Executory Contracts and Lease-Options in Texas
Executory Contracts and Lease-Options in Texas
Information, not legal advice. Laws change; check the current statute or rule and talk to a Texas attorney before you act.
An executory contract is a sale where the buyer pays over time and gets the deed later. The classic example is a "contract for deed." In Texas, a residential lease paired with an option to buy (a lease-option, or "rent-to-own") is also treated as an executory contract. Both fall under Texas Property Code chapter 5, subchapter D (§§5.061-5.085).
The rules exist because buyers under these contracts could pay for years and then lose everything, including their payments, after a single default. The result is a demanding rent-to-own law that often surprises investors coming from other states.
What the subchapter covers
- Executory contracts for residential real property, which includes a lot of one acre or less (Prop. Code §5.062(a)).
- An option to purchase that is combined with, or signed at the same time as, a residential lease (§5.062(a)(2)). The lease and option are treated together.
- It does not apply if the contract calls for the deed to be delivered within 180 days of the contract's final execution (§5.062(c)).
During the lease part of a lease-option, Texas landlord-tenant law (Prop. Code ch. 92) also applies. Once the tenant exercises the option, ch. 92 no longer applies (§5.0621).
Short lease-options versus everything else
| Contract | Which rules apply |
|---|---|
| Lease-option with a term of three years or less | A reduced set: default notice and the 30-day right to cure (§§5.063-5.065), most of the banned-terms list (§5.073), and §§5.083-5.085, which include the lien rule (§5.062(f)) |
| Contract for deed, or lease-option over three years | The full subchapter: disclosures, recording, annual statements, conversion and equity protections |
Certain equity-protection and conversion sections never apply to lease-options (§5.062(e)).
Rules every executory contract must follow
Default and cure. Before enforcing a remedy, the seller must send a written default notice that meets the statute's form requirements, and the buyer has 30 days after notice to cure (§§5.063-5.065). The buyer can't waive this.
Banned terms (§5.073). A contract may not include:
- A late fee above the lesser of 8% of the monthly payment or the seller's actual administrative cost.
- A ban on the buyer pledging their interest to secure a loan for improvements.
- A prepayment penalty.
- Forfeiture of the option fee for a late payment.
- For a lease-option, a penalty for exercising rights under tenant law, such as asking for repairs.
The lien rule (§5.085). A seller may not sign an executory contract unless the seller owns the property in fee simple free of liens and encumbrances, and must keep it that way. There are three narrow exceptions:
- liens caused by the buyer's own conduct;
- liens for improvement loans the buyer agreed to; and
- a lien the seller placed before the contract, for a loan used only to buy the property, but only if the seller gives a separate written disclosure at least three days before signing, the lienholder does not prohibit the executory contract and agrees to verify loan status for the buyer and accept payments directly from the buyer if the seller defaults, and the contract lets the buyer cure the seller's default and deduct 150% of what the buyer paid the lender.
A violation is a deceptive trade practice. The buyer may cancel and recover all payments of any kind made to the seller, plus taxes paid and the value of improvements (§5.085(c)).
Why this matters for subject-to investors. In a subject-to purchase, the prior owner placed the lien, not the investor, and the lender has not agreed to anything. So the §5.085(b)(3) exception generally isn't available, and the short-lease rule keeps §5.085 in force even for a one-year lease-option. A plain rental (no option) on a subject-to house is a different matter. A lease-option on a house the seller owns free and clear avoids the lien problem.
The full rules (contracts for deed and longer lease-options)
| Requirement | Section |
|---|---|
| Before signing: a survey from the past year or a plat of a current survey, copies of documents describing encumbrances or claims on title, and a written property-condition notice (failing to do so lets the buyer cancel and recover payments) | §5.069 |
| Tax certificate and insurance information | §5.070 |
| In writing, with required statements | §5.072 |
| Record the contract within 30 days of signing (damages up to $500 per year of noncompliance) | §5.076 |
| Annual statement postmarked by January 31 each year: amount paid, balance, payments left, taxes and insurance paid. A seller with two or more contracts a year owes $250 a day for each day it's late (capped at the property's fair market value), plus attorney's fees; others owe $100 per missed statement | §5.077 |
| Deed (recorded legal title) within 30 days of the final payment; $250 a day from day 31 to 90 and $500 a day after, plus attorney's fees | §5.079 |
| The buyer may convert to a deed and a note and deed of trust at any time, without penalty; the seller has 10 days to respond to a tendered note | §5.081 |
| Once the buyer has paid 40% of the price or 48 monthly payments, or the contract is recorded, the seller must give 60 days to cure and then foreclose under §51.002 instead of forfeiting the buyer's interest | §5.066 |
| Documents in Spanish (or another language) if negotiated in that language | §5.068 |
Federal angles
- Due-on-sale. Federal law protects a borrower only for a lease of three years or less without an option to purchase (12 U.S.C. §1701j-3(d)). A lease-option on a mortgaged house is a transfer the lender can use to accelerate.
- Credit sale. Under Regulation Z, a lease can be a credit sale if the tenant pays about the full value of the property and becomes the owner for nominal extra payment (12 C.F.R. §1026.2(a)(16)). Then lending rules can apply.
Alternatives investors use
Investors who want to sell on terms in Texas often choose a recorded deed with a note and deed of trust instead, either plain seller financing or a wraparound loan, which have their own rules. See wraparound mortgages and seller finance in Texas.
How this shows up in Agentix Data
Agentix Data does not track recorded executory contracts, leases or options; those sit in county clerk land records we don't currently carry. What it does help with is the input side: finding owners who may want to sell on terms (absentee and out-of-state owners, long-time owners, tax-delinquent owners, probate and code cases), with appraisal-district data showing homestead status and ownership history for each parcel.
Sources
- Texas Property Code ch. 5, subchapter D (executory contracts): https://statutes.capitol.texas.gov/Docs/PR/htm/PR.5.htm
- §5.062 (applicability, lease-options, 180 days, three-year rule): https://texas.public.law/statutes/tex._prop._code_section_5.062
- §5.0621 (ch. 92 applies to the lease part): https://texas.public.law/statutes/tex._prop._code_section_5.0621
- §5.065 (30-day cure): https://texas.public.law/statutes/tex._prop._code_section_5.065
- §5.066 (equity protection, foreclosure required): https://texas.public.law/statutes/tex._prop._code_section_5.066
- §5.073 (prohibited provisions): https://texas.public.law/statutes/tex._prop._code_section_5.073
- §5.076 (recording): https://texas.public.law/statutes/tex._prop._code_section_5.076
- §5.077 (annual statement): https://texas.public.law/statutes/tex._prop._code_section_5.077
- §5.081 (right to convert): https://texas.public.law/statutes/tex._prop._code_section_5.081
- §5.085 (fee simple title, lien rule): https://texas.public.law/statutes/tex._prop._code_section_5.085
- 12 U.S.C. §1701j-3: https://www.law.cornell.edu/uscode/text/12/1701j-3
- 12 C.F.R. §1026.2 (definitions, credit sale): https://www.consumerfinance.gov/rules-policy/regulations/1026/2/
General information, not legal or financial advice.