Contract for Deed vs Deed of Trust in Texas
There are two structurally different ways to owner-finance a house in Texas, and they are not variations on a theme. In one, the seller keeps legal title until the buyer pays in full. In the other, the deed transfers at closing and the seller keeps a lien. Texas law treats these so differently that choosing between them is the single most consequential decision in an owner-financed transaction.
The short version: a contract for deed is an executory contract governed by Subchapter D of Property Code Chapter 5, which imposes a long list of affirmative seller duties with per-day statutory damages attached. A deed of trust sale is an ordinary conveyance with a purchase-money lien, governed by the same foreclosure statute that applies to bank mortgages. Texas practitioners overwhelmingly use the second.
What each structure actually is
Contract for deed. The buyer takes possession and makes payments. The seller signs no deed at closing. Legal title stays in the seller’s name until the final payment; the buyer holds an equitable interest and a contract right. In statutory language it is an “executory contract for conveyance” — executory because performance on both sides remains outstanding. Texas also treats a lease with an option to purchase as an executory contract: under § 5.062(a)(2), an option to purchase combined or executed concurrently with a residential lease is, together with the lease, considered an executory contract for conveyance.
Deed of trust. The seller signs and delivers a general or special warranty deed at closing. The buyer is now the record owner. The buyer signs a promissory note and a deed of trust conveying the property to a trustee, in trust, with a power of sale exercisable if the buyer defaults. Legally this is the same instrument a bank uses. The seller occupies the lender’s chair, not the owner’s.
Side-by-side
| Contract for deed (executory) | Deed of trust (lien) | |
|---|---|---|
| When title transfers | On final payment, or on conversion under § 5.081; seller holds legal title meanwhile | At closing, by deed |
| What the buyer holds | Equitable/contract interest | Fee title, subject to the lien |
| Remedy on default | Rescission or forfeiture and acceleration only if § 5.064 conditions are met; otherwise trustee’s sale under § 5.066 | Non-judicial foreclosure under § 51.002, or judicial foreclosure |
| Cure period | 30 days under §§ 5.064–5.065; 60 days under § 5.066(b) once equity protection applies | 20-day notice of default for a debtor’s residence, then 21 days’ notice of sale (§ 51.002(b), (d)) |
| Recording | Seller must record the contract with the § 5.069 disclosure within 30 days (§ 5.076) | Deed and deed of trust recorded at closing as a matter of ordinary practice |
| Statutory seller duties | Extensive — §§ 5.069, 5.070, 5.071, 5.072, 5.073, 5.074, 5.076, 5.077, 5.079, 5.081, 5.085 | None specific to the structure; ordinary contract, disclosure, and servicing law applies |
| Damages exposure | Liquidated damages by statute, several running per day | Ordinary contract and DTPA exposure |
| Typical use today | Rare in Texas residential practice; some raw-land and short-term arrangements | The default for residential owner financing |
What Subchapter D requires of the seller
This list is the reason the structure fell out of favor. Every item below is an affirmative duty on the seller in a residential executory contract.
Before the purchaser signs. A survey completed within the past year or plat of a current survey, a legible copy of any document describing an encumbrance affecting title, and a written property-condition notice in the statutory form attached to the contract (§ 5.069). A tax certificate from each taxing unit and a legible copy of any insurance policy or binder (§ 5.070). A written statement of financing terms — purchase price, interest rate, total interest for the term, total principal and interest, any late charge, and the fact that no prepayment penalty may be charged (§ 5.071).
In the contract. No late fee exceeding the lesser of 8 percent of the monthly payment or the actual administrative cost of processing it; no prohibition on the purchaser pledging their interest to fund improvements; no prepayment penalty; no forfeiture of an option fee for a late payment (§ 5.073(a)). Any provision purporting to waive a right or exempt a party from a duty under Subchapter D is void (§ 5.073(b)). The contract must carry the statutory “final agreement” notice (§ 5.072(d)) and the 14-day cancellation notice (§ 5.074(c)–(d)).
After signing. Record the contract, with the § 5.069 disclosure attached, on or before the 30th day after execution (§ 5.076). Deliver an annual accounting statement in January of every year of the contract, postmarked by January 31 if mailed, showing amount paid, remaining amount owed, number of payments remaining, amounts paid to taxing authorities and insurers on the purchaser’s behalf, an accounting of any insurance proceeds applied, and a copy of any changed policy (§ 5.077).
Throughout. The seller may not execute an executory contract without owning the property in fee simple free of liens, and must maintain fee simple title free of liens for the duration, subject to narrow exceptions with their own disclosure conditions (§ 5.085).
At the end. If the contract was never recorded or converted, transfer recorded legal title within 30 days of receiving the final payment (§ 5.079(a)).
The penalties
Texas attached numbers to these duties, and they compound.
