accounting statement, if received All receipts for payments, taxes, or other improvements Notices, disclosures, or correspondence from seller 18

24 A Lawyer s Guide to Converting Contracts for Deed 10. VOID CONTRACT TERMS Section of the Texas Property Code prohibits certain provisions in an executory contract. Assuming these provisions apply to existing contracts, the purchaser the terms should not be included in the promissory note for a mandatory conversion despite the language of Section (c) requiring the promissory note to contain the same interest rate, due dates, and late fees as the contract. Imposing late fees exceeding 8% or actual administrative cost of processing late payment, whichever is less; Prohibiting the purchaser from pledging interest as security to obtain a loan for improvements including fire or utility service (See also Texas Property Code Sec , which is not applicable to option contracts); Imposing a pre-payment penalty; Forfeiting an option fee or other payments paid for a late payment; or Increasing any payment for requesting repairs. 19

25 A Lawyer s Guide to Converting Contracts for Deed 11. RELEASE OF LIEN FOLLOWING CONVERSION OF A CONTRACT FOR DEED At the end of payments, the purchaser who has used the automatic conversion process should seek a release of lien from the seller, as they would from any other mortgage lender. A lender who does not provide a release of lien may be sued for slander of title. See Appendix I. In certain circumstances, a purchaser may be able to work with a release of lien process set out in of the Texas Property Code. This section, which took effect on September 1, 2015, allows the purchaser to file an Affidavit As Release Of Lien if the purchaser used a title company to or authorized title insurance agent to deliver the last payment on the converted contract for deed to the seller. The Affidavit must be sworn to by the title insurance agent or an officer of the title company in order to serve as a release of lien. 20

26 12. APPENDICES A. Example of Contract for Deed B. Example of Wrap-around Mortgage (Sample All Inclusive Warranty Deed with Vendor s Lien Retained (redacted) C. Affidavit to File with Contract for Deed D. Sample Letter, Tex. Prop. Code E. Sample Letter - Tex. Prop. Code F. Sample Promissory Note G. Sample Deed of Trust H. Sample Warranty Deed with Vendor s Lien I. Sample Affidavit of Seller J. Sample Release of Lien K. Questions for Contract for Deed Cases

27 Appendix A- Example of Contract for Deed CONTRACT OF SALE THE STATE OF TEXAS COUNTY OF KNOW ALL MEN BY THESE PRESENTS That existing under the laws of the State of Texas has joined contract with said purchaser (a) on this 10th day of April of Has Granted, Sold and Conveyed, and these presents does Grant, Sell arid Convey, unto the said State of Texas all that certain tract or parcel of land being described at; follows to-wit: Block Lot SUBDIVISION in, County, Texas also known as Texas. Subject however, to restrictions, easements reservations covenants running with the land in said addition, and subject also to taxes for the current year and thereafter. TO HAVE AND TO HOLD the above described premises, together with all and singular the rights and appurtenance thereto and anywise belonging unto the said grantee (s) their heirs and assigns forever and the said seller does hereby bind itself, Its successors and assigns to Warrant and forever defend, all and singular said premises unto the said grantee (s) their heirs and assigns, against every person whomsoever lawfully claiming, or to claim the same, or any part thereof. THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF THAT (I) of the County of, State of Texas for end in consideration of the sum of ( $ ) to ME,, and secured to be paid by, AS FOLLOWS:

28 ($500000) FIVE THOUSAND DOLLARS down payment, paid by September 30th of 1998, leaving a balance of ($35,000.00) THIRTY FIVE THOUSAND DOLLARS to include principal and interest at 10% per annum. 180 Monthly payments of $ THREE HUNDRED SEVENTY SIX DOLLARS AND 11/100. Starting with the payment every 5th of the month on May of 2003 with an open contract of 15 years. Annual taxes will be the buyer s responsibility starting on the year of It is expressly provided that upon default In the punctual payment of this note or any part thereof, principal or interest, as the same shall become due and payable, the entire indebtedness evidenced hereby, shall be matured at the option of the holder. This transaction is secured by Sellers retention of Title to the lot being sold by this contract EXECUTED THIS 10th DAY OF APRIL OF 1998 Seller Identification Purchaser Identification Purchaser Identification This instrument was acknowledged before run this 10th day of April of 1998.

29 Appendix B Example of Wrap-around Mortgage

30

31

32 Appendix C Affidavit to File with Contract for Deed Affidavit Concerning Executory Contract for the Conveyance of Real Property STATE OF TEXAS COUNTY OF BEFORE ME, the undersigned authority, on this day personally appeared, Affiant(s), who on oath swears that the following statements are true and are within their personal knowledge: 1. My name is and I reside at. 2. I am making this affidavit under Section (b)(2) of the Texas Property Code in order to record the Contract attached as Exhibit A. 3. The attached contract is an Executory Contract for the Conveyance of Real Property as defined in Section of the Texas Property Code. 4. The information of the Subject Property is as follows: the real property and improvements located at:, having the legal description of. 5. The executory contract was signed by me and, Seller, on 6. The balance remaining on the promissory note is. 7. This Subject Property is my homestead. Affiant STATE OF TEXAS COUNTY OF SWORN to and SUBSCRIBED before me, the undersigned authority, on the day of by. NOTARY PUBLIC, State of Texas After Recording Please Return To:

