Texas Promulgated Contract Forms

© 2016 Peggy Santmyer All Rights Reserved

Learning Objectives• To know and understand Contract Law• Be completely aware of the pre-printed parts of the

promulgated contract forms.• Be able to fill in the blanks of the forms properly• Be aware of the business details covered in the

contract• Be knowledgeable regarding addenda.• Understand when and how to use an amendment.• Know the difference between addenda and notices

and each of their roles.• Recognize potential legal problems and know when

to advise clients to seek legal advice.

Texas Promulgated Contract Forms

The text book for this 30 hour Texas Pre-Licensing Class is available atwww.createspace.com/5249273. Discounts available for Real Estate Schools. Call Peggy Santmyer at 214-697-5533 for information.

CHAPTER ONE

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CONTRACT LAW OVERVIEW

Contract Definitions

A contract is a legally enforceable agreement to do, or not to do a specific thing.

Expressed contracts can be either verbal or written

Implied contracts are created by actions, not in writing 

Elements of a Valid Real Estate Contract

Competent Parties- (18, sane and sober)Mutual Agreement- (Offer and

Acceptance)Lawful Objective-(Legal Purpose)Consideration-(Money or something of

value- NOT earnest money) In Writing and Signed-(A requirement of

the Statute of Frauds)

Statute of Frauds

The Statute of Frauds requires that contracts involving real estate be in writing and signed in order to be enforceable.

A Contract may be…… ValidA valid contract is binding on both parties and enforceable by the court. Once a valid contract is in place, up until closing, a property is said to be pending. VoidA void contract is not enforceable because it doesn’t contain all of the essential elements of a valid contract. UnenforceableA contract that cannot be enforced by the courts is unenforceable.VoidableA voidable contract appears to be valid, but one party may disaffirm because they are a minor, were subject to duress, or a victim of fraud or misrepresentation.

Executed and Executory ContractsExecuted- (Duties are completed by both parties-closed)Executory-(The Contract was signed, but the duties are not yet complete-pending)The Texas Property Code consider contracts that do not close for an extended period executory contracts. Usually the purchaser takes possession but does not get legal title until sometime later (often after all payments are made, etc.) Contracts for Deed, Land Sales Contracts, Lease with Option to buy, are all included in executory contracts under Texas state law.

Contracts for Deed, Land Sales Contracts, Lease with Option to BuyThe Texas Property Code considers an option-to-buy that includes a residential lease an executory contract. Do not attempt to use the TREC forms or other such standard forms to create lease-purchase, lease-option contracts or contracts for deed aka land sales contracts. No one in Texas, drafts standard forms for writing executory contracts. There are significant penalties for a seller that does not comply with the Property Code.Advise the consumer to get an attorney to draw the forms and explain the risk involved in an executory contract.

Bilateral vs. Unilateral Bilateral- (a promise exchanged for a

promise, i.e., sales contacts) When acceptance is communicated the offer becomes valid and binding. The agreement binds both parties.

Unilateral- (an option-owner sells the right to purchase to a prospective buyer- the owner is obligated to sell under the agreement, but the buyer may or may not exercise his right to buy-buyer has no obligation to buy).

Reasonable Time vs. Time is of the Essence The promulgated contracts are designed to be reasonable

time contracts. The Termination Option paragraph, paragraph 23, is

designated as “time is of the essence”, and it is for that paragraph only

If a contract was unable to close until two days after the agreed upon date because the lender was not ready, a court would probably say that was within a reasonable time.

When time is of the essence if it says the period ends in five days and the time is not designated, it ends at midnight on the fifth day. Five minutes after midnight is too late.

Licensees should never write “time is of the essence” in their contracts. Those words change legal rights under the contract.

Amendments and Addenda Addenda are materials added and included in the initial contract. It is important to include any information regarding the transaction in

the contract. The court can only consider what is inside the contract from the

beginning to end of the contract. All agreements must be included in the contract to survive closing.

An Amendment changes or makes modifications to an agreed upon contract.

All parties must sign amendments. Anything that changes after a contract has been fully signed and

agreed upon by both parties, must be changed by use of an amendment.

 

Performance of a Contract Both the buyer and the seller have obligations and

rights under the contract. A lot of the obligations must be accomplished within a certain time frame, often within a certain number of days after the effective date of the contract. 

It is important that licensees keep their clients informed as to what their obligation are and when they are due. Most buyers and sellers are going to need help from their agent to stay on track.

If one of the parties fails to complete an obligation, that party is in default. Paragraph 15 of the One to Four Family Residential Contract describes the party’s rights when the other party is in default.

Statute of Limitations  The Statute of Limitations are laws that govern how

long the parties to a contract have to file a law suit after the contract terminates.

The law suit may be for specific performance or for fraud regarding property condition.

A party considering filing a law suit should seek legal advice.

Assignment vs. NovationAssignment- Transfers contract

obligations to another party, but does not release the first parties obligations

Novation- a new contract ; transfers the obligations of the first contract to the new party

Reasons for Termination  The best way for any contract to terminate is to become

fully executed (closed). Unfortunately, there are many other reasons a contract

can terminate including the following: Paragraph 23 gives the buyer the right to terminate for

any reason, within a limited time frame, if the buyer has purchased an option to terminate.

The buyer may elect to terminate by way of language in the Third Party Financing Addendum for Credit Approval, if financing is disapproved within the proper time frame.

The buyer may elect to terminate under the language in paragraph A of the Addendum for Property Subject to Mandatory Membership in an Owner’s Association.

More Reasons for Termination  The buyer may elect to terminate under paragraph

7B2 regarding the Seller’s Disclosure Notice. The buyer may elect to terminate under paragraph

6D Objections in the One to Four Family Residential Contract.

Either party may elect to terminate if the other party is in default.

Either party may terminate if an expense they have agreed to pay in a specific amount, exceeds that amount and the other party refuses to pay the excess

Before you go, can you define these terms? 

Contract Valid

Void Voidable

Unenforceable Executed

Executory Bilateral

Unilateral Time is of the Essence

Reasonable Time Amendment

Addenda Statute of Limitations

Termination Assignment

Novation Statute of Frauds

Chapter Two

Laws, Rules and Regulations

Texas Real Estate License Act

Real estate agents in Texas were first licensed through the Securities Division of the Secretary of State's office, beginning in 1939 with passage of the Real Estate Dealers License Act (House Bill 17, 46th Legislature, Regular Session).

The act's name was changed to the Texas Real Estate License Act (TRELA) in 1955

Texas Real Estate Commission In 1949, the Texas Real Estate Commission (TREC) was

created to administer the Real Estate License Act (Senate Bill 28, 51st Legislature, Regular Session).

The purpose of the Texas Real Estate Commission is to protect the public through regulation of licensed real estate brokerage practitioners, real estate inspectors, residential service companies, and entities offering timeshare interests.

The policy-making body of the Texas Real Estate Commission is a nine-member commission appointed by the governor with the advice and consent of the senate for overlapping six-year terms.

Six members must be active in real estate as full-time brokers for five years immediately preceding appointment. Three members must not be licensed by the commission and have no financial interest in real estate, except as consumers.

Section 1101.155 of the Texas Real Estate License Act, reads as follows:

RULES RELATING TO CONTRACT FORMS (a) The commission may adopt rules in the public’s best interest that require license holders to use contract forms prepared by the Texas Real Estate Broker- Lawyer Committee and adopted by the commission.

Rules of the Commission§537.11. Use of Standard Contract Forms.

1) Transactions in which the licensee is functioning solely as a principal, not as an agent;

2) Transactions in which an agency of the United States government requires a different form to be used;

3) Transactions for which a contract form has been prepared by the property owner or prepared by an attorney and required by the property owner;

4)  Transactions for which no standard contract form has been

promulgated by the Texas Real Estate Commission, and the licensee uses a form prepared by an attorney at law licensed in this state and approved by the attorney for the particular kind of transaction involved or prepared by the Texas Real Estate Broker-Lawyer Committee and made available for trial use by licensees with the consent of the Texas Real Estate Commission.

