How Should I Seller Finance To Tenant

Question

I have a single family home, 4 bedrooms, 2 baths, single story, 1800 sq. ft. in a nice suburb community in Houston, Texas. I purchased the home in 2009 for 121K and I would like to sell it today for 170K. It has had only 1 tenant since I moved out of it. They have children who go to public school and they want me to finance it to them in a 3-5 year period. They want me to keep it in my name because they have bad credit. Then in a set date,, they would close to have the title transferred legally.

They have never missed a payment and have been great tenants. They offered me 60K down payment and then would pay me around 2K per month. The monthly mortgage with Wells Fargo is around 1200 per month. They want me to use that monthly payment to begin to pay off the principal. Then in 3-5 years they will either have enough to purchase the rest or get financing through a traditional bank to close.

I have never been in this situation and I am only getting more and more confused as to what to do because of all the different types of financing structure ideas i've read about. Also, I worry what would happen if they change their mind about buying in a few years? What if there is a fire or flood? Should they pay for everything moving forward (utilities, taxes, MIP, Insurance, HOA, Repairs, etc)? What about home appreciation (it's worth 170K today but not in five years)? How will I be paid for financing the property? Interest?

Any advise or suggestions would be appreciated! I will most likely seek out a real estate lawyer to write up a contract but I would like to have a financing structure idea in mind.

Jeff Bridges · Answer

I think this proposal of yours has bad news written all over it. You have family renting from you (another bad idea, but thats for another discussion), then you want to be a nice guy and sell to them 50k higher than you purchased it for with a higher interest rate than a bank would offer ( yes we know they are likely not credit worthy). I see two conflicting goals and you can't help someone out while profiting off of them. Further, what happens if things go sour, they stop payments due to unexpected family emergency and you have to foreclose. Are you willing to foreclose and/or evict family members or let them slide while your loan goes into default?  I think you would help more by finding them a nice starter house and help them through rebuilding their credit than giving them a liability with 2k payments plus full responsibility for all other maintenance costs including HOA fee. I'd use your real estate knowledge to help them find their own house, their own financing (when they are ready and their credit has been repaired), help them develop a financial budget and give them the skills to succeed. Handing them your house, mortgage responsibility and HOA responsibility in a sketchy back room deal doesn't seem destined for greatness. Sorry if this comes off as a rant. Just trying to be honest and helpful.

Cameron Tope · Answer

@Jeff Bridges is correct, its "safer" and a lot less complicated to owner finance without a loan. Having said that, I have seller financed homes with underlying mortgages, and some mortgages that are not even mine (acquired sub2).

Biggest benefits; no repairs or maintenance, usually sell above market, and charge a high interest rate +8%.

The downsides are; they don't pay and you have to foreclose, and you can miss out on any appreciation the property sees.

If 170k is market value then you could sell it to them for 190-200k. Have them put 60k down and carry the 140k note at 8%. They pay utilities, taxes, insurance, HOA, etc. You make your money on the difference between your note (121k at 4%?) and their note (140k at 8%). If the taxes increase they pay that. Same for insurance.

You are the bank not the property owner anymore. Does Chase pay for your utilities, taxes or insurance?

Bill Schrimpf · Answer

Frank S.Do you have $40K cash or access to it?  Perhaps you can take their $60K, combine it with your $40K to payoff the Wells mortgage.  You then can privately finance to your family writing a proper mortgage or deed of trust, giving you a first position note and allowing you to foreclose if needed.  A good local attorney or closing agent should be able to hep you structure this transaction.  Contact whoever handled the closing when you bought the place,  Wells Fargo probably used somebody reputable.  How this transaction is structured and your ability to limit your risk will be based on local and state laws.  This is still probably a bad idea.

Brian Gibbons · Answer

@Frank Steinruck

(Thanks for the mention @Percy N.)

Lease Options and Wraps in Texas

Cmon folks, know the Texas Law with Executory Contracts (CFDs, Lease w Options. Wrap Around Mortgages, etc)

You can avoid "executory" with a lease and ROFR (aka Right of First Refusal (not executory)).

Bring family down to bank and open savings account to save 3% for FHA down payment plus other home buyer costs.

Fill out a 1003 Res Mortg App and bring borrowers to mortgage professional.

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From Attorney David Willis JD LLM:

"Executory contracts include any transaction  that defers some  material action by either party that pertains to real property   ownership or possession into the future.So  why do lease-options fall  within this definition?  Because the Property Code says so. Section   5.062(a)(2) states:

“An option to purchase real property that includes  or is  combined or executed concurrently with a residential lease  agreement, together  with the lease, is considered an executory contract  for conveyance of real  property.”There is an exception for   lease-options for 180 days or less under section 5.062(c)—otherwise, the  TREC  1-4 contract would violate this provision when combined with a  short-term  lease. Commercial lease-options are not affected.