33 Appendix D -- Sample Letter, Tex. Prop. Code Draft letter pursuant to Texas Property Code combining notice with a Promissory Note (Date) Seller s Name Seller s Address By regular and Certified Mail # RE: Buyer s Name Legal Property Description Lot, Block,, County, Texas Dear Seller: The buyer(s) identified above desire(s) to convert the contract for deed on the abovereferenced property into a mortgage pursuant to Section of the Texas Property Code which became effective on September 1, Enclosed with this letter you will find a promissory note executed by the buyer. The promissory note conforms to the requirements outlined in the section of the Property Code noted above. ***Choose one of the two paragraphs below*** The buyer did receive the Annual Accounting Statement by January 31, 2006 as required by Section of the Texas Property Code/ Section of the Local Government Code and the amount of the Promissory Note is the balance remaining on the contract based on the Annual Accounting Statement. OR The buyer did not receive the Annual Accounting Statement by January 31, 2006, as required by Section of the Texas Property Code/ Section of the Local Government Code and the amount of the Promissory Note is the balance determined by the Buyer and includes a 15% withholding of each monthly payment due after January 31, 2006.

34 ****************************** Pursuant to of the Property Code, the buyer(s) above request(s) that you provide the name and address of your desired trustee for the deed of trust in order to draft the deed of trust. You have ten (10) days to provide the requested information and to schedule a date for closing or provide a written explanation for your failure to schedule a closing. If you do not respond within the allotted time, Buyer will do the following: 1) Select a trustee for the deed of trust. 2) Proceed with the execution of a Deed of Trust that conforms with the requirements of Section of the Texas Property Code. 3) Deliver to you the Deed of Trust along with a Warranty Deed with Vendor s Lien that conforms to the requirements of Section of the Texas Property Code, drafted for your execution. Failure to return the properly executed (recorded?) Warranty Deed Vendor s Lien within 30 days of the receipt of this letter will subject you to the following penalties: $250 for each you fail to deliver title beginning the 31st day after you receive the promissory note and ending 90 days thereafter; and $500 for each day you fail to deliver title beginning the 91 st day after you receive the promissory note and continuing until you deliver title. any applicable attorneys fees. I can be reached at (insert phone number). Please give me a call if you have any questions, thanks. Sincerely, Attorney at Law cc: Buyers

35 Appendix E - Sample Letter - Tex. Prop. Code Draft Letter Pursuant to Texas Property Code (Date) Seller s Name Seller s Address By regular and Certified Mail # RE: Buyer s Name Legal Property Description Lot, Block,, County, Texas Dear Seller: The buyer(s) identified above desire(s) to convert the contract for deed on the abovereferenced property into mortgage pursuant to Section of the Texas Property Code which became effective on September 1, Pursuant to of the Property Code, the buyer(s) request(s) that you provide the balance remaining on the account and the name and address of your desired trustee for the deed of trust in order to draft the deed of trust. You have ten (10) days to provide the requested information and to schedule a date for closing or provide a written explanation for your failure to schedule a closing. If you do not respond within the allotted time, Buyer will do the following: 1. Draft a Promissory Note that includes the balance determined by the buyers above. 2. Select a trustee for the deed of trust. 3. Determine the balance remaining on the contract for deed. 4. Proceed with the execution of a Deed of Trust that conforms with the requirements of Section of the Texas Property Code. 5. Deliver to you the Deed of Trust (along with a Warranty Deed with Vendor s Lien) that conforms to the requirements of Section of the Texas Property Code, drafted for your execution. Failure to return the properly executed (recorded?) Warranty Deed Vendor s Lien within 30 days of the receipt of this Promissory Note will subject you to the following penalties: -$250 for each you fail to deliver title beginning the 31 st day after you receive the promissory note and ending 90 days thereafter; and -$500 for each day you fail to deliver title beginning the 91 st day after you receive the promissory note and continuing until you deliver title.

36 -any applicable attorneys fees. ***Include if the Buyer did not receive an Annual Accounting Statement*** In addition, the buyer did not receive the Annual Accounting Statement by January 31, 2006, required by Section of the Texas Property Code/ Section of the Local Government Code and will deduct 15% of each monthly payment due after January 31, 2006 from the balance determined for the Promissory Note. ************************************ I can be reached at (insert phone number). Please give me a call if you have any questions, thanks. Sincerely, cc: Buyers Attorney at Law