EXCEPTIONS:

More Rules of the Commission The licensee has an obligation to submit all offers The licensee must convey all known information that will

affect the principal’s decision to make, accept or reject offers. The licensee must deal fairly with all parties but owes a duty

of fidelity to his/her principal. The licensee has an affirmative duty to keep the principal

informed, at all times, of significant information applicable to the transaction.

If the broker receives a deposit or earnest money, the broker must deposit the money by the close of business, on the second working day, after the execution of the contract.

If the broker finds the deposit or earnest money check has been dishonored by the bank, the broker shall immediately notify the parties.

Section 537.11b of the Rules of The Commission says that a licensee may not: Practice law, Offer, give or attempt to give legal advice directly or

indirectly Give advice or opinions as to the legal effect of any

contracts or any other such instruments which may affect the title to real estate

Give opinions concerning the status or validity of real estate or

Attempt to prevent or in any manner whatsoever discourage any principal to a real estate transaction from employing a lawyer.

Section 537.11 (c) Nothing in this section shall be deemed to limit the

licensee’s fiduciary obligation to disclose to the license holder’s principals all pertinent facts which are within the knowledge of the license holder, including such facts which might affect the status of or title to real estate.

(d) A licensee may not undertake to draw or prepare documents fixing and defining the legal rights of the principals to a real estate transaction.

(e) In negotiating real estate transactions, the licensee may fill in forms for such transactions, using exclusively forms which have been approved and promulgated by the commission or such forms as are otherwise permitted by these rules.

Section 537.11 (f) When filling in a form authorized for use by this section, the

licensee may only fill in the blanks provided and may not add to or strike matter from such form, except that licensees shall add factual statements and business details desired by the principals and shall strike only such matter as is desired by the principals and as is necessary to conform the instrument to the intent of the parties.

(g) A licensee may not add to a promulgated contract form factual statements or business details for which a contract addendum, lease or other form has been promulgated by the commission for mandatory use.

(h) Nothing in this section shall be deemed to prevent the licensee from explaining to the principals the meaning of the factual statements and business details contained in the said instrument so long as the licensee does not offer or give legal advice.

 

Unauthorized Practice of Law The Texas Real Estate Licensee Act specifically

prohibits license holders from practicing law. License holders must not give opinions of title or prepare legal documents.

Sometimes clients ask questions that are difficult to answer without falling into the trap of the unauthorized practice of law.

Paragraph 24 of the One to Four Family Residential Contract makes it clear that real estate agents are not allowed to give legal advice or opinions.

Agents can state facts and tell clients their options but never tell a client what they should do.

If the clients do not know what to do, tell them to seek legal advice.

A Required Notice to the Buyer Licensees are required legally to advise the buyer to

obtain an Abstract of Title on the property, examined by an attorney of their choice, or a Policy of Title Insurance.

Notice number one in paragraph 6E of the One to Four Family Residential Contract provides the notice to the buyer regarding this requirement.

The Broker-Lawyer Committee and The Real Estate Commission have put a notice in the contract to help agents ascertain they provide the notice.

The notice is also in TREC form OP-C Notice to Prospective Buyer and the TAR Buyer’s Representation Agreement.

Common Mistakes Anything that changes the legal rights of the buyer

or the seller is the unauthorized practice of law. For example when agents write that the contract is contingent upon inspections, appraisals, etc. that is changing legal rights and is the unauthorized practice of law.

When an agent writes something into the contract instead of using an addendum promulgated by the Texas Real Estate Commission that is the unauthorized practice of law.

Adding or striking things from the preprinted portion of the contract (unless it is specifically requested by the parties) is the unauthorized practice of law.

 

The Broker-Lawyer Committee One of the advisory committees that exist under the

Texas Real Estate Commission is the Real Estate Broker-Lawyer Committee.

The committee is comprised of six Real Estate Commission appointees (who are licensed real estate brokers) and six lawyers, appointed by the president of the State Bar of Texas, and one public member, appointed by the Governor. They serve staggered six-year terms.

The Broker-Lawyer Committee drafts and edits real estate forms for use by real estate licensees. The purpose is to expedite real estate transactions and reduce controversies while protecting the interests of the parties involved.

NOTICEThe Broker-Lawyer committee

drafts and edits contract forms.

The Texas Real Estate Commission approves and promulgates contract forms.

Definition of “promulgated”

When TREC approves and promulgates a contract it means they have approved the form and require that form to be used by licensees in all situations that it fits.

Use of Promulgated Forms TREC has approved and promulgated six sales

contract forms. Each contract is written as close to the One to Four

Family Residential Contract and still fit the situation. For example the Condo Contract does not include

the lot so the legal description of the property is different than the other contract forms.

The New Home Contracts cover a required disclosure regarding insulation that is not required in the other forms.

In Chapter Six you will learn about many of the other differences.

Promulgated Addenda The Promulgated Addenda are created to

add to the contract forms to make them work for many different situations.

Any of the contracts can be used as a back-up contract, a short sale contract, etc. by adding an addendum.

In addition to attaching the addendum, it is listed in Paragraph 22 of the contract making the addendum part of the offer and acceptance.

Approved Forms, Notices and Disclosures Approved forms have been created for the

licensee to use but are not required forms. Many times the disclosure is required (such

as the Seller’s Disclosure) but the form to use to provide the disclosure is optional.

Disclosures and Notices are not part of the Contract and should not be listed in paragraph 22.

Presenting Offers and Multiple Offers Until an offer is accepted, the seller is free to consider

any and all offers. The seller has no legal duty to respond to any offer. The National Association of REALTORS® Code of Ethics

requires agents to submit all offers to the seller until closing. Only if, in the Listing Agreement, the seller agrees that the agent does not have to present offers after an offer to purchase has been accepted, is the agent relieved of this duty.

The seller has no duty to respond to the offers in any particular order. If the Seller has three offers, he/she may reject the offers that were received first and second and accept the third.

More about Offers Good business practice dictates that listing agents keep

other agents informed about their offers. Instead of countering an offer the seller could send an

invitation to the buyer to submit a new offer. The invitation must make it clear this is not a counter offer. The invitation is simply an invitation to continue negotiation at terms a seller would find more favorable. This allows the seller to keep his/her options open.

Remember, an offer or counteroffer, remains open until accepted, rejected or withdrawn.

If the Seller has countered one offer and then a better offer comes in, the Seller must be careful to withdraw his counteroffer to buyer #1 before making a counteroffer to the second buyer.

When Does the Offer Become a Contract? The offer becomes a contract when all parties have agreed to

all terms of the offer and have signed the offer. Four things must take place in order for it to become binding

and effective (becoming the effective date in the contract). The four elements are:

(1) Must be in writing. (2) Both the buyer and the seller must have signed the final contract and initialed all changes. (3) Acceptance must be complete, without a doubt. (4) The last party to accept the offer must communicate that acceptance back to the other party (or the other party’s agent). The promulgated contract forms instruct the agent acting for

the broker to fill in this date of final acceptance.

Before You Go… Can you name the four things required for the offer to

become a contract?

Who drafts and edits Texas real estate contract forms?

Who approves and promulgates Texas real estate contract forms?

Do you know the difference between explaining contract forms and crossing the line into the unauthorized practice of law?

Chapter Three

Parties, Properties and Financing 

Information Needed to Complete the Contract Form  Name, address, telephone, e-mail and fax number of the

parties. Legal description and street address of the property. Type of financing, cash down payment, term, etc. Amount of earnest money. Name and address of Title Company, telephone, e-mail, fax,

Closers name Who will pay for the title policy? Does the buyer want the survey amendment to the title policy

and who will pay for it? Is the seller going to furnish the existing survey and affidavit

or will there be a new survey? If a new survey, who will pay for it?

