Unrecorded Contracts For Deed Continue To Leave Poor, Unsophisticated Property Owners (& Their Heirs) In Texas Colonias Vulnerable

From a news release from the University of Texas at Austin:

• As many as 1 in 5 families who recently bought land on which to build their homes may have bought using an unrecorded “contract for deed”— one that does not confer formal title to their properties, according to a major report on the titling practices in Texas colonias and other informal settlements released [] by researchers at The University of Texas School of Law and Lyndon B. Johnson School of Public Affairs.
  
  Researchers visited more than 1,300 households on the border and in Central Texas counties to examine whether and how low-income buyers in Texas’ poorest communities are obtaining title to their land, with a specific focus on the use of contract for deed.

***

• Concerned with the rampant use of contracts for deed in land sales to low-income homebuyers in colonias, Texas lawmakers intervened in the mid-1990s to afford buyers greater protections. This report is one of the first major studies to chronicle land transaction practices in colonias since the passage of the legislation, and highlights the need for further study. The report also examines land transaction practices in similar settlements located in Central Texas counties.

Among the report’s key findings:

1. Since the passage of the legislative reforms of contracts for deed, most developers have steered away from using such contracts. However, in some newer low-income subdivisions and informal housing developments, developers and investors are quickly repossessing land from buyers with foreclosure rates that far surpass national rates. Buyers in these newer developments are also living in some of the poorest housing conditions in the state.
   
2. Contracts for deed continue to be used frequently in land sales by former residents. These sales are very informal and continue to place the buyers in a vulnerable position.
   
3. Texas is likely to see a rise in title problems in colonias and informal settlements caused by families inheriting property outside of the probate system. Nine out of 10 households in the study area do not have a will.(1)

For the news release, see Contracts for Deed Alive and Well in Texas, New Study Shows.

For the full report, see ―The Contract for Deed Prevalence Project (go here for report summary).

(1) Apparently, it's not all that uncommon in Texas to sell property using unrecorded contracts for deed. With regard to situations where a seller who sells property using this approach, and who (and without the knowledge of the buyer) subsequently either encumbers the property with a mortgage or sells the property to a second buyer, it should be noted that, in Texas (as well as in plenty of other states), the failure by the first buyer to record his/her instrument of ownership in the real property (while not exactly the preferred practice) is not necessarily fatal to his/her ownership claim against subsequent purchasers and encumbrancers who record their later-acquired interests where the first buyer under the unrecorded instrument takes possession of the premises and, provided that certain requirements are met.

Said possession is sufficient to impart constructive notice to the world of the possessor's interest in the property, and thereby provides some measure of legal protection against subsequent purchasers and encumbrancers who come along and record their subsequently-acquired interests in the same property.

In essence, and contrary to popular opinion, such possession has the effect of 'recording' the unrecorded instrument of said ownership.

For more on what this means, see Madison v. Gordon, 39 S.W.3d 604; 2001 Tex. LEXIS 5; 44 Tex. Sup. J. 410, (Tex. 2001), where the Texas Supreme Court refers to their earlier ruling in Strong v. Strong, 128 Tex. 470, 98 S.W.2d 346, 350 (1936) for the state law applicable in these circumstances:

• In Strong, we described the kind of possession sufficient to give constructive notice as "consist[ing] of open, visible, and unequivocal acts of occupancy in their nature referable to exclusive dominion over the property, sufficient upon observation to put an intending purchaser on inquiry as to the rights of such possessor." Strong, 98 S.W.2d at 350. Possession that meets these requirements—visible, open, exclusive, and unequivocal possession—affords notice of title equivalent to the constructive notice deed registration affords. Strong, 98 S.W.2d at 348.

See In re Hayes, 2004 WL 2926006 (W.D. Tx. 2004) (apparently, an unreported case) for an example of how one unwitting homeowner who failed to obtain and record his deed was able to save his butt against a foreclosure of a mortgage that, unbeknownst to him, was placed on the premises by the prior owner (and, ostensibly, the still- owner of record as reflected in the local deed/land document registry) after he (the unwitting homeowner) bought his home and took possession thereof. The lower Federal court's ruling in In re Hayes gives a reasonably detailed analysis on the Texas law involving the effect of the bona fide purchaser doctrine to subsequent purchasers and mortgage lenders where one is in possession of land under an unrecorded instrument and how it was applied to the facts in this case

In a much less extensive (ostensibly rubber-stamped) per curiam opinion, a Federal appeals court subsequently affirmed the trial court's ruling. Bank of Am., N.A. v. Schwartz (In re Hayes), 194 Fed. Appx. 217; 2006 U.S. App. LEXIS 21139 (5th Cir. 2006).

For more on Texas law on this issue, see footnote 2 at More Contract For Deed Horror Stories - Texas Homebuyers Lose Home To Foreclosure Despite Making All Payments As Seller Pockets Cash & Stiffs Bank.

For other states, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.