Lease-option & Contract for deed bill passes Texas Senate

Possible End of Lease/Options and Contract for Deed in Texas
Horrible bill passes Texas Senate, moves to House.
Committee recommends passage.

By Bill Crider

A horrible new law has passed the Texas Senate and moved into the House. If it passes in the House it will effectively end Lease-Purchase agreements and Contracts for Deed in Texas. The bill is SB629, and its companion in the House is HB 1823 ( )

The law is masquerading as a consumer-advocacy law to protect low-income homebuyers from unscrupulous speculators. The sponsor¡¦s analysis cites abuses by developers of ¡¥colonias¡¦ along Texas borders as justification for the law. However, the abuses that might have been perpetrated by those people are already amply covered by fraud laws, and this new law is not needed to prevent them. Special-interest groups that are pressing for passage of the law include ¡§Texas Low Income Housing Information Service¡¨ and ¡§Association of Community Organizations for Reform Now.¡¨ In focusing on the abuses in the colonias, these groups are promoting this bill to the detriment of the majority of home buyers in Texas. One effect of the law would be to trap low-income families into rental situations with no ability to ever buy a home.

The sponsor of this bill says the goal is to give people purchasing by Lease/Option and Contract for Deed the same rights as other home buyers. But that would not be the effect of the law. By removing the sellers¡¦ incentive and ability to sell on a Lease/Option and Contract for Deed, the legislature would remove the ability of these buyers to actually buy a home, since many of them would not qualify for ¡¥conventional¡¦ financing. Sellers would simply not sell to them. The result would be that people with poor credit, low income, or other problems would be unable to buy a home and be only able to rent. Even people with good credit who have been transferred to a new location would find it almost impossible to buy a new home until their old one sold.

Anyone who might buy or sell a home in Texas on a Contract for Deed or Lease/Option needs to contact their representative and/or all Texas representatives and let them know what they think of this bill.

I am not a lawyer, and what follows is just my layman¡¦s evaluation of the bill.

Contract for Deed and Lease-Purchase financing are both specifically named as ¡§executory contracts¡¨ and are the target of the bill. The bill contains many odious provisions, but some of the worst are:

„Ã Contracts for Deed and Lease-Options would not be allowed if there is an underlying mortgage or lien on the property. This would effectively end Lease-Option and Contract for Deed in Texas. Only if you own a property free and clear would you be able to sell on a Lease-Option or Contract for Deed. (Sec. 5.085. FEE SIMPLE TITLE REQUIRED; MAINTENANCE OF FEE SIMPLE TITLE. (a) A potential seller may not execute an executory contract with a potential purchaser if the seller does not own the property in fee simple free from any liens or other encumbrances. (b) Except as provided by this subsection, a seller, or the seller’s heirs or assigns, must maintain fee simple title free from any liens or other encumbrances to property covered by an executory contract for the entire duration of the contract. ¡K (c) A violation of this section: (1) is a false, misleading, or deceptive act or practice within the meaning of Section 17.46, Business & Commerce Code, and is actionable in a public or private suit brought under Subchapter E, Chapter 17, Business & Commerce Code; and (2) in addition to other rights or remedies provided by law, entitles the purchaser to cancel and rescind the executory contract and receive from the seller: (A) the return of all payments of any kind made to the seller under the contract; and (B) reimbursement for: (i) any payments the purchaser made to a taxing authority for the property; and (ii) the value of any improvements made to the property by the purchaser. )

„Ã Late payments are limited to the lesser of 8 percent of the payment or the actual cost of processing. This means that if a buyer challenges a late charge you must be able to prove the exact amount it took you to process it, and the late charge cannot exceed that. For most people carrying contracts or lease-options there is no real cost to process a late payment, so this clause effectively eliminates late charges. Since a late charge would be tiny or non-existent, tenants would have little incentive to pay on time. (SECTION 4. (a) A seller may not include as a term of the executory contract a provision that: (1) imposes an additional late-payment fee that exceeds the lesser of: (A) eight percent of the monthly payment under the contract; or (B) the actual administrative cost of processing the late payment;)

„Ã Buyers/leasers can place liens on the property (SECTION 4. (a) A seller may not include as a term of the executory contract a provision that: ¡K(2) prohibits the purchaser from pledging the purchaser’s interest in the property as security to obtain a loan¡K)

„Ã No pre-payment penalties are allowed. This can have dramatic tax consequences to the seller. Selling a property sooner than 12 months after buying it can cause it to be taxed as regular income rather than more favorable capital gains. Many times this is the reason a seller wants a delayed sale ¡V to save on taxes. Pre-payment penalties are often included as reimbursement for the extra taxes the seller might be required to pay. (SECTION 4. (a) A seller may not include as a term of the executory contract a provision that: ¡K (3) imposes a prepayment penalty or any similar fee if the purchaser elects to pay the entire amount due under the contract before the scheduled payment date under the contract; )

„Ã The buyer can void the agreement and turn it into a promissory note at any time, taking deed to the property. This means the seller has no control at all, and can lose title to the property and become a lender without wanting to. This transfers the tax benefits and control to the buyer. It might also cause the owner to pay huge tax penalties due to short-term tax treatment and/or depreciation recapture. (RIGHT TO CONVERT CONTRACT. (a) A purchaser, at any time and without paying penalties or charges of any kind, is entitled to convert the purchaser’s interest in property under an executory contract into recorded, legal title in accordance with this section. … if the purchaser delivers to the seller of property covered by an executory contract a promissory note that is equal in amount to the balance of the total amount owed by the purchaser to the seller under the contract and that contains the same interest rate, due dates, and late fees as the contract: (1) the seller shall execute a deed containing any warranties required by the contract and conveying to the purchaser recorded, legal title of the property; and (2) the purchaser shall simultaneously execute a deed of trust that: (A) contains the same terms as the contract regarding the purchaser’s and seller’s duties concerning the property; (B) secures the purchaser’s payment and performance under the promissory note and deed of trust; and (C) conveys the property to the trustee, in trust, and confers on the trustee the power to sell the property if the purchaser defaults on the promissory note or the terms of the deed of trust.)
„Ã Failure to provide information requested by the buyer (including, for example, plat information, amortization tables and payoff amounts) carry a penalty of $250 per day. Buyers can request this as often as they desire, meaning they have a means of financially harassing the seller.
„Ã Some portions of the law would be applied retroactively to contracts already in place today. This portion would probably be struck down by a court as an ex post facto. (SECTION 6. (a) Section 5.062, Property Code, as amended by this Act, and Section 5.0621, Property Code, as added by this Act, apply to an executory contract for conveyance in effect on the effective date of this Act, regardless of the date on which the purchaser and seller entered into the contract. )

I read on a site That a agreement has been reached that would amend the bill to exclude L/O with a term less that 5 years. Check out the site for your self.

This was in an email that my REI club founder sent out:

Here is the agreement that has been reached (yes, he (the lobbyist)works fast!). On Monday afternoon, during the reading of the House Bill 1823, there is supposed to be an amendment proposed that will exclude lease/option sales with a term of less than 3 years from the bill. This is probably the best that we can get at this point. This should allow investors to operate within the new law.

I know nothing more about it - just wanted to pass along what I’ve been told.

Karla in Amarillo

That is a step in the right direction, but we should not give up and assume this is the best we can get. We need to eliminate lease-options from this bill altogether. Also, the conversion of Contract for Deed to Promissory Note/Trust Deed is disastrous.

As of 11:00 Monday they text of the bill posted on the Texas State web site does NOT contain a provision excluding 3-year lease options.