A case from the Texarkana court of appeals provides a good   definition of an executory contract:

“In a typical real estate contract,  the  seller and purchaser mutually agree to complete payment and title  transfer on a  date certain, the closing date, at which time the  purchaser generally obtains  both title and possession.  By contrast,   in an executory contract, the purchaser is usually given immediate  possession,  but is required to satisfy numerous obligations over an  extended period of time  before the seller has an obligation to transfer  actual title.” Bryant v. Cady, 445 S.W.3d 815, 822-23,  (Tex.App.—Texarkana 2014, no pet.).

Executory Contracts: Requirements

Just for the record, one can still do a long-term  lease-option or  other types of executory contracts—but consider the  requirements. The  landlord/seller must provide the Buyer with a recent  survey or a current plat;  copies of liens, restrictive covenants, and  easements; a Seller’s Disclosure of  Property Condition; a disclosure  for nonsubdivision properties stating  utilities may not be available  until the subdivision is recorded; tax  certificates; a copy of the  insurance policy showing the name of the insurer  and insured along with  a description of the insured property and the policy  amount; a  seven-day notice letter; and an annual accounting that includes  amounts  paid, amounts owed, payments remaining, taxes paid, and the amount paid   for insurance premiums plus an accounting for any insurance proceeds.  All of  this must be done before the contract is signed. See Prop. Code §§5.069 et seq.

Additionally, it is required that sales  advertisements disclose the availability of water, sewer, and electric service. The   seller must provide a thorough disclosure of the financial terms of  the  transaction, including the interest rate, amount of interest  charged for the  term of the contract, the total amount of principal and  interest to be paid,  and the non-existence of a pre-payment penalty.  Excessive late fees and  pre-payment penalties are banned.

Even if all the foregoing statutory  requirements are met,  the buyer may still cancel an executory contract for any  reason within  14 days of signing. Prop. Code §5.074."

