Deed of Trust vs Contract for Deed for Texas Land: Key Differences

If you own a promissory note backed by Texas land, understanding the legal structure behind that note is more than academic — it directly affects your rights, your risks, and ultimately the value of the note you hold. The two most common instruments used to secure owner-financed land transactions in Texas are the deed of trust and the contract for deed. While both serve the purpose of allowing a buyer to purchase property over time, the deed of trust vs contract for deed distinction for Texas land creates dramatically different legal landscapes for both the seller and the buyer. Whether you are currently collecting payments, considering selling your note, or simply trying to understand what you signed years ago, this guide will walk you through everything you need to know about these two instruments and how they shape your position as a note holder in the Lone Star State.

Texas has a long tradition of owner-financed land sales, particularly in rural areas where conventional bank financing can be difficult for buyers to obtain. Over the decades, tens of thousands of these transactions have been structured using either a deed of trust or a contract for deed, and the choice between the two has significant consequences that play out over years — sometimes decades — as the buyer makes payments. For note holders who eventually decide to sell their note to a buyer like Longhorn Note Buyers, the type of instrument underlying the note is one of the first things any experienced purchaser will evaluate. Let us break down the differences in detail so you can make informed decisions about your note.

Understanding the Deed of Trust in Texas Land Transactions

How a Deed of Trust Works

A deed of trust is a three-party arrangement involving the borrower (called the trustor), the lender or note holder (called the beneficiary), and a neutral third party (called the trustee). When a buyer purchases land using owner financing secured by a deed of trust, the buyer receives the actual deed to the property at closing. This means legal title transfers to the buyer immediately, while the deed of trust serves as a lien on the property, giving the note holder a secured interest until the note is paid in full. The trustee holds what is sometimes called "bare legal title" or "power of sale" authority, which becomes relevant only if the borrower defaults on the note.

In Texas, the deed of trust is by far the preferred instrument for most real estate transactions, whether they involve conventional bank financing or owner financing. The reason is straightforward: Texas is a non-judicial foreclosure state, and the deed of trust includes a power-of-sale clause that allows the trustee to conduct a foreclosure sale without going through the court system. This makes the foreclosure process faster, less expensive, and more predictable for the note holder compared to many other states. For a note holder who might one day need to enforce their security interest, this streamlined process is a significant advantage.

The Note Holder's Rights Under a Deed of Trust

As the beneficiary under a deed of trust, you hold a powerful position. You have a recorded lien on the property, which means your interest is a matter of public record and is protected against subsequent claims. If the borrower sells the property, your lien follows the property — it cannot be shed without your consent or without full payment of the note. You also have the right to accelerate the note (call the entire balance due) if the borrower defaults, and you can initiate the non-judicial foreclosure process through the trustee. This entire process, from the first notice to the foreclosure sale, can typically be completed in about 60 to 90 days in Texas, which is remarkably fast compared to judicial foreclosure states where the process can drag on for a year or more.

Another important right is your ability to assign the note and deed of trust to another party. This is what happens when you sell your note to a note buyer. The assignment is a straightforward legal process — the note is endorsed to the new holder, and an assignment of the deed of trust is recorded in the county where the property is located. Because the deed of trust is a well-understood and widely accepted instrument, notes secured by deeds of trust are generally more liquid and command better pricing in the secondary market. If you are considering selling your land note in Texas, having a deed of trust rather than a contract for deed typically works in your favor.

Texas-Specific Rules for Deeds of Trust

Texas Property Code governs the foreclosure process for deeds of trust, and there are specific requirements that must be followed to the letter. The trustee must send a written notice of default to the borrower at least 20 days before the notice of sale. The notice of sale must then be posted at the courthouse door, filed with the county clerk, and sent to the borrower at least 21 days before the foreclosure sale date. Foreclosure sales in Texas occur on the first Tuesday of each month, between 10 a.m. and 4 p.m., at the county courthouse. These are strict requirements, and failure to follow them can void the foreclosure. However, when done correctly, the process is efficient and well-established, which is one reason why Texas deeds of trust are favored by note buyers nationwide.