- § 5.077: a seller with fewer than two transactions in a 12-month period who misses the annual statement owes $100 per statement plus reasonable attorney’s fees. A seller with two or more transactions in a 12-month period owes $250 per day after January 31 until the statement is delivered, capped at the fair market value of the property, plus attorney’s fees.
- § 5.079(b): failure to transfer title after final payment costs $250 per day from the 31st through the 90th day, then $500 per day thereafter, plus attorney’s fees.
- § 5.076(e): failure to record is measured the same way as § 5.079, capped at $500 per calendar year of noncompliance.
- §§ 5.069(d), 5.070(b), 5.072(e): failure to make the property-condition, tax-and-insurance, or oral-agreement disclosures is a deceptive act under Tex. Bus. & Com. Code § 17.46, actionable under the DTPA, and entitles the purchaser to cancel and rescind with a full refund of all payments made.
A seller who quietly collected payments for six years without sending a January statement, and who is above the two-transaction line, is looking at a per-day accrual against the property’s fair market value plus fees — before anyone reaches the DTPA claims.
Remedies on default, and the buyer’s escape hatches
The forfeiture-and-repossession remedy that made contracts for deed attractive to sellers is now heavily conditioned. Under § 5.064, a seller may enforce rescission or forfeiture and acceleration only if the seller gave notice of intent and of the 30-day cure right, the purchaser failed to cure within 30 days, § 5.066 does not apply, and the contract has not been recorded. The last condition is a trap: the seller is required by § 5.076 to record, and recording extinguishes the forfeiture remedy.
Section 5.066 supplies what replaces it. If the purchaser defaults after paying 40 percent or more of the amount due or the equivalent of 48 monthly payments, or if the contract has been recorded regardless of amount paid, the seller must proceed through a trustee’s sale — 60 days’ notice and opportunity to cure in the statutory form, notice of sale posted, filed, and served under § 51.002, sale conducted under § 51.002, fee simple title conveyed to the buyer at sale free of encumbrance, and any surplus over the debt disbursed to the defaulting purchaser. In other words, the buyer’s equity is protected the way a mortgagor’s is.
The buyer also holds two unilateral rights. Under § 5.074, the purchaser may cancel and rescind for any reason by written notice delivered not later than the 14th day after the date of the contract, with the seller obligated to return everything within 10 days. And under § 5.081, the purchaser may at any time, without penalty, convert the equitable interest into recorded legal title — either by tendering the payoff, or by delivering a promissory note equal to the balance carrying the same interest rate, due dates, and late fees as the contract, against which the seller must deliver a deed and take back a deed of trust. A seller who refuses faces § 5.079-style damages.
Why the law looks like this
Subchapter D was not written in the abstract. The Legislature acted in 1995 (Acts 1995, 74th Leg., ch. 994) against documented abuses in the colonias along the border, where families bought lots on contracts for deed at high rates and lost everything over a missed payment, often on land without water, sewer, or a recorded plat. The 2001 rewrite (Acts 2001, 77th Leg., ch. 693) renumbered and expanded the subchapter and applied it statewide with real money attached. The 2005 amendments (Acts 2005, 79th Leg., Ch. 978, H.B. 1823) added the two-or-more-transactions tier to § 5.077, brought lease-option arrangements inside the definition, and added the § 5.081 conversion right. Further amendments followed in 2015 (Ch. 996, H.B. 311).
Read the property-condition form in § 5.069 and the history is obvious: it asks whether the property is in a recorded subdivision, has potable water, has sewer, is approved for a septic system, has electric service, is outside a floodplain, and has maintained roads.
Why Texas practitioners prefer the deed of trust
Not because the deed-of-trust route is unregulated — it is not. A seller-financed sale still triggers the Texas seller finance notice requirements when an existing lien stays on the property, still raises RMLO licensing thresholds, and still requires a competent servicing ledger. But it trades an unfamiliar statutory regime with per-day damages for a familiar one. Foreclosure follows § 51.002: 20 days’ notice of default to a debtor whose residence secures the debt, then at least 21 days’ notice of sale by posting, filing with the county clerk, and certified mail to each obligated debtor, with the sale held between 10 a.m. and 4 p.m. on the first Tuesday of a month at the designated courthouse area. Title companies will insure it. Buyers can get homestead exemptions and build recorded equity. And there is no January 31 deadline that turns into $250 a day.
Both structures share one requirement completely: an accurate, contemporaneous ledger of every payment received and how it was applied. Section 5.077 makes that explicit for executory contracts by demanding an annual statement of amount paid, amount owed, and payments remaining. A deed-of-trust seller owes no such statutory statement but needs the same numbers the moment a payoff, a refinance, or a dispute arrives — which is exactly why the order in which payments are applied has to be right from the first payment, and the problem OwnerNote is being built to solve.
This is a structural overview, not a substitute for reviewing the current text of Chapter 5 and having a Texas real estate attorney paper the transaction. Confirm every section cited here against the Property Code as currently published before relying on it.