Selling a house via owner financing now illegel in Texas?!

Hey everyone Im a biggining Investor and close on my first rehab project on Jan 10th. One thing that a realtor told me that I found interesting was that selling a house via owner financing/land contract is now illegeal in Texas! Is that true? He also went on to say that you COULD sell a house via owner financing if you OWNED the property free and clear of any mortgate payments but he wasnt sure about it being true. Anyone know anything about this?! Thanks

I believe contract for deed (CFD) is “illegal”, but I’m almost 100% sure owner financing itself isn’t. CFD’s are when you sell a property but keep the deed until the buyer has fulfilled their contractual obligation. However, I can still buy a property with an underlying mortgage, and wrap it using an all inclusive trust deed to a new buyer with owner financing.

What I’m wondering about is that Lease/Options are pretty much illegal now in Texas (or will be on Jan 1, 2006), but I keep seeing signs and ads for them.

If I understand the Texas legislation correctly, this bill converts ALL residential home leases containing a purchase option into “executory contracts”. An executory contract is considered a sale under IRS tax rules, whereas a lease with option is not. This will result in DRASTIC adverse tax consequences to investors who cannot take advantage of long term capital gains rules.

Second, the bill requires that any seller of a property under an executory contract own property free and clear of all liens. There are many cases where this would be impractical, since creative financing is often a solution to a property that is difficult to sell. Restricting the means of sale is going to result in more foreclosures in Texas. It will also limit the options of many low-income buyers who have no other means of buying a home than on an executory contract from a seller.

The only means of owner financing left in the state of TX will be:

  1. Sell subject to an existing loan and taking a wrap (aka “All Inclusive Trust Deed” or “AITD”)

  2. Let the buyer assume your note and take back a second.

My suggestion is simple. Use a NARS land trust. You will be in full compliance with Texas law and it is the safest form of title transfer.

We asked our attorneys to look at these new Texas laws and analyze them for what they’re worth, while understanding clearly that such laws are not intended to prohibit the formation of trusts or the letting of one’s own income property. Our type of conveying is not of realty but personalty, and does not pertain to the execution of a contract to purchase real estate.

An analogy might be that of the leasing of a car wherein the lessee has virtually 100% of the benefits of ownership of the car without a title transfer; but does never own the vehicle until/unless he or she would decide to buy it for its Fair market value at the termination of the agreement. The lessee has the first right to purchase, but is under no obligation to do so, and receives no more of a contracted bargain price than would anyone else buying the same car if the lessee opted not to.

The “substance over form” argument should come into play only if the simultaneous contracts were fully dependent upon one another to accomplish a stated objective. In our case, the lease agreement and the trust document are independent of one another.

If the first right to purchase clause is of particular concern, I might suggest something like:

“When the trust property is offered for sale upon the trust’s scheduled termination date, such offering shall be at no less than full fair market value as determined by a bona fide MAI appraisal, or by any other means of evaluation mutually acceptable to the trust’s beneficiaries. The right to purchase the trust property at that value shall first be offered to any beneficiary who would, at the time of termination, be a resident in the trust property: following which, prior to an offer for sale on the open market, the right to purchase at the then fair market value would go to any other beneficiary making the highest offer.”

. . . we have run across this problem before, and the resolution is an easy one; that is, the hurdle that we have had to overcome in many of these cases has been that these transactions look to the untrained eye like sales-leasebacks, but they aren’t. The Texas law deals with sale-leasebacks and not transfers to Trusts followed by leases either to a beneficiary or a third party. In other words, in these transactions, there is no “sale” which helps to avoid the due on sale clauses and tax reassessments.

Further, rights of first refusal and options are different things as well. A right of first refusal means that if a seller receives a bona fide confirmed offer from a third party, the person holding the right has the opportunity to match that bona fide offer, however, there is no obligation by the seller to sell to the person holding the right for any amount other than the bona fide amount. An option is a contractual right held by the optionee that requires the seller to sell the property for a certain price dictated by the option.

In our scenario, the beneficiaries only have rights of first refusal, not options. I believe the language is fairly clear in that regard, but if there is any question, it could easily be resolved by including language along the lines of “Nothing in these documents shall be construed to create an option by any party unless expressly set forth herein.”

I hope this information is helpful to you. Good luck.

A new Texas bill says that beginning Sept. 1, 2005 all Contract for Deed aggreements are now “executory contracts”. All this means is that the buyer has the right to go to a bank and get a loan form them instead of paying you. However, the buyer can’t just go and get any loan. They have to get a “promissory note equal to the amount owed under the executory contract, containing the same interest, due dates, and late fees.”.

Just because the buyer has the right to do this does not mean they will…just that they can. Because of this new law I would say that it is better to buy on CFD, than to sell, unless you can wright it into the contract that the buyer won’t go to a bank.

Chris Bright

CFD’s and Lease/Option’s are NOT ILLEGAL IN TEXAS!!!

What is the purpose of half of these ridicules laws Texas has? The don’t protect anyone, they seem just to be another form of control. I purchased our home free and clear, then decided to remodel, so took out a small loan. Decided to do more remodeling and found that I couldn’t because of their laws…It’s my property and Texas is a dang bully!!!


 This is a very old thread! It would have probable been better to make a new post on this topic?

I don’t completely understand your post but maybe you could repost this as a new topic and elaborate further as to what Texas is doing and why your upset?


There are now some federal issues with owner carry. Unless it was an owner seller occupied home, there are legal issues with loan origination.