Years after state reforms were passed to limit the practice, University of
Texas researchers have found that Texas families continue to buy land and
homes using informal transactions called "contracts for deed," often paying
interest rates as high as 20 percent.
And though the total number of recorded contracts for deed -- more than
16,000 over the past 20 years, according to the study -- has dropped by
two-thirds, most of the estimated still-active contracts, about 5,500, are in
Maverick, Webb, Travis and Bastrop counties. Maverick and Webb are among the
counties on the border with Mexico that have high numbers of colonias --
makeshift settlements that lack basic amenities.
The contracts -- sometimes done by hand on the kitchen table -- can
result in "clouded" titles that are often not recorded with county clerks and
can put buyers at risk, according to authors of the "Contract for Deed
Prevalence Project," which was released this week.
"If a buyer fails to make a payment on a contract for deed, he or she may
risk losing the property, the home he or she built upon it, and all of the
payments previously made on the property," said Lucille Wood, a research
fellow at the UT School of Law. Other co-authors were UT sociology professor
Pete Ward and Heather Way, director of the Law School's community development
clinic.
There were 772 of the problematic contracts in Travis County and 739 in
Bastrop County, according to the study's database. About 19 percent of the
housing units in so-called informal homestead subdivisions in Bastrop County
are owned with such contracts, the third-highest percentage in the state.
A key element in most contracts for deed provides that if a buyer
defaults, the seller can regain possession and retain the buyer's prior
payments. "You can lose everything," said Wood.
In addition to combing county records, researchers surveyed 1,300 Texas
households in colonias and informal subdivisions in six counties on the border
and two in Central Texas. Ninety-six percent were Hispanic and living in "deep
poverty," they said.
They found that 11 percent of the surveyed homestead owners in Hays
County and 8 percent of those in Guadalupe County currently hold their
properties through even dicier transactions: unrecorded contracts for deed,
for which no public record of ownership exists. Known in the housing industry
as "poor man's mortgages," they are often handwritten on scraps of paper and
in some cases may be simply oral agreements.
Among the trends identified by the study, which was commissioned by the
Texas Department of Housing and Community Affairs:
A "dramatic increase in clouded property titles" is anticipated in coming
years as contract for deed properties are passed down to heirs, often without
formal wills.
Consumer-to-consumer transactions in older colonias, financed by sellers,
are replacing sales by developers, with an accompanying lack of buyer
safeguards such as title insurance and recorded deeds.
Nearly half the homeowners in colonias and informal homestead
subdivisions do not claim the homestead tax exemption to which they are
entitled.
In 1995 and 2001, the Texas Legislature passed laws to steer developers
from using contracts for deed. As a result, at least 73 percent of developer
sales between 2003 and 2010 in the colonias incorporated conventional deeds
and deeds for trust financing, according to the study.
Still, the researchers called for "stronger oversight of state laws
protecting consumers in land transactions" while noting that the Texas
attorney general's office invests no resources in enforcing contract for deed
laws.Teresa Farfan with the attorney general's office said the agency normally
investigates "large-scale" consumer fraud, not individual cases.
The Department of Housing and Community Affairs, the state agency charged
with helping homeowners convert their problematic contracts, assisted just 18
homeowners in 2011 and none in 2010.
"We were making a shift from one funding source, a mix of state and
federal funds with one set of rules, to another funding source, federal funds
with its own set of rules," spokesman Gordon Anderson said when asked why the
number was so low. He said the agency has just started to evaluate the new
study and has help centers set up to aid colonia residents.
Since 1999, the agency has done 848 conversions at a cost of $14.1
million, Anderson said. Homeowners qualify for forgivable federal loans for
home improvements up to $40,000 or a complete reconstruction up to $85,000 to
bring the structure up to code.
Other recommendations include state adoption of an easy-to-understand
land information system that would be available online and a simple deed and
deed to trust template for consumer-to-consumer transactions.
Demographics of households in informal homestead subdivisions:
-- Of the 1,287 residents surveyed, 96 percent were Hispanic and 62
percent were female.
-- 57 percent of the owners and 63 percent of the renters surveyed made
less than $1,600 a month.
-- The average household size was 4.1 people, higher than the state
average of 2.8.
-- 75 percent of the heads of households were married or in a common law
union; only 7 percent were divorced.
-- 54 percent purchased their land or home from a developer, and 34
percent bought from another consumer.
For help with contracts for deed problems:
-- For legal questions on a contract conversion, call Texas RioGrande
Legal Aid, 888-988-9996.
-- El Paso Collaborative for Community and Economic Development,
915-590-1210
-- Adults and Youths United Development Association, 915-851-0272
Distributed by MCT Information Services