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TEXAS PROPERTY CODE CHAPTER 5SUBCHAPTER D. EXECUTORY CONTRACT FOR CONVEYANCENOTE: In 2001 Senate Bill 198 [Acts of the 77th Legislature, Reg. Sess., chap. 693] substantially changed Subchapter D, adding amended versions applicable statewide of many provisions formerly in Subchapter E and applicable only in certain counties. Section 3 of SB 198 contains provisions regarding the effective date (Sept. 1, 2001) and the application of specific sections of Subchapter D to existing and new contracts for deeds. These applicability provisions are excerpted after each pertinent section below and are set out in full following § 5.080.Section5.61.   Definition.5.62.   Applicability.5.63.   Notice.5.64.   Seller's Remedies on Default.5.65.   Right to Cure Default.5.66.   Equity Protection; Sale of Property.5.67.   Placement of Lien for Utility Service. 5.068,   Foreign Language Requirement.5.69.   Seller's Disclosure of Property Condition.5.70.   Seller's Disclosure of Tax Payments and Insurance Coverage.5.71.   Seller's Disclosure of Financing Terms.5.72.   Oral Agreements Prohibited.5.73.   Contract terms Prohibited.5.74.   Purchaser's Right to Cancel Contract Without Cause.5.75.   Purchaser's Right to Pledge Interest in Property on Contracts Entered Into Before September 1, 2001.5.76.   Recording Requirements.5.77.   Annual Accounting Statement.5.78.   Disposition of Insurance Proceeds.5.79.   Title Transfer.5.80.   Liability for Disclosures.§ 5.061 DefinitionIn this subchapter, "default" means the failure to:(1)   make a timely payment; or (2)   comply with a term of an executory contract.§ 5.062. Applicability(a)   This subchapter applies only to a transaction involving an executory contract for conveyance of real property used or to be used as the purchaser's residence or as the residence of a person related to the purchaser within the second degree by consanguinity or affinity, as determined under Chapter 573, Government Code. For purposes of this subchapter, a lot measuring one acre or less is presumed to be residential property.(b)   This subchapter does not apply to a transaction involving the sale of state land or a sale of land by the Veterans' Land Board under an executory contract.(c)   This subchapter does not apply to an executory contract that provides for the delivery of a deed from the seller to the purchaser within 180 days of the date of the final execution of the executory contract.(d)   Section 5.066 and Sections 5.068-5.080 do not apply to a transaction involving an executory contract for conveyance if the purchaser of the property:(1)   is related to the seller of the property within the second degree by consanguinity or affinity, as determined under Chapter 573, Government Code; and(2)   has waived the applicability of those sections in a written agreement.§ 5.063. Notice(a)   Notice under Section 5.064 must be in writing and must be delivered by registered or certified mail, return receipt requested. The notice must be conspicuous and printed in 14-point boldface type or 14-point uppercase typewritten letters, and must include on a separate page the statement:NOTICEYOU ARE NOT COMPLYING WITH THE TERMS OF THE CONTRACT TO BUY YOUR PROPERTY. UNLESS YOU TAKE THE ACTION SPECIFIED IN THIS NOTICE BY (date) THE SELLER HAS THE RIGHT TO TAKE POSSESSION OF YOUR PROPERTY.(b)   The notice must also:(1)   identify and explain the remedy the seller intends to enforce;(2)   if the purchaser has failed to make a timely payment, specify:   (A)   the delinquent amount, itemized into principal and interest;   (B)   any additional charges claimed, such as late charges or attorney's fees; and   (C)   the period to which the delinquency and additional charges relate; and(3)   if the purchaser has failed to comply with a term of the contract, identify the term violated and the action required to cure the violation.(c)   Notice by mail is given when it is mailed to the purchaser's residence or place of business. The affidavit of a person knowledgeable of the facts to the effect that notice was given is prima facie evidence of notice in an action involving a subsequent bona fide purchaser for value if the purchaser is not in possession of the real property and if the stated time to avoid the forfeiture has expired. A bona fide subsequent purchaser for value who relies upon the affidavit under this subsection shall take title free and clear of the contract.Applicability Note [see section 3(b) of SB 198]:The changes in law made by § 5.063 apply only to a purchaser who defaults on or after September 1, 2001, regardless of when the contract was entered into. A purchaser who is in default before September 1, 2001, is covered by the law in effect when the default occurred, and the former law is continued in effect for that purpose.§ 5.064.  Seller's Remedies on DefaultA seller may enforce the remedy of rescission or of forfeiture and acceleration against a purchaser in default under an executory contract for conveyance of real property only if:(1)   the seller notifies the purchaser of:   (A)   the seller's intent to enforce a remedy under this section; and   (B)   the purchaser's right to cure the default within the 60-day period described by Section 5.065;(2)   the purchaser fails to cure the default within the 60-day period described by Section 5.065; and(3)   Section 5.066 does not apply.Applicability Note [see section 3(b) of SB 198]:The changes in law made by § 5.064 apply only to a purchaser who defaults on or after September 1, 2001, regardless of when the contract was entered into. A purchaser who is in default before September 1, 2001, is covered by the law in effect when the default occurred, and the former law is continued in effect for that purpose.§ 5.065.  Right to Cure DefaultNotwithstanding an agreement to the contrary, a purchaser in default under an executory contract for the conveyance of real property may avoid the enforcement of a remedy described by Section 5.064 by complying with the terms of the contract on or before the 60th day after the date notice is given under that section.Applicability Note [see section 3(b) of SB 198]:The changes in law made by § 5.065 apply only to a purchaser who defaults on or after September 1, 2001, regardless of when the contract was entered into. A purchaser who is in default before September 1, 2001, is covered by the law in effect when the default occurred, and the former law is continued in effect for that purpose.§ 5.066.  Equity Protection; Sale of Property(a)   If a purchaser defaults after the purchaser has paid 40 percent or more of the amount due or the equivalent of 48 monthly payments under the executory contract, the seller is granted the power to sell, through a trustee designated by the seller, the purchaser's interest in the property as provided by this section. The seller may not enforce the remedy of rescission or of forfeiture and acceleration.