37 Appendix F - Sample Promissory Note Promissory Note Pursuant to Section of the Texas Property Code, the purchaser (identified below as Borrower) tenders to the seller (identified below as Lender) the following note in order to the convert the executory contract between the parties involving the property: Lot, Block,, County, Texas (also known as ). If seller fails to deliver title to purchaser in accordance with Section of the Texas Property Code, this note is invalid and of no effect. 1 FOR VALUE RECEIVED (insert buyer s name ( Borrower ) promises to pay to the order of the (insert seller s name) ( Lender ), located at (insert place for payment) or such other place as the holder of this Note may from time to time designate in writing, the principal sum of (insert amount remaining on the contract) Dollars ($ ), with interest accruing on the unpaid principal balance from time to time remaining unpaid prior to maturity as follows: 1) Payments of Principal and Interest. The principal and interest of this Note shall be payable as follows: a) Interest on this Note shall accrue at the rate of (insert original interest rate, unless term is void) % per annum. b) Installments of principal and interest in the amount of (insert original monthly payment) Dollars ($ ), shall be due and payable monthly commencing on the (insert original due date of each month day of, ), with a like installment due and payable on the day of each succeeding month thereafter to maturity. All payments made as scheduled on this Note shall be applied, to the extent thereof, first to accrued but unpaid interest and the balance to unpaid principal. c) On the Maturity Date, the entire outstanding principal amount of the original loan amount of Dollars ($ ) shall be due and payable in one lump sum. 1 The Note is contingent upon the timely delivery of title by the seller. The Note does not authorize a late delivery of title. If delivery is late, the purchaser may wish to deduct any applicable penalty from the balance owed and tender a new promissory note. Said deduction is authorized by Tex. Prop Code

38 2) Maturity. This Note shall mature (i.e., all outstanding principal, together with all accrued interest which has not been paid, shall de due and payable in full) on (insert original end date). 3) Prepayment. Borrower may prepay the principal of this Note in whole or in part, at any time, or from time to time, without penalty or premium, and interest shall immediately cease to accrue on any amount so prepaid. 4) Partial Payment. If Lender at any time receives or accepts payment from or for the account of Borrower of less than the full amount when due on this Note, such receipt or acceptance shall, unless Lender expressly agrees otherwise in writing, be deemed a payment on account only, and shall not cure any default existing by reason of failure to pay the full amount when due, nor preclude the exercise of any remedy of Lender including, but not limited to, acceleration of any unmatured portion hereof, or foreclosure on any security. 5) Security Instrument. This Note is secured by the provisions of a certain Security Agreement (the Security Instrument ) by and between Lender and Borrower, as more fully described in the Security Instrument. 6) Events of Default and Remedies. At the option of the holder of this Note, the entire unpaid principal balance of, and all accrued interest on, this Note shall immediately become due and payable upon the occurrence at any time of any one or more of the following (herein referred to as an Event of Default ): a) Borrower shall fail to pay the principal of or interest on this Note as and when the same becomes due and payable in accordance with the terms hereof, and such failure shall continue for a period of thirty (30) days after receipt of written notice from Lender specifying such failure; or b) Borrower shall fail to perform any other covenant, condition, obligation or agreement set forth the Security Instrument and such failure shall continue for a period of thirty (30) days after receipt of written notice from Lender specifying such failure. If an Event of Default shall occur, Lender may (a) declare the entire balance of this Note, principal and interest, immediately due and payable; (b) exercise any rights under the Security Instrument or any other right contained in any other Loan Document; and (c) exercise any other remedy provided by law or equity. No remedy referred to herein is intended to be exclusive, but each shall be cumulative, and the exercise or beginning of exercise by Lender of any one or more of such remedies should not preclude the simultaneous or later exercise of any or all of such remedies. Any failure of Lender to

39 exercise any rights or remedies available to Lender if any Event of Default should occur shall not constitute a waiver of Lender s right to exercise such rights or remedies in the event of any subsequent Event of Default. 7) Past Due Interest and Late Charge. In the event that Payee has not received any installment due under the terms of this note (other than the payments required on the Maturity Date) on or before fifteen (15) days after the date such installment is due and payable, Maker will be charged, and Maker hereby agrees to pay to Payee, a late charge equal (Note: insert original late fee, unless term is void) to five percent (5%) of the amount of such installment then due and payable. 2 Maker shall be obligated to pay no more than one (1) late charge with respect to any installment, and no late charge shall be imposed on the payments due on the Maturity Date, but all amounts outstanding on the Maturity Date shall accrue interest after the Maturity Date as herein provided. 8) Controlling Agreement. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency or event whatsoever, whether by reason of demand or acceleration of the maturity hereof or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to Holder exceed interest computed at the Maximum Rate (as defined below). If, from any circumstance whatsoever, interest would otherwise be payable to Holder in excess of interest computed at the Maximum Rate, the interest payable to Holder shall be reduced to interest computed at the Maximum Rate; and if from any circumstance Holder shall ever receive anything of value deemed interest by applicable law in excess of interest computed at the Maximum Rate, an amount equal to any excessive interest shall be applied to the reduction of the principal hereof and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal hereof, such excess shall be refunded to the Borrower. All interest paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period until payment in full of the principal (including the period of any renewal or extension hereof) so that the interest hereon for such full period shall not exceed interest computed at the Maximum Rate. This section shall control all agreements between Borrower and Lender. The term Maximum Rate shall mean the highest lawful rate of interest applicable to the loan transaction evidenced by this Note taking into account whichever of applicable federal law or Texas law permits the higher rate of interest, and after also taking into consideration all compensation deemed interest under applicable law. 2 The grace period and amount of any late fee should be obtained from the contract being converted or agreed to by the parties.