Is there any specific thing the buyer wants to be able to do at the property after closing that they need time to research? If so it needs to be listed as an objection possibility under paragraph 6D. I.e. add a swimming pool, park an RV in their driveway, keep their five dogs, etc.

How many days after the buyer receives the Exception Documents, the Commitment and the Survey does the buyer need to make objections?

Is the property in a Mandatory Home Owner’s Association? Has the buyer received and reviewed the Seller’s

Disclosure Notice? If not when? Was the property built before 1978? Are there any specific treatments or repairs the buyer

wants to ask for to be included in the offer price? When do the parties plan to close?

Will possession be at closing and funding or is a temporary lease needed?

Are there any factual statements or business details that need added to Special Provisions?

Is the Seller willing to pay any of the buyer’s closing cost? Where and how do the parties want any notices regarding the

contract to be sent? What addenda will need to be added to the contract? Does the buyer want an option to terminate? The parties will

need to agree on the amount of option money and the number of days for the right to terminate.

Do the parties want their attorneys listed? Name and license number of both brokers. Name, office address, telephone, fax and e-mail for both agents Name and telephone for the licensed supervisors of both agents The representation each broker has with their client.

The date in the right-hand corner is the date that TREC approved and promulgated the form. Licensees must be aware of the date and ascertain that they are using the current form. To use an old form is a violation of the License Act. 

Paragraph 1 Parties

Paragraph 1 Parties Licensee must carefully list the legal names of the

parties Name should match their ID Original documents of the seller can give good

information Texas is a community property state; title company

will need to know the marital status of the parties

Name Styling Examples Sue Smith, an unmarried person  John Jones, a widower  Jim Johnson and wife Susan Johnson Steve Swan, as separate property (Steve is married) Sue Smith and John Jones as Tenants in common (2

unmarried people) Tom Harold, Executor of the estate of (deceased

name) Business Name, a Texas Corporation Business Name, a Texas Partnership

Paragraph 2 Property

Legal Description The Statute of Frauds requires any agreement affecting

the title to real estate to have a valid legal description. If the property is located within a city, it will probably

have a legal description that is part of a recorded plat. For example Lot 12, Block 15, Greenwich Subdivision, City of Carrollton, County of Dallas.

The street address and zip code are added for convenience and are required by the TREC form.

If the property is not within a city, use “Unincorporated” or “None” on the form for City.

If the property has a metes and bounds legal description, put N/A in the blanks for lot and block and add an attachment to the contract with the description. Refer to the attachment in paragraph 2.

Improvements and Accessories Licensees need to be knowledgeable about what

stays with the property. Para 2B Improvements are items that are attached to

the property. Para 2C Accessories are not attached, but still remain

with the property Any item listed that will not remain with the property,

needs to be listed under Paragraph 2D Exclusions. If the parties want to add additional items of personal

property to stay with the property, you can attach the Non-Realty Items Addendum. Notice it is an approved form, not promulgated.

Paragraphs 3 and 4

If this is an all cash offer, 3A and 3C will be the same amount. 3B will be -0-. If all cash no boxes will be checked and no addendum will be added.

If there will be financing on a portion of the sales price, the total of all the financing will be reflected in Paragraph 3B.

Paragraph 3B gives three different financing possibilities. (1) Third Party Financing (2) Loan Assumption and (3) Seller Financing. Each of these requires a different Addendum to be attached to the contract.

Paragraph 4 reminds us that if you are acting for a spouse, parent, child or business in which you own more than 10% it must be disclosed to the other party in the transaction. If you or any of the listed parties are acting as a trustee for the benefit of any of the parties that also must be disclosed. 

Paragraph 3B Third Party Financing Third party financing is any type of new financing

that is done by anyone that is a third party (not the seller or the buyer).

Be sure to check the box in 3B to indicate that this is third party financing.

Keeping the first lien mortgage at or below 80% of the sales price saves the buyer the cost of Private Mortgage Insurance. If the buyer is obtaining two third party loans, such as an 80% first lien mortgage and a 10% second lien, the two will be added together for the amount in paragraph 3B.

$100,000 Sales Price with 10% down= $10,000 in 3A80% first lien + 10% 2nd lien = $90,000 in 3B$10,000 down + $90,000= Sales Price $100,000 in 3C

Third Party Financing Addendum The first paragraph of the Third Party Financing Addendum clarifies

that the buyer is going to apply for the financing promptly and will provide the lender with the documentation needed to make a loan decision.

Paragraphs A1 through A6 describe the third party financing. Notice that in A1b, conventional financing, it provides for a 2nd lien if being used.

The Terms Described Here Must be Available Interest is a “not to exceed figure” If this is a fixed rate mortgage, interest will be the same for

the entire term of the loan. Therefore, the “interest not to exceed ___% per annum for the first 30 years of the loan” if the loan has a 30 year term.

If it is an adjustable rate mortgage that will adjust in one year, it will be “per annum for the first one year of the loan.”

Any adjustment caps or lifetime caps for an adjustable rate mortgage will need to be described in Special Provisions, paragraph 11 of the contact.

Agents should learn about each loan program and ascertain they have a lender on their team that can help the buyer with any of them.

Buyer’s circumstances dictate which program is best for them.

Buyer Approval + Property Approval =

Loan Approval

Buyer’s Right to Terminate Paragraph B1 gives the buyer the right to terminate and receive

a refund of earnest money, if the lender says they do not meet the buyer requirements and it is within the number of days agreed to by the parties.

The buyer must act to terminate within that certain number of days or they lose their right to terminate under this addendum, and there is no longer any financing contingency on this contract. If the loan fails after this date because of the buyer the buyer will be in default.

Paragraph B2 describes the property approval. Notice that property approval can take up to the closing date. It is not limited to the time for buyer approval. If the property does not meet the lenders requirements the Buyer may terminate.

Paragraph B3 “time is of the essence for this paragraph”. This is one of only six places these words are used in the promulgated forms.

Paragraph C describes the vendor’s (seller’s) lien that will be on the property. The seller has a lien until he/she is paid in full.

Paragraph D is language required by FHA and VA. They want to ascertain that their buyers are not penalized if the property does not appraise.

The buyer is not obligated to purchase the property if the appraisal is not enough for the lender to make the loan described here.

If the property is not approved by the lender (appraisal, insurability and lender required repairs) the buyer has the option to terminate and receive their earnest money back.

If the buyer elects to go forward with a smaller loan amount, the buyer will be paying the difference in the cash down payment. Another option is that the seller may be willing to reduce the sales price to the appraised value.

Under new legislation the lender may require real estate agents to have written authority from the buyer to review the loan documents or closing statement. Paragraph E gives the agent that written authorization.

Let’s Practice

1,2 and 3Practice what you have

learned by completing paragraph 3 and the Third Party Financing Addendum.

Paragraph 3 Loan Assumption Addendum

Paragraph 3 of the contract provides for the possibility of the buyer assuming the seller’s existing loan. If the assumption of the seller’s existing loan is the choice being used be sure to check Loan Assumption and attach the Loan Assumption Addendum.

Paragraph A of the Loan Assumption Addendum gives the parties an opportunity to negotiate for the buyer to provide the seller with a variety of items to establish creditworthiness. The items must be delivered to the seller within the limitation of time negotiated in the blank.

Paragraph B starts off by giving the seller the right to terminate if the items are not received within the time frame. If the seller is going to terminate he/she must notify the buyer within seven days after expiration of the time for delivery and the seller receives the earnest money.The seller also has the right to terminate if the items are received within the time frame, but the seller determines that the buyer’s credit is not acceptable. Seller must terminate within seven days after expiration of the time for delivery. In this event, buyer receives the earnest money.Notice that if seller does not terminate within these seven-day periods, seller loses their right to terminate and is deemed to have approved the buyer’s creditworthiness.

   

Paragraph C describes the Note(s) that is/are being assumed and cautions the buyer that the obligations imposed by the deed of trust securing these notes will continue.(1) Describes any first lien note being assumed and (2) describes any second lien note being assumed. In both cases, the buyer’s first payment will be the first payment due after closing.

