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Featured: Lucille D. Wood, Clinical Professor at The University of Texas School of Law, whose research in a 2012 study helped lead to the passage of House Bill 311 by Rep. Terry Canales, D-Edinburg, and Sen. Eddie Lucio, Jr., D-Brownsville. HB 311 will help protect thousands of low-income families, especially those who live in colonias, who purchase their homes through non-traditional financing known as contracts for deed. Photograph Courtesy THE UNIVERSITY OF TEXAS SCHOOL OF LAW

 

Thousands of Texans who purchase their homes through non-traditional financing known as contracts for deed would be better safeguarded from losing their investment under legislation by Rep. Terry Canales, D-Edinburg, which was approved by the Legislature on Saturday, May 30. The measure, House Bill 311, whose Senate sponsor was Sen. Eddie Lucio, Jr., D-Brownsville, now goes to Gov. Greg Abbott for his approval. “I am honored to announce that House Bill 311 has been passed by the Texas Legislature, ” said Canales. “This important legislation will help protect Texas homebuyers from unscrupulous sellers. For most Texans, our home is the most expensive purchase we will make in our lifetime and it is paramount that we protect that investment.” Contracts for deed oftentimes are used when traditional financing, such as mortgages through a financial institution, is not available. Many of the estimated half-million Texans who live in colonias are at risk because they buy their homes through a contract for deed. The legislation’s major goals include streamlining the title conversion process for contracts for deed so title is conveyed to the purchaser, giving the purchaser protection, and the seller still retains a lien on the property at the same terms of the original contract. “This puts these properties back into the real estate market, allowing them to be properly sold and allows the homeowner to take out a loan on them,” Canales said. HB 311 also will encourage contracts for deed to be recorded so that other buyers, lenders, and title companies know that a property has been sold. Contracts for deed, also known as executory contracts, are contracts for the sale of land – usually residential property – where the seller keeps title to the property until the buyer has paid the full contract price. “Most of these contracts are long-term arrangements, lasting eight to 10 years on average,” Canales, an attorney, explained. “In that time, lots of things can go wrong. Sellers die, get divorced, or just disappear. Buyers have a difficult time getting homestead exemptions for their taxes, buying insurance, refinancing, or doing other things property owners with a deed can do.” A deed is a written instrument that, when executed and delivered, convey (transfer) title to or an interest in real estate. HB 311 would automatically require contracts for deed to convey (transfer) the title to the homebuyer, and would encourage these contracts to be legally recorded, which establishes ownership of the residence. Canales said HB 311 would help improve “an outdated system of property transactions. Unfortunately, contracts for deed are structured in a way that allows for abusive practices to arise,” the House District 40 lawmaker explained. “Buyers who complete their payment are not guaranteed the conveyance of title, and if the buyer defaults, they may lose any payment that they have already paid. When not recorded, buyers face less protection and risk losing their property.” Robert Doggett, an attorney with Texas Family Council, which supported the legislation, agreed that the legislation modernizes this type of residential real estate transaction.“For many decades these transactions have caused problems for Texas homeowners because they delayed the buyer receiving title to their property for many years. Buyers who had to move in the middle of their contracts lost the value of all improvements and any equity they achieved because there was nothing for them to sell,” said Doggett. “Thanks to the continued efforts of Rep. Canales and his staff both this session and last, Texans with these contracts will actually become Texas homeowners simply by filing their contracts. HB 311 will truly help make the problems caused by contracts for deed a relic of the past.” Canales thanked the Texas Family Council and Randy Lee with Stewart Title Guaranty Company for endorsing the legislation, which Canales first filed in 2013. But the South Texas lawmaker also praised a 2012 study commissioned by the Texas Department of Housing and Community Affairs (TDHCA), which contracted with Peter M. Ward, C.B. Smith Sr. Centennial Chair in US-Mexico Relations at the LBJ School; Heather Way, ’96, director of the Law School’s Community Development Clinic; and Lucille Wood, 2011–2012 Research Fellow at the William Wayne Justice Center for Public Interest Law, to direct the study. Their “invaluable research” found that despite these reforms, contracts for deed continue to be problematic transactions for consumers, the South Texas legislator noted. The research was extensive, according to a December 10, 2012 feature story by UT Law, The Magazine of the University of Texas School of Law, which chronicled the in-depth look at the problems of contracts for deeds among lower-income families ( http://www.utexas.edu/law/magazine/2012/12/10/colonias-contracts/ ).