40 9) Waiver. Except as expressly otherwise provided for herein, Borrower and all other parties now or hereafter liable or responsible for the payment of this Note, whether as endorser, guarantor, surety or otherwise, severally waive demand, presentment, presentment for payment, notice of intent to demand, notice of nonpayment, notice of dishonor, diligence in collecting, grace, notice (including notice of intent to accelerate and notice of acceleration) and protest and consent to all renewals and extensions that from time to time may be granted by the Holder of this Note and to all partial payments herein, whether before or after maturity. Borrower hereby further agrees that no act or omission of Lender with reference to any property securing or intended to secure this Note, including but not limited to failure to file or perfect any lien or security interest, shall release the absolute obligation of Borrower and each such endorser, guarantor or surety to pay this Note as and when due. 10) Cumulative Rights. No delay on the part of Lender or other holder of this Note in the exercise of any power or right under this Note, under the Security Instrument, or under any other Loan Document, shall operate as a waiver thereof, nor shall a single or partial exercise of any power or right preclude other or further exercise thereof or exercise of any other power or right. Enforcement by Lender or other holder of this Note of any security for the payment hereof shall not constitute any election by it of remedies so as to preclude the exercise of any other remedy available to it. 11) Attorneys Fees and Costs. If this Note or any installment or part hereof is not paid when due and the same is placed in the hands of an attorney for collection, or if this Note is collected by suit or through bankruptcy, probate or other proceedings, Borrower agrees to pay the reasonable attorneys fees of the holder of this Note, together with all actual expenses of collection and litigation and costs of court incurred by the holder of this Note. If the holder of this Note fails to perform any duty or obligation related to this Note, or the Security Instrument, the holder agrees to pay the reasonable attorney s fees of the Borrower together with all actual expenses of collection and litigation and costs of court. 12) Notices. Any notice or demand required or to be given hereunder shall be in writing, and shall be deemed to have been given and received when deposited in a post office or official depository of the United States Postal Service, sent by certified mail, postage prepaid, return receipt requested, addressed as follows: If to Borrower:

41 If to Lender: The address or addresses set forth in this Note may be changed by any party by giving written notice of such change to the other party in the manner provided herein for giving notice. 13) Severability. In case any of the provisions of this Note shall for any reason be held to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision hereof and this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 14) GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES APPLICABLE TO TRANSACTIONS IN TEXAS. 15) JURISDICTION AND VENUE. ALL ACTS CONTEMPLATED BY THIS NOTE SHALL BE PERFORMABLE IN COUNTY, TEXAS, AND ALL SUMS PAYABLE UNDER THIS NOTE SHALL BE PAYABLE IN COUNTY, TEXAS. BORROWER HEREBY CONFIRMS AND AGREES THAT ALL LEGAL ACTIONS INVOLVING THE VALIDITY OR ENFORCEMENT OF THIS NOTE SHALL HAVE JURISDICTION AND VENUE IN COUNTY, TEXAS. 16) Headings. The headings of the paragraphs of this Note are inserted for convenience only and shall not be deemed to constitute a part hereof. 17) Successors and Assigns. This Note and all of the convenants, promises and agreements contained herein shall be binding upon and shall inure to the benefit of Borrower and Lender and their respective executors, administrators, successors and assigns. 18) FINAL AGREEMENT. THIS NOTE AND THE OTHER LOAN DOCUMENTS EXECUTED IN CONNECTION TO THIS NOTE, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

42 Maker:

43 Appendix G - Sample Deed of Trust NOTICE OF CONFIDENTIALITY RIGHTS: IF YOU ARE A NATURAL PERSON, YOU MAY REMOVE OR STRIKE ANY OF THE FOLLOWING INFORMATION FROM THIS INSTRUMENT BEFORE IT IS FILED FOR RECORD IN THE PUBLIC RECORDS: YOUR SOCIAL SECURITY NUMBER OR YOUR DRIVER S LICENSE NUMBER. Deed of Trust This document is drafted pursuant to Section of the Texas Property Code Date: Grantor: (Insert Buyer s Name) Grantor's Mailing Address: (Insert Buyer s address) Trustee: (Insert Trustee selected by Seller or, in default, named by buyer) Trustee's Mailing Address: (Insert Trustee s address) Lender: (Insert Seller s Name) Lender's Mailing Address: (Insert Seller s address) Note Date: Original principal amount: $(insert balance remaining on contract) Borrower: (insert buyer s name) Lender: (insert seller s name) Property (including any improvements): (insert legal property description) The debt evidenced by the Note is in payment of the purchase price of the Property; the debt is secured both by this deed of trust and by a vendor's lien on the Property, which is expressly retained in a deed to Grantor of even date. This deed of trust does not waive the vendor's lien, and the two liens and the rights created by this deed of trust are cumulative. Lender may elect to foreclose under either of the liens without waiving the other or may foreclose under both.