 

The paragraph at the bottom of section C talks about what will happen in the event the principal balance varies from the balance stated when the contract was prepared. (1st) It discusses what will happen if the balance varies. Since the cash + the loan balance = the sales price, if the loan balance varies, either the cash or the sales price must be adjusted. The parties check the appropriate box to make that choice. (2nd) It gives either party the right to terminate if the variance exceeds $500, unless the other party elects to pay the excess. If the parties terminate the contract for this reason, earnest money will be refunded to the buyer.

Paragraphs D and E protect the buyer in the event the Lender should charge an assumption fee or an interest rate more than what was agreed to or refuses to consent to the assumption. In any of these events, the earnest money will be refunded to the buyer.

Paragraph F protects the seller in the event the lender does not release the seller from liability. The seller would have a lien on the property and the ability to pay any delinquency and get the property back. The Vendor’s lien is released when the lender relieves the seller of future liability.Paragraph G protects both parties. If there is a deficiency in the Tax and Insurance escrow account, the seller has to pay the deficiency. The buyer reimburses the seller for the amount in the account so if there is any overage in the account the seller is paid for it.

Both the buyer and the seller need to read and pay attention to the important information in the above notices. These are things that sometimes the parties do not understand and it is critical information.  

Let’s Practice #4

Practice what you have learned by completing paragraph 3 of the sales contract and the Loan Assumption Addendum.

Paragraph 3 Seller Financing

Paragraph 3 of the contract provides for the possibility of the seller doing the financing and becoming the lender. If seller financing is the choice being used be sure to check Seller Financing in paragraph 3 and attach the Seller Financing Addendum.

Paragraph A of the Seller Financing Addendum gives the parties an opportunity to negotiate for the buyer to provide the seller with a variety of items to establish creditworthiness. The items must be delivered to the seller within the limitation of time negotiated in the blank.

The seller has the right to terminate if the items are not received within the time frame. The seller must terminate within seven days, by notice to the buyer and the seller receives the earnest money.

The seller also has the right to terminate if the items are received within the time frame, but the seller determines that the buyer’s credit is not acceptable. Seller must terminate within seven days after expiration of the time for delivery. In this event, buyer receives the earnest money.

Notice that if seller does not terminate within these 7-day periods, seller loses their right to terminate and is deemed to have approved the buyer’s creditworthiness.

 

Paragraph C of the Seller Financing Addendum describes the rate of interest for the loan, Buyer’s right of pre-payment of the loan and Seller’s right to collect late charges.C1, 2, and 3 provide the parties with three choices of ways the loan can be repaid.

Paragraph D (1) discusses what will happen if the property is sold. Most sellers will want the right to give their consent to any sale of the property while they still have an outstanding loan secured by the property. D(1) (b)describes the seller’s right to declare the balance of the loan due if the property is sold without consent.  

Paragraph D (2) gives the parties the option to negotiate a requirement for a tax and insurance escrow account.Paragraph D (3) protects the seller by making a default on any superior lien, a default under the seller’s lien. This protects the seller by enabling him to foreclose if any superior lien gets into default. Seller can foreclose and take the property subject to the superior lien.

Let’s Practice #5

Practice what you learned by completing paragraph 3 of the sales contract and the Seller Financing Addendum.

Notice in this study the seller financing is only for a portion of the financing.

A new Third Party Financing Addendum will also be needed.

Conventional Loans

Mortgages can be defined as either government-backed or conventional.

Mortgage loans that are not guaranteed or insured by the government are called conventional loans.

Some conventional loans are insured by private mortgage insurance and paid for by borrowers.

Texas Veterans Loans The State of Texas honors Texas Veterans in

a very unique way.  Funds are set aside to help Texas Veterans buy a home at interest rates below the market rates.  

-Lower fixed rates -Lower closing costs -Easier approval process -Lower payments NOTE: The loans are made by lenders using

FHA, VA or Conventional financing. Texas Veterans purchase the loan after closing.

FHA Loans FHA loans are popular with mortgage

borrowers because of lower down payment requirements and less stringent lending standards.

An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development.

Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan

VA Loans

A VA loan is a mortgage loan guaranteed by the U.S. Department of Veterans Affairs (VA).

The loan may be issued by qualified lenders. The VA loan was designed to offer long-term

financing to eligible American veterans or their surviving spouses (provided they do not remarry).

USDA Loans Texas USDA mortgage loans (Rural

Development) may be the client’s best choice.

USDA loans are government guaranteed home mortgages for borrowers living in rural and suburban communities in Texas.

Low fixed rates and no mortgage insurance NO MONEY DOWN home loans!

Reverse Mortgage Financing A reverse mortgage is special financing for people over the age of 62 They have a low loan to value ratio based on the borrowers age. Up-

front fees can be large. The property must remain owner occupied. Taxes and insurance must

be paid. There are no monthly payments. Interest is being added to the loan

balance monthly so the balance increases rather than decreases each month.

The buyer does not have to qualify. The owner still owns the property and it passes to the heirs at the

time of death. The heirs can pay off the mortgage and keep the property or let the lender take it back.

It is a non-recourse loan so all the lender gets is the property. It may enable your buyer with $100,000 cash to buy a much more

expensive home and still have no monthly payments. Frequently used as a cash out refinance.

 

Before You Go Because we are a community property state the title

company will need to know the parties ____________ _____________.

If the buyer wants to ask the seller to leave the free standing bookcase for a small amount of money the proper form to use is the _________ _________ ________ _________.

If the financing for the offer includes the seller financing a portion of the price the ______________ __________ Addendum will be attached.

If the financing is an FHA or VA first lien mortgage the _______________ __________________________ Addendum will be attached.

 

Chapter Four

Covenants, Commitments and Notices

The parties agree upon the amount of earnest money. Earnest money is not an essential element of the

contract. If the parties agreed upon a contract with no earnest

money, it would be a valid contract. Rules of the Texas Real Estate Commission say the

agent must deposit the earnest money check with the escrow agent, by the close of business on the 2nd working day after the contract is fully executed.

Notice that if the buyer fails to deposit the earnest money, buyer will be in default.

Caution…

Be cautious about telling the buyer they will get their earnest money back if the transaction does not closeWhen the buyer gets the earnest money back it is not always all of the earnest money. Paragraph 18B allows for unpaid expenses to be taken out of the earnest money by the escrow agent when the transaction does not close;

• Paragraph 23 of the Contract gives the buyer the opportunity to offer the seller money to allow the buyer to have a certain number of days to terminate the contract for any reason.

• If the seller agrees and accepts the money it gives the buyer time to do their due diligence in getting inspections, getting bids for insurance, etc.

More about Option Money The amount of the option money and the

number of option days are agreements of the parties.

The money must be delivered to the seller within three days after the effective date.

The termination must be delivered to the seller by 5 PM on the final day.

Time is of the essence for this paragraph. The option fee can be credited to the sales

price at closing if the box in the 2nd to last sentence is checked.

More about Option Money If the money is not delivered with the three

days, paragraph 23 will not exist. The contract is still valid but buyer has no option to terminate.

If the option money is delivered to the listing agent, it is as though it was delivered to the seller and is in compliance.

Never deliver option money to a third party such as the title company..

Option money is never refundable.

6A Title Policy The parties negotiate who will pay for the Owner’s Title Policy

and which Title Company will be used. The decision of which title company to use must be left to the

decision of the parties. Agents need to be familiar the exceptions to the Title Policy.

The items listed in 1-8 are things that are not covered by the title policy.

Choices must be made in exception number 8. If the title policy is to be amended, only excepting shortages in area, the parties negotiate who will pay for that. The correct boxes must be checked.

Amendments to the standard coverage in the Title policy can be made by the use of endorsements.

 

The Title Company will send a commitment for title insurance to the buyer and the agent.