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Protections for low-income Texas homeowners, including thousands who live in colonias, approved by the Legislature, says Rep. Canales

By DAVID A. DÍAZ
Legislativemedia@aol.com

Thousands of Texans who purchase their homes through non-traditional financing known as contracts for deed would be better safeguarded from losing their investment under legislation by Rep. Terry Canales, D-Edinburg, which was approved by the Legislature on Saturday, May 30.

The measure, House Bill 311, whose Senate sponsor was Sen. Eddie Lucio, Jr., D-Brownsville, now goes to Gov. Greg Abbott for his approval.

“I am honored to announce that House Bill 311 has been passed by the Texas Legislature” said Canales. “This important legislation will help protect Texas homebuyers from unscrupulous sellers. For most Texans, our home is the most expensive purchase we will make in our lifetime and it is paramount that we protect that investment.”

Contracts for deed oftentimes are used when traditional financing, such as mortgages through a financial institution, are not available.

Many of the estimated half-million Texans who live in colonias are at risk because they buy their homes through a contract for deed.

The legislation’s major goals include:

• Streamlining the title conversion process for contracts for deed so title is conveyed to the purchaser, giving the purchaser protection, and the seller still retains a lien on the property at the same terms of the original contract. “This puts these properties back into the real estate market, allowing them to be properly sold and allows the homeowner to take out a loan on them,” Canales said.

• Encouraging contracts for deed to be recorded so that other buyers, lenders, and title companies know that a property has been sold.

Contracts for deed, also known as executory contracts, are contracts for the sale of land – usually residential property – where the seller keeps title to the property until the buyer has paid the full contract price.

“Most of these contracts are long-term arrangements, lasting eight to 10 years on average,” Canales, an attorney, explained. “In that time, lots of things can go wrong. Sellers die, get divorced, or just disappear. Buyers have a difficult time getting homestead exemptions for their taxes, buying insurance, refinancing, or doing other things property owners with a deed can do.”

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

HB 311 would automatically require contracts for deed to convey (transfer) the title to the homebuyer, and would encourage these contracts to be legally recorded, which establishes ownership of the residence.

Canales said HB 311 would help improve “an outdated system of property transactions.”

“Unfortunately, contracts for deed are structured in a way that allows for abusive practices to arise,” the House District 40 lawmaker explained. “Buyers who complete their payment are not guaranteed the conveyance of title, and if the buyer defaults, they may lose any payment that they have already paid. When not recorded, buyers face less protection and risk losing their property.”

Robert Doggett, an attorney with Texas Family Council, which supported the legislation, agreed that the legislation modernizes this type of residential real estate transaction.

“For many decades these transactions have caused problems for Texas homeowners because they delayed the buyer receiving title to their property for many years. Buyers who had to move in the middle of their contracts lost the value of all improvements and any equity they achieved because there was nothing for them to sell,” said Doggett. “Thanks to the continued efforts of Rep. Canales and his staff both this session and last, Texans with these contracts will actually become Texas homeowners simply by filing their contracts. HB 311 will truly help make the problems caused by contracts for deed a relic of the past.”

Canales thanked the Texas Family Council and Randy Lee with Stewart Title Guaranty Company for endorsing the legislation, which Canales first filed in 2013.