44 For value received and to secure payment of the Note, Grantor conveys the Property to Trustee in trust. Grantor warrants and agrees to defend the title to the Property, subject to the Other Exceptions to Conveyance and Warranty. On payment of the Note and all other amounts secured by this deed of trust, this deed of trust will have no further effect, and Lender will release it at Grantor's expense. Clauses and Covenants A. Grantor's Obligations Grantor agrees to 1. keep the Property in good repair and condition; 2. pay all taxes and assessments on the Property before delinquency; 3. defend title to the Property subject to the Other Exceptions to Conveyance and Warranty and preserve the lien's priority as it is established in this deed of trust; 4. obey all laws, ordinances, and restrictive covenants applicable to the Property; and 5. if the lien of this deed of trust is not a first lien, pay or cause to be paid all prior lien notes and abide by or cause to be abided by all prior lien instruments. B. Lender's Rights 1. Lender may appoint in writing a substitute trustee, succeeding to all rights and responsibilities of Trustee. 2. If the proceeds of the Note are used to pay any debt secured by prior liens, Lender is subrogated to all the rights and liens of the holders of any debt so paid. 3. Lender may apply any proceeds received under the insurance policy either to reduce the Note or to repair or replace damaged or destroyed improvements covered by the policy. If the Property is Grantor's primary residence and Lender reasonably determines that repairs to the improvements are economically feasible, Lender will make the insurance proceeds available to Grantor for repairs. 4. Notwithstanding note terms to the contrary, and unless applicable law prohibits, all payments received by Lender from Grantor under the Note or this deed of trust may, at Lender's

45 discretion, be applied first to amounts payable under this deed of trust and then to amounts due and payable to Lender under the Note, to be applied to late charges, principal, or interest in the order Lender in its discretion determines. 5. If Grantor fails to perform any of Grantor's obligations, Lender may perform those obligations and be reimbursed by Grantor on demand for any amounts so paid, including attorney's fees, plus interest on those amounts from the dates of payment at the rate stated in the Note for matured, unpaid amounts. The amount to be reimbursed will be secured by this deed of trust. 6. If there is a default on the Note or if Grantor fails to perform any of Grantor's obligations and the default continues after any required notice of the default and the time allowed to cure, Lender may a. declare the unpaid principal balance and earned interest on the Note immediately due; b. direct Trustee to foreclose this lien, in which case Lender or Lender's agent will cause notice of the foreclosure sale to be given as provided by the Texas Property Code as then in effect; and c. purchase the Property at any foreclosure sale by offering the highest bid and then have the bid credited on the Note. 7. Lender may remedy any default without waiving it and may waive any default without waiving any prior or subsequent default. C. Trustee's Rights and Duties If directed by Lender to foreclose this lien, Trustee will 1. either personally or by agent give notice of the foreclosure sale as required by the Texas Property Code as then in effect; 2. sell and convey all or part of the Property AS IS to the highest bidder for cash with a general warranty binding Grantor, subject to the Prior Lien and to the Other Exceptions to Conveyance and Warranty and without representation or warranty, express or implied, by Trustee; 3. from the proceeds of the sale, pay, in this order

46 a. expenses of foreclosure, including a reasonable commission to Trustee; b. to Lender, the full amount of principal, interest, attorney's fees, and other charges due and unpaid; c. any amounts required by law to be paid before payment to Grantor; and d. to Grantor, any balance; and 19) be indemnified by Lender against all costs, expenses, and liabilities incurred by Trustee for acting in the execution or enforcement of the trust created by this deed of trust, which includes all court and other costs, including attorney's fees, incurred by Trustee in defense of any action or proceeding taken against Trustee in that capacity. D. General Provisions 1. If any of the Property is sold under this deed of trust, Grantor must immediately surrender possession to the purchaser. If Grantor fails to do so, Grantor will become a tenant at sufferance of the purchaser, subject to an action for forcible detainer. 2. Recitals in any trustee's deed conveying the Property will be presumed to be true. 3. Proceeding under this deed of trust, filing suit for foreclosure, or pursuing any other remedy will not constitute an election of remedies. 4. This lien will remain superior to liens later created even if the time of payment of all or part of the Note is extended or part of the Property is released. 5. If any portion of the Note cannot be lawfully secured by this deed of trust, payments will be applied first to discharge that portion. 6. Grantor assigns to Lender all amounts payable to or received by Grantor from condemnation of all or part of the Property, from private sale in lieu of condemnation, and from damages caused by public works or construction on or near the Property. After deducting any expenses incurred, including attorney's fees and court and other costs, Lender will either release any remaining amounts to Grantor or apply such amounts to reduce the Note. Lender will not be liable for failure to collect or to exercise diligence in collecting any such amounts. Grantor will immediately give Lender notice of any actual or threatened proceedings for condemnation of all or part of the Property. 7. Grantor assigns to Lender absolutely, not only as collateral, all present and future rent and other income and receipts from the Property. Grantor warrants the validity and enforceability