It will be sent to the buyer to the address listed in Paragraph 21 of the contract.

Double check the names of the sellers, the legal description of the property, and any issue that will not be cleared up at closing.

The buyer will want to determine if anything is being reserved by the seller i.e. mineral rights.

Restrictive Covenants ( example Deed Restrictions)

The buyer will also receive a copy of the restrictive covenants and other deed restrictions that are in place for the real estate your buyer wants to buy. The restrictions dictate how the buyer can and cannot use the property. Notice that restrictive covenants are an exception to the title policy under paragraph 6 A1.

Restrictive covenants usually apply to a group of homes or lots, or property that's part of a specific development or subdivision. They are normally put in place by the original developer and are different for every area of homes.

Restrictive covenants nearly always stipulate the minimum size residence allowed, how many homes may be built on one lot, and what type of construction the homes must (or must not) be.

More Topics in Restrictive Covenants Setbacks (how far homes must be from streets and interior lot lines).

Easements (such as a pathway for power lines or roads). Fees for road maintenance or amenities. Rules regarding changing or voiding the covenants. Rules about pets and other animals (for instance: no breeding for

profit, no livestock, and no unchained pets). Regulations dealing with in-home businesses and home rentals. Rules that limit tree-cutting Clauses that dictate what type of fencing can be used, or that forbid

all types of fencing. Clauses to reduce clutter on lots, such as prohibiting owners from

storing a vehicle that doesn't run within view of others, or parking a recreational vehicle on the property.

Paragraph 6C2 and 6C3 are both used for obtaining a new survey. The only difference is that in C2 it is at the buyer’s expense and in C3 it is at the seller’s expense. 

What About C1? If the seller wants to furnish the existing survey, as per

paragraph 6C1, the listing agent must ascertain that the survey is available. A Residential Real Property Affidavit promulgated by the Texas Department of Insurance must also be furnished. The number of days to deliver both those items are limited by what the parties negotiated in the blank in paragraph 6C1.

The seller needs to get the Affidavit signed and notarized and provide it to the listing agent along with a copy of the survey soon after listing the property.

If the seller agrees to 6C1, he/she must furnish the survey and the affidavit or the buyer will obtain a new survey, and it will be at the seller’s expense.

If the seller furnishes the survey and the affidavit timely, but the buyer’s lender or the title company says that the existing survey is not acceptable, the parties negotiate in paragraph 6C1 and agree on who will pay for a new survey.

Check the box regarding payment when using paragraph 6C1.

Does the Buyer want to do anything that could be restricted by deed restrictions, easements, POA docs, etc? ( Add a swimming pool, park his truck in his driveway, add a 2nd story, etc.) Use the blank in para 6D to make the restriction a valid objection.

Time Limitation to Objections The buyer has a limited number of days to object to the items you

listed in paragraph 6D and to things found on the commitment, exception documents and survey or he/she loses their right to object.

The things on Schedule C of the Title Commitment must be cleared. Clearance of those items is required by the title company and cannot be waived by the buyer.

According to paragraph 6D of the contract form, the closing date can be extended if necessary, to allow the seller time to cure any timely objections made by the buyer or the lender.

After the seller receives the objections, he/she has 15 days to cure them or the contract is terminated, and earnest money is refunded to the buyer, unless buyer waives the objections with lender and title company approval.

 

The Notice in 6E (1) is a requirement of the Real Estate License Act. Every licensee is required to give this written notice to every buyer, even if they are getting a Title Policy.

Agents have three ways they may give the notice: (1)If you are using any TREC Promulgated Contract

form, it is in the form. (2)If you are using the TAR Buyer’s Representation

Agreement, it is in the form. (3)There is a separate approved TREC form, Notice to

Purchaser that can be used to give the notice.

Notice that the first sentence in 6E2 requires a box to be checked.

Six More Notices Required by Law

# 10 Newest Requirement

Every buyer has the right to do inspections Hydrostatic testing must be authorized separately in

writing by the seller. The seller is responsible for turning on utilities and

keeping them on until closing. The buyer and the buyer’s agent have access to the

property at reasonable times

The Seller’s Disclosure Notice is required by the Texas Property Code and gives the parties three choices for negotiations.

Be certain the seller completes the form and not the agent. It must be the seller’s knowledge.

If seller does not know the correct answer, the answer is “unknown”.

Sellers can limit their future liability by disclosing everything they know about the property.

Buyers need to review the Seller’s Disclosure before making an offer so that they know what they are making an offer on, in “as is” condition.

Review theSeller’s Disclosure

Approved

More About the Seller’s Disclosure The seller’s disclosure is mandatory, the form to

give the disclosure is optional. The TREC Seller’s Disclosure form includes only the

things required by the Texas Property Code. All of this required information is also on the Texas

Association of REALTORS® (TAR) Seller’s Disclosure form as well as other variations of the form.

Some of the forms, including the TAR Seller’s Disclosure, include many things of value, even though the property code does not require them.

The intent is to protect sellers and agents by encouraging full disclosure to the buyer.

Choice number (2) in paragraph 7B is for the buyer’s agent that is preparing an offer but has not been able to get a copy of a completed Seller’s Disclosure from the listing agent. The buyer can make an offer and ask the seller to provide the Notice within a certain number of days. This is risky for the seller.

The risk for the seller is that even if he/she delivers Sellers’ Disclosure Notice within the proper time frame, the buyer can terminate the contract, for any reason, within 7 days after receipt of the Notice and receive their earnest money back.

If the seller never delivers the Notice, the buyer has the right to terminate and receive their earnest money back up to the day of closing.

Choice number (3) is for the seller that (by law) is not required to furnish the Notice. The sellers that do not have to furnish the Notice are: (1) pursuant to a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in

interest, or to a beneficiary of a deed of trust by a trustor or successor in interest;

(4) by a mortgagee or a beneficiary under a deed of trust who has acquired the real property at a sale conducted pursuant to a power of sale under a deed of trust or a sale pursuant to a court ordered foreclosure or has acquired the real property by a deed in lieu of foreclosure;

Sellers that do not have to furnish the Notice are: (5) by a fiduciary in the course of the administration of a

decedent's estate, guardianship, conservatorship, or trust; (6) from one co-owner to one or more other co-owners; (7) made to a spouse or to a person or persons in the lineal

line of consanguinity of one or more of the transferors; (8) between spouses resulting from a decree of dissolution

of marriage or a decree of legal separation or from a property settlement agreement incidental to such a decree;

(9) to or from any governmental entity; (10) transfers of new residences of not more than one

dwelling unit which have not previously been occupied for residential purposes; or 

A Lead Based Paint Disclosure is required on all residential property built before 1978. See Paragraph 7C.

Seller must check one of the boxes in each section of paragraph B.

Buyer must check boxes in both paragraph C and D. The buyer’s agent should have furnished the buyer

with a booklet called Protect Your Family from Lead in Your Home. Buyer must acknowledge receipt of the booklet in paragraph D.

Paragraph C2 explains the buyer’s right to do inspections within ten days and right to terminate within 14 days.

Paragraph F certifies that everyone who signs this, including buyers, sellers and both agents are giving information “to the best of their knowledge”.

Paragraph E explains the broker’s obligation, including the obligation to maintain a copy of the addendum for at least three years.

Condition The first paragraph in 7D says, “Buyer

accepts the Property in it’s as is condition”. It describes “as is” as with any and all defects and without warranty.

When the buyer closes on the property it is in it’s as is condition with all defects and no warranties.

The buyer has an obligation to check everything out before closing. 

There is space to negotiate for items the buyer can already see in 7D2.

Buyer must Understand

The important thing for the buyer to understand is that they are offering a certain price for the property in it’s as is condition plus the repairs agreed to in paragraph 7D2.

If buyer has an option to terminate and new problems are discovered during inspections those become negotiable or the buyer has the right to terminate.

Inspections Paragraph 7A says the buyer has the right to do inspections

and the buyer and their agent have the right to access to the property at reasonable times.