But the South Texas lawmaker also praised a 201 2 study commissioned by the Texas Department of Housing and Community Affairs (TDHCA), which contracted with Peter M. Ward, C.B. Smith Sr. Centennial Chair in US-Mexico Relations at the LBJ School; Heather Way, ’96, director of the Law School’s Community Development Clinic; and Lucille Wood, 2011–2012 Research Fellow at the William Wayne Justice Center for Public Interest Law, to direct the study.

Their “invaluable research” found that despite these reforms, contracts for deed continue to be problematic transactions for consumers, the South Texas legislator noted.

The research was extensive, according to a December 10, 2012 feature story by UT Law, The Magazine of the University of Texas School of Law, which chronicled the in-depth look at the problems of contracts for deeds among lower-income families (www.utexas.edu/law/magazine/2012/12/10/colonias-contracts/).

“We visited more than thirteen hundred households to examine whether and how low-income buyers in Texas’s poorest communities are obtaining title to their land, with a specific focus on the use of contract for deed,” Way told the magazine. “Texas lawmakers were concerned with the rampant use of contracts for deed in land sales to low-income homebuyers in colonias, and passed legislation in the mid-1990s to afford buyers greater protections. This report is one of the first major studies to chronicle land transaction practices in colonias since the passage of the legislation.”

But now, HB 311 limits a seller’s ability to enforce certain remedies under an executory contract for conveyance of real property, creates liability for failing to record an executory contract, and specifies the effect of a recorded executory contract related to legal title of the property, according to the bill analysis prepared by the House Research Organization.

The House Research Organization is the research arm of the House of Representatives.

Over the past 27 years, the Legislature has enacted many consumer protections for contracts for deed buyers. However, the study commissioned by the Texas Department of Housing and Community Affairs (TDHCA) found that despite these reforms, contracts for deed continue to be problematic transactions for consumers, the South Texas legislator noted.

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

“In a survey done by TDHCA of six counties with the largest number of colonias, they found that approximately 20 percent of homestead owners purchased property with an unrecorded contract for deed, and an estimated 6,597 homestead owners still use unrecorded contracts as of 2012,” Canales said. “Additionally, TDHCA reported that 47 percent of homeowners who use contracts for deed have not obtained a homestead tax exemption.”

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

The narrative by UT Law, The Magazine of the University of Texas School of Law provided important insights into the need for legislation:

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

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

In 2011, the Texas Sunset Advisory Commission requested that the Texas Department of Housing and Community Affairs commission a study to assess the prevalence of contracts for deed in colonias.

Peter M. Ward, C.B. Smith Sr. Centennial Chair in US-Mexico Relations at the LBJ School; Heather Way, ’96, Director of the Law School’s Community Development Clinic; and Lucille Wood, 2011–2012 Research Fellow at the William Wayne Justice Center for Public Interest Law, were contracted to direct the study.

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

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

BILL ANALYSIS

In a separate accounting, the House Research Organization provided the following background and highlights of the Canales legislation:

Under Property Code, sec. 5.061 default related to an executory contract for conveyance is the failure to make timely payment or comply with a term of the contract. Under sec. 5.066, if the purchaser defaults after paying 40 percent or more of the amount due or the equivalent of 48 monthly payments under the executory contract, the seller can conduct a sale similar to a traditional foreclosure sale through a trustee.
The purchaser’s interest in the property can be sold, but the seller cannot enforce the remedy of rescission or of forfeiture and acceleration after the purchaser has paid 40 percent of the amount due or the equivalent of 48 monthly payments.

Under sec. 5.066 the seller must give the purchaser 60 days to cure the default after notice is given before the seller can sell the property. If the amount received for the property at the sale is greater than the amount of debt the purchaser still owes the seller, the seller must give the excess amount to the purchaser.

Sec. 5.076 requires a seller to record an executory contract within 30 days after it is executed. Sec. 5.079 requires a seller to transfer recorded, legal title of the property covered by an executory contract to the purchaser within 30 days of receiving the final payment due.

