If you’re a small business owner considering buying property in Texas, you’re probably weighing your options. Do you finance through a bank? Or do you work out a deal directly with the seller? In Texas, especially in underbanked or rural areas, many buyers turn to executory contracts. These agreements can be great when traditional financing isn’t an option.
But what is an executory contract? And what should you watch out for? Let’s walk through what these contracts are, how they work, and what Texas law says about them so that you can make smart decisions for your business.
And if you need help with your business agreements and building your brand, talk to our highly experienced business attorney at The Vastine Law Firm, PLLC. We have helped our clients amass millions, and we are passionate about supporting business owners.
What Is an Executory Contract?
In the simplest terms, an executory contract is one that plays out over time. Instead of creating a “one-and-done” transaction, one or all parties in an executory contract have significant obligations to fulfill over time. In real estate, this typically means a buyer agrees to make payments over time, and only after the final payment will the seller transfer the deed.
A common executory contract example is a lease-to-own arrangement. If you are an entrepreneur who needs several types of sophisticated machinery to run your business, you might enter a years-long agreement to make monthly payments with an option to buy the machinery at the end of the contract term.
Executory Contracts Can Be the Answer to Financing Issues
When taking on the stress of moving or building a business, seeking loan after loan from financial institutions might be the last thing you want to do. Additionally, traditional financing might be out of reach for some businesspeople and aspiring homeowners.
This is where executory contracts come in. In an executory contract, the seller often finances the transaction for the buyer by allowing the buyer to use the property or product while they pay for it over time. With this arrangement, you can avoid jumping through hoops to receive business association loans or lengthy and uncertain mortgage application processes.
Requirements for Executory Contracts in Texas
An executory contract is often less formal and less regulated than a traditional mortgage, loan, or transfer of deed. However, you may have a handful of rules to follow if you want an enforceable agreement.
Many Agreements Must Be in Writing
Texas contract law requires parties to put several types of contracts in writing and sign them. These agreements include:
- Contracts that are not to be performed within a year of entering the agreement,
- Real estate leases that last longer than a year, and
- Contracts for selling real estate.
From the examples listed above, you can see that many executory contracts must be written and signed to hold up in court. And even if Texas contract law doesn’t require your agreement to be written, reducing your contract to writing can clarify your rights and obligations and protect you in a dispute.
Many Real Estate Contracts Must Include Property Disclosures
If your executory contract transfers real estate ownership, the seller typically has to disclose the following:
- The property’s condition and characteristics,
- Whether the property is part of a property owners’ association, and
- Whether there is any type of lien or encumbrance (e.g., a mortgage) on the property.
These are just a handful of disclosures a seller might have to make in an executory contract for real estate. If the seller fails to disclose, they might owe the buyer damages or other legal remedies.
What Is an Executory Contract in Real Estate?
In a real estate executory contract, the buyer makes regular payments directly to the seller, much like a mortgage, but doesn’t receive the legal title until the full price is paid off. These contracts include contracts for deed, lease-to-own agreements, and other installment sales where the buyer makes payments over time and receives the deed later.
Executory contracts for real estate were once used with little regulation, leading to unfair and predatory practices. Today, Texas has stricter laws designed to protect many buyers of residences. These laws require:
- Many executory contracts to be recorded in the county clerk’s office;
- Disclosures about title, condition of the property, interest rates, financing terms, and tax payments;
- Notice to the buyer before the seller can cancel the contract because of a default; and
- A 30-day period for the buyer to cure a default and avoid contract cancellation.
Despite these protections, informal deals often happen without the buyer understanding their rights or risks.
Potential Setbacks in Executory Contracts
An executory contract might make purchasing property or products easier, but there is a tradeoff. There are several possible pitfalls in these agreements, and you should speak to a seasoned attorney about the benefits and risks according to your unique circumstances.
Loss of Money
If you sign an executory contract to buy property, your installment payments are likely not giving you any equity in the asset. There is also a risk that you might not become the property owner in the end. In fact, many buyers who default on their installment payments not only lose their right to own the property, but they also cannot recover their past payments. A buyer’s past payments might become liquidated damages that pay for their breach.
Fewer Title Protections
When you use traditional financing to purchase real estate, your lender will likely require you to get a general warranty deed and title insurance. These steps help ensure that the seller has the full right to sell you the property and that they will protect you against any property claims from past owners or lienholders.
A buyer might not receive the protection of a general warranty deed or title insurance in an executory contract. Without formal title checks and insurance, the buyer may unknowingly take on properties with unpaid taxes, liens, or ownership disputes.
While executory contracts may be riskier, the guidance of a skilled attorney can help you stay safe.
We Can Help You Be Smart with Your Investment
Executory contracts can be valuable tools—especially for business owners looking for alternative financing. But they come with risks that could cost you time, money, and property.
If you’re considering a contract for deed or other type of installment agreement, seek legal assistance from The Vastine Law Firm. With over a decade of experience, we help buyers and sellers structure legal, fair contracts that protect their rights and meet Texas law. You can contact us online or by phone today to schedule a consultation. Let’s help make sure your next property purchase works for you.
Resources:
- The Federal Accounting Standards Advisory Board, “Memorandum: Software Technology” (Oct. 5, 2022), p. 6, link.
- Seller’s Disclosure of Property Condition, Tex. Prop. Code § 5.008 (2023), link.
- Conveyance of Residential Property Encumbered by Lien, Tex. Prop. Code § 5.016 (2008), link.
- Notice of Obligations Related to Membership in Property Owners’ Association, Tex. Prop. Code § 5.012 (2012), link.
- Title Transfer, Tex. Prop. Code § 5.079 (2015), link.
- Recording Requirements, Tex. Prop. Code § 5.076 (2015), link.
- Seller’s Disclosure of Tax Payments and Insurance Coverage, Tex. Prop. Code § 5.070 (2015), link.
- Seller’s Disclosure of Financing Terms, Tex. Prop. Code § 5.071 (2001), link.
- Seller’s Remedies on Default, Tex. Prop. Code § 5.064 (2015), link.