If they learn about some new problem with the property, they can send an amendment to the seller asking for those repairs to be made. The seller can agree to the repairs or say no.

If the seller says no and the buyer has an option to terminate under paragraph 23, the buyer can terminate the contract, and the earnest money will be refunded to the buyer.

A seller who refuses to do the repairs and has the buyer terminate the contract, must be aware that the seller’s disclosure will need to be updated with the new information for any future potential buyers.

Repairs The seller is never obligated to do any repairs. The seller is obligated to disclose everything they

know. Buyers have protection under the contract. Every buyer should do inspections and any other

research they deem necessary and make a decision if they want to (1) continue or want to (2) terminate before their option days expire.

Neither party is obligated to do lender required repairs. If neither party will do the lender required repairs, paragraph 4A1 says if property does not satisfy the lender’s underwriting requirements, buyer may terminate and receive the earnest money.

Repairs If the seller agrees to do any repairs, either

in the original offer or later in an amendment, paragraph F explains that any repairs agreed upon will be done by professionals and completed before closing.

Buyer’s agent should take the buyer for a final walk through inspection right before closing.

Once Buyer closes they own the property as is.

Paragraph 7H informs the buyer of their right to choose a policy from a Residential Service Company and to negotiate for the seller to reimburse for the cost of that policy. Many different companies offer residential service

contracts. Coverage and exclusions differ from one company

to another. It is the buyer’s responsibility to review and choose

the coverage.

Brokers’ Fee Agreements are not in this contract. Where are they?? Listing Agreements Buyer Representation Agreements Agreements between Brokers (usually through the MLS

system) Broker's fees are NOT designated on the last page of this contract; this will be discussed further in Chapter 6. 

Before You Go….

Once a contract is accepted, the agent must deposit any earnest money in their possession with the escrow agent by the close of business on the ____ working day.

Option money must be delivered to the ________ or their agent within three days after the effective date of the contract.

When a contract is in writing, the parties have agreed to everything, all signatures and initials are in place and the acceptance has been communicated to the other party or their agent you can fill in the _______________ ______________. 

Chapter Five

Closing, Possession and More

The parties negotiate the closing date in Paragraph 9A. Once the offer is agreed upon this closing date is an on or before date. So if the parties agree, they can close earlier but not later. If the closing date needs to be extended to later, it will require all parties to sign an Amendment to the contract.  

Paragraph 9B discloses some of the buyer’s and the seller’s obligation at the time of closing. Paragraph 9B5 defines what happens when a leased property is sold. Seller delivers a copy of the lease and the security deposit to the buyer. Buyer acknowledges amount and receipt of the deposit money to the tenant.

The seller is to convey title with a general warranty deed, according to paragraph 9B1 A general warranty deed is a type of deed where

the grantor guarantees that he or she holds clear title to a piece of real estate and has a right to sell it to the grantee.

The guarantee extends back to the property's origins.

Seller guarantees no liens or other encumbrances since the beginning of time.

A special warranty deed only guarantees no liens or other encumbrances put against the property during this seller’s ownership.

Possession is negotiated in paragraph 10 of the sales contract. Notice that if the parties agree that possession will be other than “upon closing and funding” a Temporary Lease Agreement must be used.

Temporary Lease Agreements Paragraph 10A of the sales contract, is important for the

parties to read. Both need to consult their insurance agent and ascertain their

interest are protected. If closing takes place on Tuesday, and the seller is still living in

the property when it is destroyed by fire on Thursday it brings up several questions. 

Since the sellers are no longer the owner, their Homeowners insurance may no longer exist. Does the seller still have coverage on the personal items in the property? 

And since the buyers have not moved in yet, is the dwelling covered by the buyer’s new Homeowners policy?

Both parties need to negotiate the appropriate Temporary Lease Agreement and contact their insurance agent to ascertain coverage

Paragraph 10B establishes how an existing lease on the property being sold will be handled. The seller furnishes the buyer with a copy of the lease, move in condition form and the security deposit. The buyer acknowledges amount and receipt of security deposit to the tenant.

Paragraph 11, Special Provisions Only to be used to add factual statements or

business details as desired by the principals, to conform to the negotiations.

Factual statements and business details are clarifications of something in the contract. They are true, factual and simply expand on a subject elsewhere in the contract. Not a new negotiation.

If there is an addendum that covers the detail, the addendum must be used in lieu of paragraph 11.

Paragraph 12A defines all of the various costs and who is responsible for payment. If the seller is willing to help the buyer with the buyers’ cost in addition to paying the sellers’ cost, the amount can be negotiated in 12A1b.

Since property taxes, in Texas, are paid in arrears, many times the tax pro-rations are based on last year’s tax amount because the current year’s tax amount is not yet available. If, when current amounts are available, there is a variance from what is pro-rated; paragraph 13 says the parties will work that out on their own.

Paragraph 14 makes it clear that the seller is responsible for the property up until the closing date. If the property is damaged and the seller is unable to repair it by the closing date, the buyer has several options including terminating and recovering their earnest money. 

Both parties have the same rights if the other party defaults under the contract: Enforce specific performance, or seek such other relief provided by law ORaccept the earnest money as liquidated damages, releasing everyone under the contract

Paragraph 16 says the parties agree to mediate if a problem arises they cannot solve by discussion and that they will share the cost of the mediation equally. Paragraph 17 has been used in several court cases to award the cost of attorneys’ fees and the cost of proceedings to the prevailing party. Many of those cases involved real estate agents that recovered their cost in law suits they prevailed in.

Paragraph 18 Escrow

Paragraph 18C covers two different situations: Either party can send a release of earnest money form to the other party. If the parties agree on how and to whom the money should be released, and they both sign the release, the escrow agent can release the earnest money. 

What if the Parties Do Not Agree? Either party can send a written demand to the

escrow agent for the money. The escrow agent will then send a copy of the demand

to the other party. After 15 days, if the escrow agent does not receive an

objection from the other party, escrow agent may refund the money to the party making the demand

Notice that the expenses that have been incurred on behalf of the party receiving the money will be withheld from the earnest money,

Paragraph 18D relates to the party who wrongfully refuses to sign a release and makes them liable for damages for the earnest money, plus attorneys’ fees and court cost. 18E reminds us that all notices must be sent in compliance with paragraph 21.

Paragraph 19 tell the parties that all representations and warranties in the contract will survive closing.

Notice that the last sentence says the seller may continue to show the property for back-up offers.

The buyer is to comply with IRS rules in the event seller is a foreign person. The escrow agent (usually the title company) checks to be sure the transaction is in compliance with the regulations.

If the cash, in the transaction, exceeds a certain amount, the escrow agent will file a required report with IRS.

Paragraph 21 provides the addresses, telephone numbers, fax numbers and e-mail addresses of both the buyer and the seller. It is important to note that notices from one party to the other party are only effective if in writing and delivered by one of these methods.

All parts of the agreement must be made a part of the contract. Paragraph 22 gives the opportunity to make the addenda part of the agreement. Only the things in the contract can ever be considered by the court.

Notices and Disclosures are NOT Addenda Notices and Disclosures do not get listed

in paragraph 22. These forms are for information only and are

not part of the agreement between the parties.

 Many notices ride around with the contract but are not part of the contract.

Paragraph 23 provides a method for the buyer to purchase time to do his/her due diligence and then walk away if they do not like what that investigation shows.

The option money for the purchase has to be delivered to the seller (or their agent) within three days after the effective date or paragraph 23 is not a part of the contract.

Time is of the essence for this paragraph. The option ends at 5 PM on the final date.

Executing the Contract and Finalizing the Agreement

Both the buyer(s) and the seller(s) need to sign a contract at the bottom of page 8. Signatures need to be the same names as listed in paragraph one of the contract. All changes that were made to the original offer need to be initialed by all parties.

The agent getting the final signature, or initials should fill out the executed (effective) date on behalf of their Broker.