(b)   The seller shall notify a purchaser of a default under the contract and allow the purchaser at least 60 days after the date notice is given to cure the default. The notice must be provided as prescribed by Section 5.063 except that the notice must substitute the following statement:NOTICEYOU ARE NOT COMPLYING WITH THE TERMS OF THE CONTRACT TO BUY YOUR PROPERTY. UNLESS YOU TAKE THE ACTION SPECIFIED IN THIS NOTICE BY (date) A TRUSTEE DESIGNATED BY THE SELLER HAS THE RIGHT TO SELL YOUR PROPERTY AT A PUBLIC AUCTION.(c)   The trustee or a substitute trustee designated by the seller must post, file, and serve a notice of sale and the county clerk shall record and maintain the notice of sale as prescribed by Section 51.002. A notice of sale is not valid unless it is given after the period to cure has expired.(d)   The trustee or a substitute trustee designated by the seller must conduct the sale as prescribed by Section 51.002.  The seller must:(1)   convey to a purchaser at a sale conducted under this section fee simple title to the real property; and(2)   warrant that the property is free from any encumbrance.(e)   The remaining balance of the amount due under the executory contract is the debt for purposes of a sale under this section. If the proceeds of the sale exceed the debt amount, the seller shall disburse the excess funds to the purchaser under the executory contract. If the proceeds of the sale are insufficient to extinguish the debt amount, the seller's right to recover the resulting deficiency is subject to Sections 51.003, 51.004, and 51.005 unless a provision of the executory contract releases the purchaser under the contract from liability.(f)   The affidavit of a person knowledgeable of the facts that states that the notice was given and the sale was conducted as provided by this section is prima facie evidence of those facts. A purchaser for value who relies on an affidavit under this subsection acquires title to the property free and clear of the executory contract.(g)   If a purchaser defaults before the purchaser has paid 40 percent of the amount due or the equivalent of 48 monthly payments under the executory contract, the seller may enforce the remedy of rescission or of forfeiture and acceleration of the indebtedness if the seller complies with the notice requirements of Sections 5.063 and 5.064.Applicability Note [see section 3(b) of SB 198]:The changes in law made by § 5.066 apply only to a purchaser who defaults on or after September 1, 2001, regardless of when the contract was entered into. A purchaser who is in default before September 1, 2001, is covered by the law in effect when the default occurred, and the former law is continued in effect for that purpose.§ 5.067.  Placement of Lien for Utility ServiceNotwithstanding any terms of a contract to the contrary, the placement of a lien for the reasonable value of improvements to residential real estate for purposes of providing utility service to the property shall not constitute a default under the terms of an executory contract for the purchase of the real property.§ 5.068.  Foreign Language RequirementIf the negotiations that precede the execution of an executory contract are conducted primarily in a language other than English, the seller shall provide a copy in that language of all written documents relating to the transaction, including the contract, disclosure notices, annual accounting statements, and a notice of default required by this subchapter.Applicability Note [see section 3(c) of SB 198]:The changes in law made by § 5.068 apply only to transactions involving executory contracts for conveyance for which negotiations begin on or after September 1, 2001. For such purposes, negotiations begin on the date an offer to enter into an executory contract for conveyance is made. Transactions involving executory contracts for conveyance for which negotiations begin before September 1, 2001, are covered by the law in effect when the negotiations began, and the former law is continued in effect for that purpose.§ 5.069.Seller's Disclosure of Property Condition(a)   Before an executory contract is signed by the purchaser, the seller shall provide the purchaser with:   (1)   a survey, which was completed within the past year, or plat of a current survey of the real property;   (2)   a legible copy of any document that describes an encumbrance or other claim, including a restrictive covenant or easement, that    affects title to the real property; and(3)   a written notice, which must be attached to the contract, informing the purchaser of the condition of the property that must, at a minimum, be executed by the seller and purchaser and read substantially similar to the following:WARNINGIF ANY OF THE ITEMS BELOW HAVE NOT BEEN CHECKED, YOU MAY NOT BE ABLE TO LIVE ON THE PROPERTY.SELLER'S DISCLOSURE NOTICE CONCERNING THE PROPERTY AT (street address or legal description and city)THIS DOCUMENT STATES CERTAIN APPLICABLE FACTS ABOUT THE PROPERTY YOU ARE CONSIDERING PURCHASING.CHECK ALL THE ITEMS THAT ARE APPLICABLE OR TRUE:    The property is in a recorded subdivision.  The property has water service that provides potable water.    The property has sewer service.  The property has been approved by the appropriate municipal, county, or state agency for installation of a septic system.    The property has electric service.    The property is not in a floodplain.  The roads to the boundaries of the property are paved and maintained by:       the seller;       the owner of the property on which the road exists;       the municipality;       the county; or       the state.    No individual or entity other than the seller:     (1)   owns the property;     (2)   has a claim of ownership to the property; or     (3)   has an interest in the property.  No individual or entity has a lien filed against the property.  There are no restrictive covenants, easements, or other title exceptions or encumbrances that prohibit construction of a house on the    property.NOTICE:  SELLER ADVISES PURCHASER TO:(1)   OBTAIN A TITLE ABSTRACT OR TITLE COMMITMENT COVERING THE PROPERTY AND HAVE THE ABSTRACT OR COMMITMENT REVIEWED BY AN ATTORNEY BEFORE SIGNING A CONTRACT OF THIS TYPE; AND(2)   PURCHASE AN OWNER'S POLICY OF TITLE INSURANCE COVERING THE PROPERTY.      (Date)   (Signature of Seller)      (Date)   (Signature of Purchaser)(b)   If the property is not located in a recorded subdivision, the seller shall provide the purchaser with a separate disclosure form stating that utilities may not be available to the property until the subdivision is recorded as required by law. (c)   If the seller advertises property for sale under an executory contract, the advertisement must disclose information regarding the availability of water, sewer, and electric service.