Understanding the Contract for Deed in Texas Land Sales

How a Contract for Deed Works

A contract for deed — also known as a land contract, installment contract, or bond for deed — is a fundamentally different arrangement. In a contract for deed, the seller retains legal title to the property throughout the entire payment period. The buyer receives equitable title, meaning they have the right to possess and use the property, but they do not receive the actual deed until the contract is paid in full. From the buyer's perspective, they are essentially making payments toward eventual ownership, but they do not legally own the property until that final payment is made or the contract terms are fully satisfied.

Historically, contracts for deed were extremely common in Texas land sales, particularly for smaller rural parcels where both parties wanted a simpler, less expensive transaction. Before modern reforms, a seller could cancel a contract for deed with relatively little notice if the buyer defaulted, essentially treating the transaction more like a lease than a sale. This made contracts for deed attractive to sellers who wanted maximum control and a quick remedy if the buyer stopped paying. However, Texas law has changed significantly in recent years, and the regulatory landscape for contracts for deed is now much more complex than many note holders realize.

Texas Property Code Chapter 5 Requirements

The Texas Legislature has enacted extensive protections for buyers under contracts for deed, primarily codified in Chapter 5 of the Texas Property Code. These reforms were driven by concerns about abuse, particularly in colonias along the Texas-Mexico border, where buyers sometimes paid for years without receiving a deed or any meaningful protections. Under current law, the seller must provide the buyer with an annual accounting statement showing the amount paid, the remaining balance, and the number of payments remaining. The seller must also provide certain disclosures at the time the contract is executed, including information about any existing liens on the property, the condition of the property, and the buyer's right to convert the contract for deed into a deed of trust arrangement.

One of the most significant provisions is the buyer's right to convert. Under Section 5.081 of the Texas Property Code, after the buyer has paid 40 percent of the purchase price or made 48 monthly payments (whichever comes first), the buyer can demand that the seller deliver the deed and convert the contract for deed into a traditional deed of trust arrangement. This means that as a note holder with a contract for deed, you may not retain title for the entire payment period even if you intended to — the buyer has a statutory right to force the conversion. If you fail to comply with the conversion request, the buyer can bring legal action against you, and you may face penalties. This is an important consideration for anyone holding or considering purchasing a contract for deed note in Texas.

Cancellation and Foreclosure Under Contracts for Deed

The process for enforcing a contract for deed when the buyer defaults has also been modified by Texas law. Gone are the days when a seller could simply cancel the contract and retake possession. Under current law, if the buyer has paid less than 40 percent of the purchase price or made fewer than 48 monthly payments, the seller must provide at least 30 days' written notice before canceling the contract. If the buyer has crossed either of those thresholds, the seller must go through a formal judicial or non-judicial foreclosure process — essentially the same process required for a deed of trust. This has significantly reduced the speed advantage that contracts for deed once offered sellers, and it means that note holders with mature contracts for deed face essentially the same enforcement timeline as those holding deeds of trust.

Deed of Trust vs Contract for Deed: A Direct Comparison for Texas Land

Title and Ownership

The most fundamental difference between a deed of trust vs contract for deed for Texas land is who holds title during the payment period. With a deed of trust, the buyer holds title from the moment of closing, and the seller's interest is limited to the lien created by the deed of trust. With a contract for deed, the seller retains title until the contract is fully satisfied. For the note holder, this means that with a deed of trust, you have a security interest in property owned by someone else, while with a contract for deed, you technically still own the property but have contracted to convey it upon full payment. This distinction matters in a number of practical scenarios, including bankruptcy, property tax disputes, liability for property conditions, and the note selling process.

Default and Remedies

When it comes to remedies upon borrower default, the practical differences between these two instruments have narrowed considerably under modern Texas law. As discussed above, the deed of trust allows for non-judicial foreclosure through the trustee, a process that takes roughly 60 to 90 days. For contracts for deed where the buyer has crossed the 40 percent or 48-payment threshold, the seller must also go through a comparable foreclosure process. The only scenario where a contract for deed still offers a faster remedy is in the early stages of the contract, before the buyer has reached those thresholds, when a 30-day cancellation notice may suffice. For note holders who are dealing with a borrower who has stopped paying, understanding which process applies to your situation is critical.