The executed date is the date (1) everything is in writing (2) the parties have totally accepted all of the terms (3) the contract is signed and all changes are initialed, and (4) the written acceptance of the final agreement has been communicated, by some method, to the other party or their agent.

Names of attorneys are not required, but can be included at the request of the parties. 

Licensed Supervisor On the last page of the contract, it asks for the

name of the licensed supervisor for each agent. The licensed supervisor is the Broker of Record or

the licensee, designated in writing by the Broker of Record, that has been given the authority to monitor the agents’ business practices. 

The Broker may not relinquish overall responsibility for the supervision of licensees sponsored by the broker.

More About Page 9 The last page also makes it clear this page is

not part of any agreement. Buyer and seller’s signatures ended on the previous page. This page says “Print. Do Not Sign”.

This page is not what determines commission. Listing Agreements, Buyer Representation Agreements and Agreements between Brokers (usually in MLS) are what determines commission.

Strassman to Applewhite Case Study Read the case study carefully and then

complete the forms that follow.

Chapter 6

The Remaining Promulgated Contract Forms

Condominium ContractDifferences in Paragraph 2,12, and 14Paragraph 2 is different because the legal

description is different. (No Lot included)Paragraph 12 includes information

regarding the HOA feesParagraph 14 is different. The seller owns

the unit only (not the lot) that has to be defined.

Farm and Ranch Contract Differences in Paragraph 2,3,6,7 and 13 Paragraph 2 is different because the legal description is

different and it includes many additional accessories. Paragraph 3 is different in the Farm and Ranch

Contract because the sales price can be adjusted by variances in the survey.

Paragraph 6 is different in the Farm and Ranch Contract to allow for information regarding Exception Documents and Surface Leases.

Paragraph 6G7 in the Farm and Ranch Contract discusses the Texas Agricultural Development District. There is no notice regarding property owners associations in paragraph 6.

Farm and Ranch Contract Paragraph 7 is different in the Farm and Ranch

Contract. Different seller’s disclosures are required by this type property and are contained in these paragraphs.

Paragraph 13 is different in the Farm and Ranch Contract because there is a possibility of the assessment of roll back taxes. Roll back taxes can be assessed when the property zoning is changing. Encourage the parties to investigate and understand roll back taxes and the amount of the assessment before agreeing to be responsible for them.

 Unimproved Property Contract Differences in Paragraphs 2,7 and 13 Paragraph 2 is different because there are no

improvements. Paragraph 7 is different in the Unimproved Property

Contract. Different seller’s disclosures are required by the type property and are contained in these paragraphs.

Paragraph 13 is different in the Unimproved Property Contract. There is a possibility of the assessment of roll back taxes. Roll back taxes can be assessed when the property zoning is changing. TREC contracts forms say the party changing the usage is responsible for the roll back assessment. Encourage the parties to investigate and understand roll back taxes and the amount of the assessment before agreeing to be responsible for them.

New Home Contract-Complete Construction 

Differences in Paragraphs 2,7 and 13 Paragraph 2 is different because the legal description is

different. Improvements are new. Paragraph 7 is different in the New Home Contract. Different

seller’s disclosures are required by the type property and are contained in these paragraphs.

Paragraph 13 is different in the Unimproved Property Contract. There is a possibility of the assessment of roll back taxes. Roll back taxes can be assessed when the property zoning is changing. TREC contracts forms say the party changing the usage is responsible for the roll back assessment. Encourage the parties to investigate and understand roll back taxes and the amount of the assessment before agreeing to be responsible for them.

New Home Contract-Incomplete Construction  Differences in Paragraphs 2,7 and 13

Paragraph 2 is different because the legal description is different and the improvements are not complete.

Paragraph 7 is different in the Unimproved Property Contract. Different seller’s disclosures are required by the type property and are contained in these paragraphs.

Paragraph 13 is different in the Unimproved Property Contract. In each of these transactions there is a possibility of the assessment of roll back taxes. Roll back taxes can be assessed when the property zoning is changing. TREC contracts forms say the party changing the usage is responsible for the roll back assessment. Encourage the parties to investigate and understand roll back taxes and the amount of the assessment before agreeing to be responsible for them.

Chapter 7

Promulgated Addenda, Notices and Other Forms

ADDENDUM FOR  SALE OF OTHER PROPERTY BY BUYER

The form to use if the buyer is unable to buy a new property unless their existing property is sold and closed.

Paragraph A gives a date by which the funds from the sale of an existing property must be received.

Notice that paragraph E says that, for this addendum, “time is of the essence.”

Paragraph 19 of the contract says that the seller can continue to market the property for back up offers and receive, negotiate and accept a back-up offer.

Paragraph B in the Sale of Other Property Addendum discusses what will happen if the seller accepts a back-up offer.  

Paragraph D cautions the buyer not to waive the contingency unless they are certain they can close even if their first property does not close. Otherwise, the buyer will be in default.

In paragraph C, the parties can agree upon the amount of additional earnest money that must be paid if buyer #1 waives the contingency.

ADDENDUM FOR“BACK-UP” CONTRACT

 

This Addendum enables the seller to negotiate with a second buyer and agree upon terms that will be used for the back-up buyer in the event the first buyer’s transaction falls through.

This addendum can be win-win It is a win for this buyer because if the first contract

terminates for any reason, this buyer does not have to compete for the home the next time.

It is a win for the seller, who is free to continue to work with the first buyer in a good faith attempt at getting to closing, but now has the power of knowing there is another buyer wanting their home.

More About the Back Up Addendum Paragraph A simply says that the back-up buyer is going to put

up the earnest money and the option money and wait to see if the first transaction terminates.

The parties negotiate the contract and execute it, deposit the earnest money with the escrow agent, pay the option money to the seller and wait…..

Paragraph B and C make several points: If the first contract does not terminate by a dead line date

negotiated by the parties, this back-up contract will terminate and the earnest money will be refunded to the buyer.

Seller is free to continue to work with the first buyer and an amendment of the first contract does not terminate the first contract. 

What If the First Contract Terminates? If the first contract does terminate, the seller must

notify the back-up buyer immediately. The effective date of the back-up contract is amended

to the date the back-up buyer receives notification of termination of the first contract.

Paragraph D relates that if the back-up buyer has the option to terminate:

 (1)The right to terminate begins on the original effective date of the back-up contract.(2)The right to terminate continues after the amended effective date for the number of days agreed to in paragraph 23 of the contract. Paragraph E tells us time is of the essence.

Test Your Know How

A back-up contract was originally executed on April 19th. The parties agreed to a ten day option period in paragraph 23. On April 25th the back-up buyer received a notice from the seller that the first contract has terminated.

When does the back-up buyer’s option period end?

At 5PM on _________________. (Fill in the blank)

Addendum for Oil, Gas and Other Minerals

Information regarding the most important and probably the most misunderstood part of the transfer of mineral rights is contained in the Notice section of the form.

More About Mineral Rights Records were not maintained on the transfer of mineral

rights the same way they were maintained on the transfer of property.

Unless someone has researched who owns the mineral rights, the information may be unknown to the seller.

Since title policies do not guarantee mineral rights, it is possible the seller bought the property after the mineral rights had already been sold, and the seller was never aware that he never acquired the mineral estate.

If the parties have concern about the mineral estate, it is important they seek advice from an oil and gas attorney.

Paragraph A of the addendum defines what the term “mineral estate” does and does not include.

Paragraph A of the addendum defines what the term “mineral estate” does and does not include.

Paragraph B defines what portion of the mineral estate the seller is reserving and what portion the seller is transferring to the new owner. Pay particular attention to the NOTE at the end of B2. It is essential buyer read and understand this.

 The Title Company will probably request the parties also sign a release of earnest money. 

Notice that only the buyer has to sign this document.

Mutual Termination of Contract  Contracts terminate sometimes for reasons that are not

in the contract. For example if something has happened in either the buyer or the seller’s life that causes them to want out of the contract and the other party agrees to release them, they would do a mutual termination that releases everyone from any liability under the contract.

