Texas Property Code Chapter 5: Disclosures and Executory Contracts

Texas Property Code Chapter 5 governs how real estate is sold and transferred in Texas, and its rules land mostly on the seller: written disclosures about the home’s condition, a stack of situation-specific notices, tight controls on contracts for deed and other executory arrangements, and a ban on most private transfer fees. If you are buying, these are the protections you can lean on. If you are selling, these are the requirements you have to meet before the deal closes, and several of them let the buyer walk away if you miss them.

The Seller’s Disclosure of Property Condition

Section 5.008 requires the seller of any single-unit residential property in Texas to give the buyer a written disclosure of the home’s condition before the buyer is contractually bound to purchase.¹ The form runs through the roof, foundation, walls, plumbing, electrical, HVAC, and any known defects or malfunctions. Sellers use the statutory form or one substantially similar, and they have to answer honestly about what they know.

Timing is where sellers get caught. The disclosure has to be delivered on or before the date the buyer becomes contractually bound. If it comes late, the buyer can cancel the contract for any reason within seven days of actually receiving it.² The buyer does not have to point to a specific defect; the seller simply loses the deal.

When the Disclosure Isn’t Required

Section 5.008(e) exempts a long list of transfers:²

Court-ordered sales, foreclosure sales, and deeds in lieu of foreclosure.
Transfers by a bankruptcy trustee.
Sales by a fiduciary administering an estate, guardianship, conservatorship, or trust.
Transfers between co-owners, to a spouse, or to a parent, child, or grandchild.
Conveyances between spouses under a divorce decree, legal separation, or property settlement.
Transfers to or from a governmental entity.
The first sale of a newly built home that has never been occupied.
Property where the dwelling’s value is 5 percent or less of the total property value.

Buyers in an exempt category should not read the exemption as reassurance about the property. It just means the seller has no statutory duty to fill out the form. An independent inspection matters more, not less, when buying from a bank, an estate, or a government entity.

Other Notices the Seller Has to Deliver

Chapter 5 adds several situation-specific notices on top of the general condition form. Each has to be delivered before the buyer is bound, and skipping any of them can give the buyer a right to cancel.

Property Owners’ Association Notice

If the home sits in a community governed by a property owners’ association, Section 5.011 requires a written notice telling the buyer they will have to join the association, pay assessments, and follow its restrictive covenants. The notice also has to warn that unpaid assessments can lead to a lien or foreclosure.²

Public Improvement District Notice

Section 5.014 applies when the property is inside a Public Improvement District, an area where special assessments pay for roads, drainage, parks, or similar infrastructure. The seller has to give the buyer a written notice describing those charges before the contract binds.³ PID assessments look like property taxes but are separate line items and can add hundreds or thousands of dollars to annual carrying costs.

Water Level Fluctuation Notice

Section 5.019 covers residential or commercial property adjoining a reservoir or lake with at least 5,000 acre-feet of storage capacity. The seller has to disclose in writing that the water level fluctuates because of weather, drought, and operations by entities with rights to use the stored water.⁴ If the notice is late, the buyer can cancel within seven days of receiving it. After closing, a buyer who never got the notice can bring a misrepresentation claim if the seller actually knew about the fluctuations.

Underground Pipeline Notice on Unimproved Land

Section 5.013 applies when unimproved land is sold for residential use. The seller has to disclose the location of transportation pipelines under the surface, including lines carrying natural gas, petroleum, or hazardous substances.⁵ Without the notice, a buyer could break ground and discover a pipeline easement that dictates where the house can go. If the seller skips the disclosure, the buyer can terminate within seven days of the contract’s effective date.

Lead-Based Paint on Pre-1978 Homes

Any sale of a Texas home built before 1978 also triggers a federal disclosure that sits on top of Chapter 5. Under 42 U.S.C. § 4852d, the seller must disclose known lead-based paint hazards, provide any existing lead inspection reports, and give the buyer the EPA-prescribed lead hazard information pamphlet.⁶ The contract itself has to include a Lead Warning Statement in large type, with a signed buyer acknowledgment.

Federal regulations give the buyer a 10-day window, unless the parties agree in writing to a different period, to test for lead before the contract binds them.⁷ The buyer can waive that right in writing. A seller who knowingly violates the rule faces civil penalties of up to $10,000 per violation and can be held liable for three times the buyer’s actual damages.⁶

Executory Contracts and Contracts for Deed

Subchapter D of Chapter 5 is where the buyer protections get most aggressive. It governs executory contracts, meaning arrangements where the seller keeps legal title until the buyer finishes making all the payments. These are usually called contracts for deed or rent-to-own agreements. Because the buyer can be paying for years without holding the deed, the legislature layered on detailed rules.

Which Deals Are Covered

Subchapter D applies to executory contracts for property used or intended as the buyer’s residence, or the residence of a close family member. A lot of one acre or less is presumed residential. Lease-option agreements that combine a residential lease with an option to purchase get treated as executory contracts and fall under the same rules.⁸ The subchapter does not apply to sales of state or government land, or to contracts where the seller delivers a deed within 180 days of execution. Sellers who want to avoid Subchapter D sometimes structure deals to close inside that 180-day window.