(d)   The seller's failure to provide information required by 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)   entitles the purchaser to cancel and rescind the executory contract and receive a full refund of all payments made to the seller.(e)   Subsection (d) does not limit the purchaser's remedy against the seller for other false, misleading, or deceptive acts or practices actionable in a suit brought under Subchapter E, Chapter 17, Business & Commerce Code.Applicability Note [see section 3(c) of SB 198]:The changes in law made by § 5.069 apply only to transactions involving executory contracts for conveyance for which negotiations begin on or after September 1, 2001. For such purposes, negotiations begin on the date an offer to enter into an executory contract for conveyance is made. Transactions involving executory contracts for conveyance for which negotiations begin before September 1, 2001, are covered by the law in effect when the negotiations began, and the former law is continued in effect for that purpose.§ 5.070.Seller's Disclosure of Tax Payments and Insurance Coverage(a)   Before an executory contract is signed by the purchaser, the seller shall provide the purchaser with:   (1)   a tax certificate from the collector for each taxing unit that collects taxes due on the property as provided by Section 31.08,    Tax Code; and   (2)   a legible copy of any insurance policy, binder, or other evidence relating to the property that indicates:     (A)   the name of the insurer and the insured;     (B)   a description of the property insured; and     (C)   the amount for which the property is insured. (b)   The seller's failure to provide information required by 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)   entitles the purchaser to cancel and rescind the executory contract and receive a full refund of all payments made to the seller.(c)   Subsection (b) does not limit the purchaser's remedy against the seller for other false, misleading, or deceptive acts or practices actionable in a suit brought under Subchapter E, Chapter 17, Business & Commerce Code.Applicability Note [see section 3(c) of SB 198]:The changes in law made by § 5.070 apply only to transactions involving executory contracts for conveyance for which negotiations begin on or after September 1, 2001. For such purposes, negotiations begin on the date an offer to enter into an executory contract for conveyance is made. Transactions involving executory contracts for conveyance for which negotiations begin before September 1, 2001, are covered by the law in effect when the negotiations began, and the former law is continued in effect for that purpose.§ 5.071.Seller's Disclosure of Financing TermsBefore an executory contract is signed by the purchaser, the seller shall provide to the purchaser a written statement that specifies:   (1)   the purchase price of the property;   (2)   the interest rate charged under the contract;   (3)   the dollar amount, or an estimate of the dollar amount if the interest rate is variable, of the interest charged for the term of    the contract;   (4)   the total amount of principal and interest to be paid under the contract;   (5)   the late charge, if any, that may be assessed under the contract; and   (6)   the fact that the seller may not charge 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.Applicability Note [see section 3(d) of SB 198]: The change in law made by § 5.071 applies only to transactions involving executory contracts for conveyance for which negotiations begin on or after September 1, 2001. For such purposes, negotiations begin on the date an offer to enter into an executory contract for conveyance is made.§ 5.072.  Oral Agreements Prohibited(a)   An executory contract is not enforceable unless the contract is in writing and signed by the party to be bound or by that party's authorized representative.(b)   The rights and obligations of the parties to a contract are determined solely from the written contract, and any prior oral agreements between the parties are superseded by and merged into the contract.(c)   An executory contract may not be varied by any oral agreements or discussions that occur before or contemporaneously with the execution of the contract.(d)   The seller shall include in a separate document or in a provision of the contract a statement printed in 14-point boldfaced type or 14-point uppercase typewritten letters that reads substantially similar to the following:THIS EXECUTORY CONTRACT REPRESENTS THE FINAL AGREEMENT BETWEEN THE SELLER AND PURCHASER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.      (Date)   (Signature of Seller)      (Date)   (Signature of Purchaser)(e)   The seller's failure to provide the notice required by 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)   entitles the purchaser to cancel and rescind the executory contract and receive a full refund of all payments made to the seller.(f)   Subsection (e) does not limit the purchaser's remedy against the seller for other false, misleading, or deceptive acts or practices actionable in a suit brought under Subchapter E, Chapter 17, Business & Commerce Code.Applicability Note [see section 3(e) of SB 198]:The change in law made by § 5.072 applies only to a contract entered into on or after September 1, 2001.§ 5.073.  Contract Terms ProhibitedA 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;(2)   prohibits the purchaser from pledging the purchaser's interest in the property as security to obtain a loan to place improvements, including utility improvements or fire protection improvements, on the property; or(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.Applicability Note [see section 3(e) of SB 198]:The change in law made by § 5.073 applies only to a contract entered into on or after September 1, 2001.§ 5.074.Purchaser's Right to Cancel Contract Without Cause(a)   In addition to other rights or remedies provided by law, the purchaser may cancel and rescind an executory contract for any reason by sending by telegram or certified or registered mail, return receipt requested, or by delivering in person a signed, written notice of cancellation to the seller not later than the 14th day after the date of the contract.(b)   If the purchaser cancels the contract as provided by Subsection (a), the seller shall, not later than the 10th day after the date the seller receives the purchaser's notice of cancellation:   (1)   return to the purchaser the executed contract and any property exchanged or payments made by the purchaser under the contract;    and   (2)   cancel any security interest arising out of the contract.