Marketability and Note Value

From a note selling perspective, the type of instrument securing your note has a direct impact on its value in the secondary market. Notes secured by deeds of trust are generally worth more than notes secured by contracts for deed, for several reasons. First, the deed of trust is a universally understood and accepted instrument — note buyers, title companies, and attorneys all know exactly how it works and what rights it conveys. Second, the assignment process for a deed of trust is clean and well-established, making the transaction simpler for the buyer. Third, the non-judicial foreclosure process provides a clear and efficient remedy if the borrower defaults after the note has been sold. Contracts for deed, by contrast, carry additional regulatory complexity under Texas Property Code Chapter 5, potential conversion rights that could change the structure of the deal, and a less standardized assignment process. All of these factors translate into a larger discount when selling a contract for deed note compared to a deed of trust note.

Why the Distinction Matters When Selling Your Texas Land Note

Note Buyer Evaluation Criteria

When an experienced note buyer evaluates a Texas land note, the underlying instrument is one of the first things they examine. A note secured by a properly recorded deed of trust with a clear chain of title is the gold standard — it represents a clean, enforceable security interest with well-defined remedies. A note secured by a contract for deed requires additional analysis: Has the buyer crossed the conversion threshold? Is the seller in compliance with all Chapter 5 requirements, including annual accounting statements and required disclosures? Are there any title issues created by the seller's retention of title? Each of these questions can complicate the transaction and potentially reduce the price offered. Longhorn Note Buyers has been purchasing Texas land notes since 2007, and in that time, they have seen every conceivable variation of both deeds of trust and contracts for deed. Their experience allows them to evaluate and close on both types of notes, but sellers should understand that the instrument type will affect pricing.

Converting a Contract for Deed to a Deed of Trust

If you currently hold a contract for deed and are considering selling your note, one option worth exploring is converting the contract for deed to a deed of trust arrangement before bringing the note to market. This conversion involves delivering the deed to the buyer, recording a deed of trust and promissory note (or a modified version of the existing note), and essentially restructuring the transaction into the more standard format. While there are costs associated with this process — including title work, deed preparation, and recording fees — the improved marketability and higher price you may receive for the note can more than offset those costs. If you are thinking about this option, it is wise to consult with a Texas real estate attorney who can walk you through the specific steps and ensure everything is done correctly.

What Documents You Need Regardless of Instrument Type

Whether your note is secured by a deed of trust or a contract for deed, you will need certain documents when you decide to sell. These include the original promissory note (or a copy if the original is lost), the deed of trust or contract for deed, any recorded assignments, a payment history showing what the borrower has paid and what remains, and basic information about the property. Having these documents organized and readily available can speed up the process considerably. For a detailed overview of the documentation requirements, you can review our guide on the documents needed to sell a land note in Texas.

Common Scenarios Involving Both Instrument Types in Texas

The Aging Contract for Deed

One scenario that comes up frequently involves a note holder who created a contract for deed years ago, often before the more recent legislative reforms took effect. In many of these cases, the note holder may not have been providing the annual accounting statements required by Chapter 5, may not have made the required disclosures at the time of sale, and may not be aware of the buyer's conversion rights. This can create a messy situation from a compliance standpoint, but it does not necessarily mean the note cannot be sold. An experienced note buyer will evaluate the situation holistically, looking at the payment history, the property value, the borrower's track record, and the overall risk profile. If you find yourself in this situation, the worst thing you can do is ignore it — the compliance issues will only get worse over time, and addressing them proactively puts you in a stronger position whether you decide to sell the note or continue holding it.