47 of the assignment. Grantor may as Lender's licensee collect rent and other income and receipts as long as Grantor is not in default under the Note or this deed of trust. Grantor will apply all rent and other income and receipts to payment of the Note and performance of this deed of trust, but if the rent and other income and receipts exceed the amount due under the Note and deed of trust, Grantor may retain the excess. If Grantor defaults in payment of the Note or performance of this deed of trust, Lender may terminate Grantor's license to collect rent and other income and then as Grantor's agent may rent the Property and collect all rent and other income and receipts. Lender neither has nor assumes any obligations as lessor or landlord with respect to any occupant of the Property. Lender may exercise Lender's rights and remedies under this paragraph without taking possession of the Property. Lender will apply all rent and other income and receipts collected under this paragraph first to expenses incurred in exercising Lender's rights and remedies and then to Grantor's obligations under the Note and this deed of trust in the order determined by Lender. Lender is not required to act under this paragraph, and acting under this paragraph does not waive any of Lender's other rights or remedies. If Grantor becomes a voluntary or involuntary debtor in bankruptcy, Lender's filing a proof of claim in bankruptcy will be deemed equivalent to the appointment of a receiver under Texas law. 8. Interest on the debt secured by this deed of trust will not exceed the maximum amount of nonusurious interest that may be contracted for, taken, reserved, charged, or received under law. Any interest in excess of that maximum amount will be credited on the principal of the debt or, if that has been paid, refunded. On any acceleration or required or permitted prepayment, any such excess will be canceled automatically as of the acceleration or prepayment or, if already paid, credited on the principal of the debt or, if the principal of the debt has been paid, refunded. This provision overrides any conflicting provisions in this and all other instruments concerning the debt. 9. In no event may this deed of trust secure payment of any debt that may not lawfully be secured by a lien on real estate or create a lien otherwise prohibited by law. 10. When the context requires, singular nouns and pronouns include the plural. 11. The term Note includes all extensions and renewals of the Note and all amounts secured by this deed of trust. 12. This deed of trust binds, benefits, and may be enforced by the successors in interest of all parties. 13. If Grantor and Borrower are not the same person, the term Grantor includes Borrower.

48 14. Grantor agrees to pay reasonable attorney's fees, trustee's fees, and court and other costs of enforcing Lender's rights under this deed of trust if this deed of trust is placed in the hands of an attorney for enforcement. 15. If any provision of this deed of trust is determined to be invalid or unenforceable, the validity or enforceability of any other provision will not be affected. 16. Grantor represents that this deed of trust and the Note are given for the following purposes: to secure the payment of the purchase price for (insert legal property description), which Grantor is purchasing from (Insert seller s name(s)). Buyer STATE OF TEXAS COUNTY OF ACKNOWLEDGEMENT (Buyer) ACKNOWLEDGED this instrument before me on the day of, 200_. NOTARY PUBLIC, State of Texas Buyer STATE OF TEXAS COUNTY OF ACKNOWLEDGEMENT (Buyer) ACKNOWLEDGED this instrument before me on the day of, 200_.

49 NOTARY PUBLIC, State of Texas * * * * * After Recording Please Return To: Buyer s Name and Address PREPARED IN THE LAW OFFICE OF * * * * *

50 Appendix H - Sample Warranty Deed with Vendor s Lien NOTICE OF CONFIDENTIALITY RIGHTS: IF YOU ARE A NATURAL PERSON, YOU MAY REMOVE OR STRIKE ANY OF THE FOLLOWING INFORMATION FROM THIS INSTRUMENT BEFORE IT IS FILED FOR RECORD IN THE PUBLIC RECORDS: YOUR SOCIAL SECURITY NUMBER OR YOUR DRIVER S LICENSE NUMBER. Date: General Warranty Deed with Vendor s Lien Grantor: (insert seller s name), as his sole and separate property and owning, occupying, and claiming other property as homestead. Grantor's Mailing Address: (insert seller s address) Grantee: (insert buyer s name), husband and wife. Grantee's Mailing Address: (insert buyer s address) Consideration: Ten and No/100ths Dollars ($10.00) and a Promissory Note of even date executed by Grantee and payable to the order of Grantor in the principal amount of (insert amount of note) Dollars ($). The note is secured by a first and superior vendor s lien and superior title retained in this deed and by a first-lien deed of trust of even date from Grantee to (insert name of trustee), Trustee. Property (including any improvements): (insert property description) being more particularly described as follows: (insert property description) Reservations from Conveyance: None

51 Exceptions to Conveyance and Warranty: Validly existing easements, rights-of-way, and prescriptive rights, whether of record or not; all presently recorded and validly existing instruments, other than conveyances of the surface fee estate, that affect the Property. Grantor, for the Consideration and subject to the Reservations from Conveyance and the Exceptions to Conveyance and Warranty, grants, sells, and conveys to Grantee the Property, together with all and singular the rights and appurtenances thereto in any way belonging, to have and to hold it to Grantee and Grantee's heirs, successors, and assigns forever. Grantor binds Grantor and Grantor's heirs and successors to warrant and forever defend all and singular the Property to Grantee and Grantee's heirs, successors, and assigns against every person whomsoever lawfully claiming or to claim the same or any part thereof, except as to the Reservations from Conveyance and the Exceptions to Conveyance and Warranty. The vendor's lien against and superior title to the Property are retained until each note described is fully paid according to its terms, at which time this deed will become absolute. When the context requires, singular nouns and pronouns include the plural. Seller, GRANTOR STATE OF TEXAS COUNTY OF ACKNOWLEDGEMENT (Insert Seller s name), ACKNOWLEDGED this instrument before me on the day of, 200. NOTARY PUBLIC, State of Texas * * * * *