(c)   The seller shall include in immediate proximity to the space reserved in the executory contract for the purchaser's signature a statement printed in 14-point boldface type or 14-point uppercase typewritten letters that reads substantially similar to the following:YOU, THE PURCHASER, MAY CANCEL THIS CONTRACT AT ANY TIME DURING THE NEXT TWO WEEKS. THE DEADLINE FOR CANCELING THE CONTRACT IS (date). THE ATTACHED NOTICE OF CANCELLATION EXPLAINS THIS RIGHT.(d)   The seller shall provide a notice of cancellation form to the purchaser at the time the purchaser signs the executory contract that is printed in 14-point boldface type or 14-point uppercase typewritten letters and that reads substantially similar to the following:NOTICE OF CANCELLATION(date of contract)YOU MAY CANCEL THE EXECUTORY CONTRACT FOR ANY REASON WITHOUT ANY PENALTY OR OBLIGATION BY (date).(1)   YOU MUST SEND BY TELEGRAM OR CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, OR DELIVER IN PERSON A SIGNED AND DATED COPY OF THIS CANCELLATION NOTICE OR ANY OTHER WRITTEN NOTICE TO (Name of Seller) AT (Seller's Address) BY (date).(2)   THE SELLER SHALL, NOT LATER THAN THE 10TH DAY AFTER THE DATE THE SELLER RECEIVES YOUR CANCELLATION NOTICE:   (A)   RETURN THE EXECUTED CONTRACT AND ANY PROPERTY EXCHANGED OR PAYMENTS MADE BY YOU UNDER THE CONTRACT; AND   (B)   CANCEL ANY SECURITY INTEREST ARISING OUT OF THE CONTRACT.I ACKNOWLEDGE RECEIPT OF THIS NOTICE OF CANCELLATION FORM.    (Date)   (Purchaser's Signature)I HEREBY CANCEL THIS CONTRACT.   (Date)   (Purchaser's Signature)(e)   The seller may not request the purchaser to sign a waiver of receipt of the notice of cancellation form required by this section.Applicability Note [see section 3(e) of SB 198]:The change in law made by § 5.074 applies only to a contract entered into on or after September 1, 2001.§ 5.075.Purchaser's Right to Pledge Interest in Property on Contracts Entered Into Before September 1, 2001(a)   On an executory contract entered into before September 1, 2001, a purchaser may pledge the interest in the property, which accrues pursuant to Section 5.066, only to obtain a loan for improving the safety of the property or any improvements on the property.(b)   Loans that improve the safety of the property and improvements on the property include loans for:   (1)   improving or connecting a residence to water service;   (2)   improving or connecting a residence to a wastewater system;   (3)   building or improving a septic system;   (4)   structural improvements in the residence; and   (5)   improved fire protection.Applicability Note [see section 3(f) of SB 198]:The change in law made by § 5.075 applies to a purchaser on or after September 1, 2001, who accrues interest regardless of when the interest accrued.§ 5.076.  Recording Requirements(a)   Except as provided by Subsection (b), the seller shall record the executory contract, including the attached disclosure statement required by Section 5.069, as prescribed by Title 3 on or before the 30th day after the date the contract is executed.(b)   Section 12.002(c) does not apply to an executory contract filed for record under this section.(c)   If the executory contract is terminated for any reason, the seller shall record the instrument that terminates the contract.(d)   The county clerk shall collect the filing fee prescribed by Section 118.011, Local Government Code.Applicability Note [see section 3(e) of SB 198]:The change in law made by § 5.076 applies only to a contract entered into on or after September 1, 2001.§ 5.077.  Annual Accounting Statement(a)   The seller shall provide the purchaser with an annual statement in January of each year for the term of the executory contract. If the seller mails the statement to the purchaser, the statement must be postmarked not later than January 31.(b)   The statement must include the following information:   (1)   the amount paid under the contract;   (2)   the remaining amount owed under the contract;   (3)   the number of payments remaining under the contract;   (4)   the amounts paid to taxing authorities on the purchaser's behalf if collected by the seller;   (5)   the amounts paid to insure the property on the purchaser's behalf if collected by the seller;   (6)   if the property has been damaged and the seller has received insurance proceeds, an accounting of the proceeds applied to the    property; and   (7)   if the seller has changed insurance coverage, a legible copy of the current policy, binder, or other evidence that satisfies the    requirements of Section 5.070(a)(2).(c)   A seller who fails to comply with Subsection (a) is liable to the purchaser for:   (1)   liquidated damages in the amount of $250 a day for each day after January 31 that the seller fails to provide the purchaser with    the statement; and(2)   reasonable attorney's fees.Applicability Notes  [see  sections  3(g)  and  3(h)  of SB 198]:The changes in law made by § 5.077(a) and § 5.077(b) apply to an executory contract on or after September 1, 2001, regardless of when the contract was entered into. The change in law made by § 5.077(c) applies only to a violation that occurs on or after September 1, 2001. A violation that occurs before September 1, 2001, is covered by the law in effect when the violation occurred, and the former law is continued in effect for that purpose.§ 5.078.  Disposition of Insurance Proceeds(a)   The named insured under an insurance policy, binder, or other coverage relating to property subject to an executory contract for the conveyance of real property shall inform the insurer, not later than the 10th day after the date the coverage is obtained or the contract executed, whichever is later, of:   (1)   the executory contract for conveyance and the term of the contract; and   (2)   the name and address of the other party to the contract.(b)   An insurer who disburses proceeds under an insurance policy, binder, or other coverage relating to property that has been damaged shall issue the proceeds jointly to the purchaser and the seller designated in the contract.(c)   If proceeds under an insurance policy, binder, or other coverage are disbursed, the purchaser and seller shall ensure that the proceeds are used to repair, remedy, or improve the condition on the property.(d)   The failure of a seller or purchaser to comply with Subsection (c) 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.(e)   Subsection (d) does not limit either party's remedy for other false, misleading, or deceptive acts or practices actionable in a suit brought under Subchapter E, Chapter 17, Business & Commerce Code.Applicability Note [see section 3(i) of SB 198]:The change in law made by § 5.078 applies to an executory contract regardless of when the contract was entered into. A named insured who currently holds an insurance policy binder or other coverage relating to property subject to an executory contract shall notify the insurer as provided by § 5.078(a) not later than January 1, 2002. § 5.079.  