Pre-Sale Disclosures and the Cap on Late Fees

Before an executory contract is signed, the seller has to give the buyer a written disclosure covering both the property’s condition and the financing: the purchase price, interest rate, total amount the buyer will pay over the life of the deal, and any late charges. Late fees are capped at 8 percent of the monthly payment, no matter what the contract says.² Section 5.074 also gives the buyer a statutory right to cancel without cause during a cooling-off period after signing.⁹

The 30-Day Recording Requirement

The seller has to record the executory contract in the county’s real property records within 30 days of execution.¹⁰ Recording puts the world on notice that the buyer has an interest. Without it, the seller could sell the same property again or borrow against it. A seller who fails to record faces liability of up to $500 per calendar year of noncompliance, plus the same damages available when a seller fails to deliver the deed after final payment.¹¹

The Annual Accounting Statement

Each January, the seller has to send the buyer an accounting statement showing the total paid, the remaining balance, the number of payments left, any amounts the seller paid to taxing authorities or insurers on the buyer’s behalf, and an accounting of insurance proceeds if the property was damaged.¹²

The penalty for skipping the statement has a threshold worth understanding. A seller who conducts two or more executory-contract transactions in a 12-month period and fails to deliver the statement owes $250 per day for each day past January 31, plus reasonable attorney’s fees, with daily damages capped at the property’s fair market value.¹² The two-transaction floor means the penalty targets repeat sellers and investors, not someone selling a single property on contract.

Delivering the Deed After Final Payment

Once the buyer makes the last payment, the seller has 30 days to deliver a recorded deed. Section 5.079 imposes escalating penalties for stalling. From days 31 through 90 after final payment, the seller owes $250 per day. After day 90, the daily figure doubles to $500, plus reasonable attorney’s fees.¹³ Those numbers compound quickly. A seller who drags things out for six months past the 90-day mark could owe more than $90,000 in liquidated damages alone.

What Equitable Title Gets the Buyer

During the payment years, the buyer holds equitable title, meaning the right to use and enjoy the property even though the seller’s name is still on the deed. Equitable title lets the buyer take legal action to protect their interest if the seller tries to sell to someone else or lets liens pile up. It has limits, though. The buyer typically cannot refinance the property, transfer their interest to a third party, or record ownership without a court order. Converting equitable title to full legal ownership before all payments are made generally requires a quiet title or declaratory judgment action.

Private Transfer Fees Are Mostly Gone

Subchapter G targets private transfer fees, which are charges built into a property’s title that trigger every time the property changes hands, with the money going to a developer, HOA, or other private party. Any private transfer fee obligation created on or after June 17, 2011 is void and unenforceable against later owners.¹⁴ For obligations created before that date, the person entitled to receive the fee has to file a Notice of Private Transfer Fee Obligation in the county’s real property records and keep it current. If the filings are not maintained, even a pre-2011 obligation becomes void.¹⁵

Title companies catch these obligations during the title search. When one exists, it appears as an exception on the title commitment, and at closing the fee shows up as a line item on the seller’s closing statement. Review the title commitment carefully for any transfer fee language. If it points to a date after June 2011, it is unenforceable, and the title company should be able to clear it.

Federal Tax and Financing Rules for Seller-Financed Sales

Financing a sale through an executory contract changes how the seller reports the transaction to the IRS. Any sale where at least one payment is received after the end of the tax year is treated as an installment sale, reported on Form 6252.¹⁶

Under the installment method, the seller calculates a gross profit percentage, meaning the ratio of total profit to contract price, and applies that percentage to each payment received during the year. Only that portion counts as capital gain. Interest received under the contract is reported separately as ordinary interest income.¹⁷ If the contract charges less than the applicable federal rate of interest, the IRS imputes interest, meaning a portion of each payment gets reclassified as interest income regardless of contract wording. IRS Publication 537 covers the full calculation.

Sellers who finance more than three properties in a 12-month period also run into federal SAFE Act and Dodd-Frank restrictions on residential seller financing. Loans have to be fully amortizing with no balloon payments, and any adjustable interest rate cannot reset for at least five years. Annual rate increases are generally limited to 2 percentage points.

1
State of Texas. Texas Property Code 5.008 – Seller’s Disclosure of Property Condition
2
State of Texas. Texas Property Code Chapter 5 – Conveyances
3
State of Texas. Texas Property Code 5.014 – Notice of Obligations Related to Public Improvement District
4
State of Texas. Texas Property Code PROP 5.019 – Notice of Water Level Fluctuations
5
State of Texas. Texas Property Code 5.013 – Seller’s Disclosure of Location of Conditions Under Surface of Unimproved Real Property
6
Office of the Law Revision Counsel. 42 USC 4852d – Disclosure of Information Concerning Lead Upon Transfer of Residential Property
7
eCFR. 24 CFR Part 35 Subpart A – Disclosure of Known Lead-Based Paint and Lead-Based Paint Hazards Upon Sale or Lease of Residential Property
8
Texas Public Law. Texas Property Code 5.062 – Applicability
9
Justia. Texas Property Code Title 2, Chapter 5, Subchapter D – Executory Contract for Conveyance
10
State of Texas. Texas Property Code 5.076 – Recording Requirements
11
Texas Public Law. Texas Property Code 5.076 – Recording Requirements
12
State of Texas. Texas Property Code 5.077 – Annual Accounting Statement
13
State of Texas. Texas Property Code PROP 5.079 – Title Transfer
14
State of Texas. Texas Property Code PROP 5.202 – Certain Private Transfer Fee Obligations Void
15
Justia. Texas Property Code – Certain Private Transfer Fees Prohibited; Preservation of Private Real Property Rights
16
Internal Revenue Service. About Form 6252, Installment Sale Income
17
Internal Revenue Service. Publication 537, Installment Sales