52 After Recording Please Return To: (Insert Buyer s name and address) PREPARED IN THE LAW OFFICE OF

53 Appendix I - Sample Affidavit of Seller Affidavits and Indemnity as to Debts, Liens, and Possession (Use separate form for each party. To be filled in personally by seller or borrower in his/her own handwriting) SUBJECT PROPERTY: CONTRACT FOR DEED INFORMATION: STATE OF Texas COUNTY OF BEFORE ME, the undersigned authority, on this day personally appeared: Seller* personally known to me to be the person whose name is subscribed hereto and upon his/her oath deposes and says that no proceedings in bankruptcy or receivership have been instituted by or against him/her and that the marital status of Affiant has not changed since the day of acquisition of said property and represents to the Buyer(s) in this transaction that (since, the day on which the Affiant entered into a contract for deed to sell the above referenced property), there are: 1. No unpaid debts for lighting and plumbing fixtures, water heaters, floor furnaces, heaters, air conditioners, built-in fireplace screens, installed outdoor cooling equipment, swimming pool equipment, built-in cleaning equipment, built-in kitchen equipment, satellite dish, radio or television antennae, garage door openers, carpeting, rugs, lawn sprinkling systems, venetian blinds, curtains and rods, window shades, draperies and rods, valances, screens, shutters, awnings, mirrors, ceiling fans, attic fans, mail boxes, security and fire alarm detection equipment, water softener, electric appliances, fences, street paving, or any personal property or fixtures that are located on the subject property described above, and that no such items have been purchased on time payment contracts, and there are no security interests on such property secured by financing statement, security agreement or otherwise.

54 2. No loans, unpaid judgments, or liens (including Federal or State Liens or Judgment Liens) and no unpaid association or governmental taxes, charges or assessments of any kind on such property. 3. All labor and materials used in the construction of improvements on the above-described property have been paid for and there are now no unpaid labor or material claims against the improvements or the property upon which same are situated, and I hereby declare that all sums of money due for the construction of improvements have been fully paid and satisfied. 4. No leases, contracts to sell the land, or parties in possession other than Affiant. INDEMNITY: I AGREE TO PAY ON DEMAND TO THE BUYER (S) IN THIS TRANSACTION, THEIR SUCCESSORS AND ASSIGNS, ALL AMOUNTS SECURED BY ANY AND ALL LIENS, CLAIMS, OR RIGHTS NOT SHOWN ABOVE, TOGETHER WITH ALL COSTS, LOSS AND ATTORNEY'S FEES THAT SAID PARTIES MAY INCUR IN CONNECTION WITH SUCH UNMENTIONED LIENS, PROVIDED SAID LIENS, CLAIMS, OR RIGHTS EITHER CURRENTLY APPLY TO SUCH PROPERTY, OR A PART THEREOF, OR ARE SUBSEQUENTLY ESTABLISHED AGAINST SAID PROPERTY AND ARE CREATED BY ME, KNOWN BY ME, OR HAVE AN INCEPTION OR ATTACHMENT DATE PRIOR TO THE CLOSING OF THIS TRANSACTION AND RECORDING OF THE DEED AND MORTGAGE. I realize that the Buyer(s) in this transaction are relying on the representations contained herein in purchasing same or lending money thereon and issuing title policies and would not purchase same or lend money or issue a title policy thereon unless said representations were made. If Seller is an entity, I have authority to sign on its behalf. STATE OF TEXAS COUNTY OF ACKNOWLEDGEMENT (Buyer) ACKNOWLEDGED this instrument before me on the day of, 200_. NOTARY PUBLIC, State of Texas

55 * * * * * After Recording Please Return To: Buyer s Name and Address PREPARED IN THE LAW OFFICE OF

56 Appendix I - Sample Affidavit to Seller Affidavits and Indemnity as to Debts, Liens, and Possession (Use separate form for each party. To be filled in personally by seller or borrower in his/her own handwriting) SUBJECT PROPERTY: CONTRACT FOR DEED INFORMATION: STATE OF Texas COUNTY OF BEFORE ME, the undersigned authority, on this day personally appeared: Seller* personally known to me to be the person whose name is subscribed hereto and upon his/her oath deposes and says that no proceedings in bankruptcy or receivership have been instituted by or against him/her and that the marital status of Affiant has not changed since the day of acquisition of said property and represents to the Buyer(s) in this transaction that (since, the day on which the Affiant entered into a contract for deed to sell the above referenced property), there are: 1. No unpaid debts for lighting and plumbing fixtures, water heaters, floor furnaces, heaters, air conditioners, built-in fireplace screens, installed outdoor cooling equipment, swimming pool equipment, built-in cleaning equipment, built-in kitchen equipment, satellite dish, radio or television antennae, garage door openers, carpeting, rugs, lawn sprinkling systems, venetian blinds, curtains and rods, window shades, draperies and rods, valances, screens, shutters, awnings, mirrors, ceiling fans, attic fans, mail boxes, security and fire alarm detection equipment, water softener, electric appliances, fences, street paving, or any personal property or fixtures that are located on the subject property described above, and that no such items have