Title Transfer(a)   The seller shall transfer recorded, legal title of the property covered by the executory contract to the purchaser not later than the 30th day after the date the seller receives the purchaser's final payment due under the contract.(b)   A seller who violates Subsection (a) is liable to the purchaser for:   (1)   liquidated damages in the amount of:     (A)   $250 a day for each day the seller fails to transfer the title to the purchaser during the period that begins the 31st day      and ends the 90th day after the date the seller receives the purchaser's final payment due under the contract; and     (B)   $500 a day for each day the seller fails to transfer title to the purchaser after the 90th day after the date the seller      receives the purchaser's final payment due under the contract; and   (2)   reasonable attorney's fees.(c)   If a person to whom a seller's property interest passes by will or intestate succession is required to obtain a court order to clarify the person's status as an heir or to clarify the status of the seller or the property before the person may convey good and indefeasible title to the property, the court in which the action is pending may waive payment of the liquidated damages and attorney's fees under Subsection (b) if the court finds that the person is pursuing the action to establish good and indefeasible title with reasonable diligence.(d)   In this section, "seller" includes a successor, assignee, personal representative, executor, or administrator of the seller.Applicability Notes  [see  sections  3(g)  and  3(h)  of SB 198]:The changes in law made by § 5.079(a) apply to an executory contract on or after September 1, 2001, regardless of when the contract was entered into.The change in law made by § 5.079(b) applies only to a violation that occurs on or after September 1, 2001. A violation that occurs before September 1, 2001, is covered by the law in effect when the violation occurred, and the former law is continued in effect for that purpose. § 5.080.  Liability for DisclosuresFor purposes of this subchapter, a disclosure required by this subchapter that is made by a seller's agent is a disclosure made by the seller.Applicability Note [see section 3(d) of SB 198]:The change in law made by § 5.080 applies only to transactions involving executory contracts for conveyance for which negotiations begin on or after September 1, 2001. For purposes of this subsection, negotiations begin on the date an offer to enter into an executory contract for conveyance is made.FULL TEXT OF APPLICABILITY PROVISIONS FOR SUBCHAPTER D:Section 3 of Senate Bill 198 [Acts of the 77th Legislature, 2001, Reg. Sess., chap. 693] contains a number of provisions to clarify how the amended sections of Subchapter D "phase in" to apply to particular transactions and contracts.  It states in full:(a)   This Act takes effect September 1, 2001.(b)   The changes in law made by Sections 5.063, 5.064, 5.065, and 5.066, Property Code, as amended and redesignated by this Act, apply only to a purchaser who defaults under Subchapter D, Chapter 5, Property Code, as amended by this Act, on or after September 1, 2001, regardless of when the contract was entered into. A purchaser who is in default before September 1, 2001, is covered by the law in effect when the default occurred, and the former law is continued in effect for that purpose.(c)   The changes in law made by Sections 5.068 and 5.069, Property Code, as amended and redesignated by this Act, and Section 5.070, Property Code, as added by this Act, apply only to transactions involving executory contracts for conveyance for which negotiations begin on or after September 1, 2001. For purposes of this subsection, negotiations begin on the date an offer to enter into an executory contract for conveyance is made. Transactions involving executory contracts for conveyance for which negotiations begin before September 1, 2001, are covered by the law in effect when the negotiations began, and the former law is continued in effect for that purpose.(d)   The change in law made by the amendment of Section 5.091 and the repeal of Section 5.092, Property Code, by this Act and the application of Section 5.071, Property Code, as amended and redesignated by this Act, and Section 5.080, Property Code, as redesignated by this Act, applies only to transactions involving executory contracts for conveyance for which negotiations begin on or after September 1, 2001. For purposes of this subsection, negotiations begin on the date an offer to enter into an executory contract for conveyance is made.(e)   The change in law made by the amendment of Section 5.091 and the repeal of Section 5.092, Property Code, by this Act and the application of Section 5.072, Property Code, as added by this Act, Section 5.074, Property Code, as redesignated by this Act, and Sections5.073 and 5.076, Property Code, as amended and redesignated by this Act, applies only to a contract entered into on or after September 1, 2001.(f)   The change in law made by the amendment of Section 5.091 and the repeal of Section 5.092, Property Code, by this Act and the application of Section 5.075, Property Code, as amended and redesignated by this Act, applies to a purchaser on or after September 1, 2001, who accrues interest as provided by that section regardless of when the interest accrued.(g)   The changes in law made by the amendment of Section 5.091 and the repeal of Section 5.092, Property Code, by this Act and the application of Subsections (a) and (b), Section 5.077, Property Code, as amended and redesignated by this Act, and Subsection (a), Section 5.079, Property Code, as redesignated by this Act, apply to an executory contract on or after September 1, 2001, regardless of when the contract was entered into.(h)   The change in law made by Subsection (c), Section 5.077, and Subsection (b), Section 5.079, Property Code, as amended and redesignated by this Act, applies only to a violation that occurs on or after September 1, 2001. A violation that occurs before September 1, 2001, is covered by the law in effect when the violation occurred, and the former law is continued in effect for that purpose.(i)   The change in law made by Section 5.078, Property Code, as added by this Act, applies to an executory contract regardless of when the contract was entered into. A named insured who currently holds an insurance policy binder or other coverage relating to property subject to an executory contract shall notify the insurer as provided by Subsection (a), Section 5.078, Property Code, not later than January 1, 2002.