The Well-Structured Deed of Trust Note

On the other end of the spectrum, a note holder who used proper legal documents from the start — a well-drafted promissory note, a deed of trust recorded in the county records, a title policy or at least a title search, and consistent payment records — is in an excellent position to sell their note quickly and at a competitive price. These notes are straightforward to evaluate, easy to assign, and carry minimal risk for the buyer. If you have this type of note and are considering selling, you may be pleasantly surprised at the offers you receive, particularly from a Texas-focused buyer like Longhorn Note Buyers who understands the local market and can move quickly.

Mixed Situations and Partial Sales

Sometimes note holders have multiple notes, some secured by deeds of trust and some by contracts for deed. In these cases, it may make sense to sell some notes while keeping others, or to sell partial interests in certain notes. The flexibility available to you depends on the specific terms of each note, the instrument type, and the buyer you are working with. A full-service note buyer can help you evaluate your options and determine the best strategy for your particular portfolio. Whether you have a single note or a dozen, understanding the deed of trust vs contract for deed distinction for Texas land gives you the foundation to make smart decisions.

Ready to Sell Your Note?

Whether your Texas land note is secured by a deed of trust or a contract for deed, Longhorn Note Buyers can provide you with a fair, no-obligation quote within 24 hours. With over $46 million in Texas notes purchased and a 100 percent close rate on quoted deals, Longhorn has the experience and capital to handle notes of all types and complexities. Founded by Nick McFadin, who has been buying notes since 1983, and partnered with Sandy McFadin since 2013, Longhorn Note Buyers is a San Antonio-based company that works exclusively in Texas and understands the nuances of Texas real estate law better than anyone. Call (210) 828-3573 or visit longhornnotebuyers.com today to get your free quote and find out what your note is worth.

Frequently Asked Questions

Is a contract for deed legal in Texas?

Yes, contracts for deed are legal in Texas, but they are subject to extensive regulation under Chapter 5 of the Texas Property Code. Sellers must comply with disclosure requirements, provide annual accounting statements, and respect the buyer's right to convert the contract to a deed of trust arrangement after certain payment thresholds are met. Failure to comply with these requirements can result in penalties and legal liability for the seller, so it is essential to understand your obligations if you are holding a contract for deed in Texas.

Which is better for the seller — a deed of trust or a contract for deed?

For most sellers, a deed of trust is the better option. It provides a clean, well-understood legal structure with efficient enforcement mechanisms through non-judicial foreclosure. Notes secured by deeds of trust are also more marketable and command higher prices in the secondary market. While contracts for deed may seem simpler or cheaper to set up initially, the regulatory burdens under modern Texas law and the reduced marketability of the resulting note often outweigh any upfront savings.

Can I sell a note that is secured by a contract for deed?

Absolutely. While notes secured by contracts for deed may receive slightly lower offers than comparable notes secured by deeds of trust, experienced buyers like Longhorn Note Buyers purchase both types regularly. The key factors affecting the offer will include the borrower's payment history, the remaining balance, the property value, and the seller's compliance with Texas Property Code Chapter 5 requirements. Having your documents organized and being transparent about the note's history will help you get the best possible price.

What is the buyer's right to convert a contract for deed in Texas?

Under Section 5.081 of the Texas Property Code, once a buyer under a contract for deed has either paid 40 percent of the total purchase price or made 48 monthly payments (whichever comes first), the buyer has the right to demand that the seller deliver the deed and convert the arrangement into a deed of trust. The seller must comply with this request, and failure to do so can result in legal action by the buyer. This conversion right is a significant consideration for anyone holding or purchasing a contract for deed note in Texas, as it can fundamentally change the structure of the deal.

How does the instrument type affect the timeline for selling my note?

Notes secured by deeds of trust can generally be evaluated, quoted, and closed more quickly than notes secured by contracts for deed. The deed of trust's standardized assignment process and clear legal framework make due diligence faster and more straightforward. Contract for deed notes may require additional review to confirm compliance with Chapter 5 requirements, assess the buyer's conversion rights, and determine the appropriate assignment mechanism. That said, an experienced buyer can typically close on either type within a few weeks, and Longhorn Note Buyers provides quotes on both types within 24 hours of receiving the necessary documentation.