57 been purchased on time payment contracts, and there are no security interests on such property secured by financing statement, security agreement or otherwise. 2. No loans, unpaid judgments, or liens (including Federal or State Liens or Judgment Liens) and no unpaid association or governmental taxes, charges or assessments of any kind on such property. 3. All labor and materials used in the construction of improvements on the above-described property have been paid for and there are now no unpaid labor or material claims against the improvements or the property upon which same are situated, and I hereby declare that all sums of money due for the construction of improvements have been fully paid and satisfied. 4. No leases, contracts to sell the land, or parties in possession other than Affiant. INDEMNITY: I AGREE TO PAY ON DEMAND TO THE BUYER (S) IN THIS TRANSACTION, THEIR SUCCESSORS AND ASSIGNS, ALL AMOUNTS SECURED BY ANY AND ALL LIENS, CLAIMS, OR RIGHTS NOT SHOWN ABOVE, TOGETHER WITH ALL COSTS, LOSS AND ATTORNEY'S FEES THAT SAID PARTIES MAY INCUR IN CONNECTION WITH SUCH UNMENTIONED LIENS, PROVIDED SAID LIENS, CLAIMS, OR RIGHTS EITHER CURRENTLY APPLY TO SUCH PROPERTY, OR A PART THEREOF, OR ARE SUBSEQUENTLY ESTABLISHED AGAINST SAID PROPERTY AND ARE CREATED BY ME, KNOWN BY ME, OR HAVE AN INCEPTION OR ATTACHMENT DATE PRIOR TO THE CLOSING OF THIS TRANSACTION AND RECORDING OF THE DEED AND MORTGAGE. I realize that the Buyer(s) in this transaction are relying on the representations contained herein in purchasing same or lending money thereon and issuing title policies and would not purchase same or lend money or issue a title policy thereon unless said representations were made. If Seller is an entity, I have authority to sign on its behalf.

58 STATE OF TEXAS COUNTY OF ACKNOWLEDGEMENT (Buyer) ACKNOWLEDGED this instrument before me on the day of, 20. NOTARY PUBLIC, State of Texas * * * * * After Recording Please Return To: Buyer s Name and Address PREPARED IN THE LAW OFFICE OF

59 Appendix J Sample Release of Lien Release of Lien Date: Holder of Lien: Holder s Mailing Address (including county): Lien is Described in the Following Documents, Recorded in: Property (including any improvements) Subject to Lien: Holder of Lien is the owner of the Note and Lien described above. Holder of Lien releases the Property from the Lien and from all liens held by of Lien, without regard to how they were created or evidenced. Holder of Lien expressly waives and releases all present and future rights to establish or enforce the Lien as security for payment of any future or other indebtedness. When the context requires, singular nouns and pronouns include the plural. STATE OF TEXAS COUNTY OF (Signature of Lien Holder) This instrument was acknowledged before me on the by. day of, 20 [signature] [printed name] Notary Public in and for The State of Texas My Commission Expires:

60 Appendix K - Questions for Contract for Deed Cases Purchasing the property How did you find the property? Who did you speak to? What did they tell you? What did you do next and when did you do it? Who sold you the property? Questions for Contract for Deed Cases What is the street address of the home you bought? What was the sales price? What was the interest rate? What were the monthly payments? What was the down payment? When did you give them the down payment and for how much? For how many years where you supposed to pay on this contract? What documents did they show you when you agreed to buy the house/property? Did you sign any documents? If so,which? (If they are monolingual Spanish-speaking), did someone translate the documents to you? Did they give you a copy of the documents you signed? Has the contract been filed in the property records? Is the client listed as the owner with the appraisal district? Do you know if the seller has sold properties to others using a contract for deed? If so, do you know of a way to get in touch with these other purchasers? Improvements When did you move in? Have you made improvements to the house? What improvements did you make and how much did you spend on them? Payments Have you made your payments on time each month? Are you current on your payments right now?

61 How did you pay? In cash? Check? Money order? Do you have receipts for the payments you made? When was the last payment you made? Did you ever fall behind on the payments? How many payments, if any, did you miss? Did the seller ever send you a notice that you were behind on the payments? Did the seller ever send you an annual statements, showing what payments you made each year and how much you still owe? Insurance Did the seller require you to purchase insurance on the house? Did the seller require you to pay them money so that they could buy insurance (escrow)? If so, did the seller provide you a copy of the insurance policy? Did you ever have to make a claim on the insurance? If so, did you have any problems making a claim and receiving the money? Taxes Did you receive notices from another person, such as a bank, that the property has a mortgage or there is going to be a foreclosure? Did you discuss taxes with the seller when you purchased the house? Were taxes included in the monthly payments? (escrow) Did you pay taxes directly to the tax collector? Are you behind on your taxes? Were there back-taxes on the property when you purchased it? Did the seller pay off those back-taxes? Client s goals What is the problem you are concerned about? What is your goal? Do you want to keep the house? Do you want to move out? Anything else you d like to tell me?

62

63 A Lawyer s Guide to Converting Contracts for Deed Texas RioGrande Legal Aid 2017