Cameron Tope · Answer

Frank S. there is a lot of conflicting advice which is  great for generating discussion but bad for trying to make a decision.

When making a decision I would encourage you to take advice from people who have done lease options and owner financing.

PM me and we can have a chat.

Frank S. · Answer

A ton of helpful insight here. Thank you so much to everyone who took the time to provide me with feedback. I'm going to sit down weigh my options and carefully make a decision on how I should proceed. I will consult with a real estate lawyer before entering into any agreements. Thanks again everyone - VERY helpful!

Bret Allen · Answer

A Lease Option in Texas is not a very good idea if the lease is for more than 6 months (even if they are separate instruments).  Wrapping  the underlying mortgage and sending the proper notices under the code is probably the better way to do it.

You should spend the extra money to have a Texas attorney draft the paperwork and help you structure.  Scott Horne is the best seller finance structure attorney I know in Texas.

Thomas S. · Answer

How long have they been your tenants.

If they have been your tenant for a extended period of time and paid on time they should not still have bad credit. If they do I would be very leery of seller financing. If on the other hand they have $60,000 saved they should also have been rebuilding their credit. If so then you go to the bank with them, show they have paid on time every month the amount of the rent and that along with possibly a better credit rating than they think and $60,000 in hand should get them a bank mortgage.

I would not consider seller financing without first going with them to the bank. If they do not want to try the bank route first I would not consider offering them seller financeing.

Frank S. · Answer

@Jeff Bridges the home is not fully owned by my self. I still owe 100k to Wells Fargo. The reason I'm even considering this is because the tenant is family. Otherwise I'd just sell on the market, no problem. @Cameron Tope I like your idea on selling at an above market price. Yes, the bank pays the taxes and insurance in an escrow. I'm a bit confused on how to structure the payments where I continue to pay off the mortgage but get paid interest. Any more thoughts?

How Should I Seller Finance To Tenant

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