A seller who fails to transfer the title is liable to the purchaser for liquidated damages of $250 per day for each day the seller fails to transfer the title from the 31st day until the 90th day, and $500 per day following the 90th day after final payment. The seller also would be liable for reasonable attorney’s fees.

DIGEST

HB 311 limits a seller’s ability to enforce certain remedies under an executory contract for conveyance of real property, create liability for failing to record an executory contract, and specify the effect of a recorded executory contract related to legal title of the property.

The bill adds to the limitations on a seller’s authority to exercise the remedy of rescission or of forfeiture and acceleration the condition that an executory contract had not been recorded. A seller could not enforce the remedies of rescission or of forfeiture and acceleration after the contract had been recorded.

The bill specifies that in the event the purchaser defaulted and the executory contract had been recorded, regardless of the amount the purchaser had paid, the seller could conduct a sale through a trustee to sell the purchaser’s interest in the property. The requirements of the sale would be the same as under current law.

The bill creates liability for sellers who failed to record an executory contract within 30 days after the contract was executed. The liability of the seller to the purchaser would be similar to the liability for failing to transfer title that exists under current law, except the damages could not exceed the value of the property or the amount paid under the contract, whichever was greater. This would not limit or affect any other rights or remedies a purchaser had under the law.

On recording, an executory contract would convey legal title to the purchaser, subject to a lien retained by the seller for the amount of the unpaid contract price, less any lawful deductions. Extrinsic evidence could be used to supply the legal description of the property if that information was not apparent from the recorded contract.

The bill allows a purchaser, as under current law, to convert an interest in the property under an executory contract into recorded, legal title at any time and without paying penalties or charges of any kind, but it would make this provision apply regardless of whether the seller had already recorded the executory contract. This could not be construed to limit the purchaser’s equitable interest in the property or other rights of the purchaser.

The bill would take effect September 1, 2015, and would apply only to an executory contract entered into on or after that date.

SUPPORTERS SAY:

HB 311 would protect purchasers involved in executory contracts from unfair practices.

Executory contracts often are used in transactions involving purchasers who do not understand their rights under the law. The bill would protect purchasers’ equity and title in their homes by providing liability if the seller did not record the contract, as required by law, and by limiting the use of rescission or forfeiture and acceleration as a remedy when the purchaser defaulted.

Under both rescission and forfeiture and acceleration, purchasers lose their homes and the money they have already paid under the contract, making it more similar to a landlord-tenant relationship than a homeowner-lender relationship. The bill would protect homeowners from losing everything because of a missed payment.

HB 311 would not restrict businesses because the use of executory contracts would not be limited, only clarified. The recording requirement for executory contracts already exists, but it is not always followed.

The bill encourages sellers to record executory contracts by creating liability if the seller did not, but a business still would be able to use this kind of contract. The bill also changes the remedies used in the event of a default of an executory contract to be more like traditional remedies under a conventional mortgage, such as a foreclosure sale. This also would not restrict businesses and still would offer a remedy for a seller to take the property back in the event of a default and receive the value of the property through a foreclosure-type sale.

In approving HB 311, the Legislature also endorsed an amendment by Canales that specifies that the use of extrinsic evidence to supply the legal description of property, if the recorded contract did not contain that information, would not affect the rights of a creditor or a subsequent purchaser who paid valuable consideration and who did not have notice of the executory contract.

The extrinsic evidence does not affect the rights of a creditor or a subsequent purchaser who has paid valuable consideration and who does not have notice of the executory contract.

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Rep. Terry Canales, D-Edinburg, represents House District 40 in Hidalgo County. HD 4o includes portions or all of Edinburg, Elsa, Faysville, La Blanca, Linn, Lópezville, McAllen, Pharr, San Carlos and Weslaco. He may be reached at his House District Office in Edinburg at (956) 383-0860 or at the Capitol at (512) 463-0426.

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