NOTE: The seller may have liability for the listing commission under the Listing Agreement.

The Title Company can provide the parties with a form, for each of them to sign, for the release of contract and addresses what will happen with the earnest money, 

The public has a right to use the beach area.

If the property comes to be on the beach area because of storms and erosion of the soil, the state can require the owner to remove the structure at their own expense. Purchaser needs to do their due diligence in checking rates of erosion, discussing with an attorney, etc. before signing a contract. 

This addendum is used with contracts on properties that share a boundary with the submerged lands of the state.

That boundary may change because of erosion. A survey is the only way to establish the boundary.

Because of erosion the boundary will probably change again later.

No structure can be over the state’s property.

Addendum for Property Subject to Mandatory Membership in an Owner’s Association. The term “Subdivision Information” includes the (1) current copy of

restrictions (2) bylaws (3) Rules of the Association and (4) Resale Certificate.

If the buyer does not require the Subdivision Information, they would check number 4. This is risky. The buyer needs to know what he/she can do with the property and what financial responsibilities they are acquiring.

The best option for the seller is number 3 because it does not give the buyer the opportunity to terminate. For that to be possible the seller is going to have to obtain the documents prior to having an offer.

Both number 1 (Seller shall obtain, pay for and deliver) and number 2 (Buyer shall obtain, pay for and deliver) give the buyer 3 days to terminate the contract after they receive the subdivision information.

Notice that the title company must receive the required fee before they will obtain the Subdivision Information for the parties 

The transfer fees to the buyer are limited in paragraph C. Seller will pay any excess. The Notice to the Buyer Regarding Repairs By the Association puts the buyer on notice to not sign a contract before they are satisfied with the condition of the property.

Short Sale Addendum Paragraph A protects the seller by describing “net proceeds” and giving

the seller an out under the contract if their lender will not accept their net proceeds as full payment.

Paragraph C verifies that this is a binding contract and that the earnest money and option money must be deposited the same as on any contract.

Paragraph D tells us the final date the purchaser is willing to wait for the seller to receive approval from their lender. If that date comes, the contract will terminate, and earnest money will be refunded to the buyer.

Option money is never refunded. The option money pays for the right to terminate the buyer received beginning with the original effective date.

Paragraph D also explains that if the seller receives approval from the lender and the seller notifies the buyer of that approval, the effective date of the contract will be amended to the date the buyer receives that notification.

More About the Short Sale Addendum Paragraph F explains that if the buyer has the option to terminate, the number of days for the option period in paragraph 23, will begin on the amended effective date.

The right to terminate began on the original effective date and keeps running until there is an amended effective date. The option days begin to run on the amended effective date and end when the number of days is gone.

Time is of the essence for this addendum. 

PromulgatedResale

Certificates

 Consumer Information Form

Addenda Workshop

Find the letter, with the answer that corresponds with the blank for the situation. Letters can be used more than once or not at all.

Chapter 8

Other Real Estate Matters

Real Estate Fraud

Real estate fraud is a losing proposition. Mortgage lenders are usually the ones being

cheated, Their losses result in inflated appraisals and

property values and bogus documents recorded in public records.

You and I and other consumers end up paying the price for this loss.

Flipping A property is purchased and then quickly

resells at a value that is artificially inflated by false appraisals

First buyer purchases the home for $400,000 (which is the actual value) and then resells it at $600,000, with a phony appraisal, to a straw (phony) buyer, they might each pocket $100,000.

No payments are made on the $600,000 loan and when the lender forecloses they find the property is only worth $400,000.

The lender takes a loss, their cost increase, and we all pay.

Buyer Rebates Anything that causes money to go back to the buyer, either

at or after closing, without the knowledge of the lender, is illegal.

Anything being paid by any party in the transaction must be disclosed in the contract and on the HUD statement.

For example $20,000 to be paid to ABC Home Improvements for future improvements. ABC Home Improvements is owned by a friend of the buyer and after closing the friend and the buyer split the $20,000. No improvements are made; no payments are made, and the lender has to foreclose and finds the property worth less than the loan amount.

Almost everyone involved in a home buying transaction could be involved. The agents, the mortgage broker, the appraiser, the Title Company. The lender is usually the victim.

Red Flags of Fraud Inflated price or appraisal  Frequently you are being asked to remove the property from

MLS (that is a violation of MLS rules) or being asked to increase the price in MLS to a higher price to match the sales price.

False financial statements by the buyer Contract calling for future improvements. High fees to the Mortgage Broker, Real Estate Broker or both No fee for a title policy on the HUD statement A title company you have never heard of before  Last minute amendments to the contract, increasing the

sales price 

Risk Management Document everything Disclose everything to the lender (representing

the Buyer does not include helping them cheat the lender)

Be sure everything is accurate on the HUD statement.

If you believe your transaction is involved in illegal activity withdraw from the transaction. Tell the seller that if he/she intends to continue with the transaction, they need to seek legal advice.

You Would Like to Be Paid 

So where are these separate written agreements?  (1) The Listing Agreement-an agreement between seller and broker. (2) A Buyer’s Representation Agreement- an agreement between buyer and broker. (3) The Sales Contract-an agreement between buyer and seller.(4) An agreement between brokers- either a written agreement/registration or through the MLS system.

This statement is NOT an agreement between brokers

This statement is NOT an agreement between brokers, it only affirms what the agreement is. If the property is in MLS the amount in this blank should be the same as Seller Agency Compensation (SAC) or Buyer Agency Compensation (BAC) in MLS.

When the Property is in MLS When a listing broker enters a property in MLS and

enters an amount under SAC (Sub-agency Compensation) or BAC (Buyer Agency Compensation) that is an offer to selling agents to participate in the sale and be compensated in a certain amount.

When a selling agent shows the property and writes an offer, the listing broker’s offer of compensation has been accepted.

Agents cannot try to change that offer by filling in something on the last page of the contract that does not exist.

When the Property is Not in MLS If the property is not in MLS, there is no

offer of compensation. A buyer’s agent would want to get a

Registration/Agreement between Brokers signed before showing the property to be clear on the offer of compensation.

The Statute of Frauds says anything regarding real estate must be in writing to be enforceable. 

FAIR HOUSING LAWS The Fair Housing Act covers most housing The Act exempts owner-occupied buildings with

no more than four units, single-family housing sold or rented without the use of a broker, and housing operated by organizations and private clubs that limit occupancy to members.

An owner that is exempt from the Fair Housing Act may still be liable for racial discrimination under the Civil Rights Act of 1866. There are no exceptions under that act.

Protected Classes Race Color National origin Religion Sex Familial status Handicap The NAR Code of Ethics has added Sexual

Orientation as a protected class for REALTORS® States and cities can also add protected classes. Be

familiar with your market area.

In the Sale and Rental of Housing:No one may take any of the following actions based on protected classes: Refuse to rent or sell housing Refuse to negotiate for housing Make housing unavailable Deny a dwelling Set different terms, conditions or privileges for sale or rental of a

dwelling Provide different housing services or facilities Falsely deny that housing is available for inspection, sale, or

rental For profit, persuade owners to sell or rent (blockbusting) or Deny anyone access to or membership in a facility or service

(such as a multiple listing services) related to the sale or rental of housing

Additional Protection if …. If you or someone associated with you: Have a physical or mental disability

(including hearing, mobility and visual impairments, chronic alcoholism, chronic mental illness, AIDS, AIDS Related Complex and mental retardation) that substantially limits one or more major life activities

Have a record of such disability or Are regarded as having such a disability

Your landlord may not: Refuse to let one make reasonable modifications to the

dwelling or common use areas, at their expense, if necessary for the disabled person to use the housing.

Refuse to make reasonable accommodations in rules, policies, practices or services if necessary for the disabled person to use the housing.

Example: A building with a "no pets" policy must allow a visually impaired tenant to keep a guide dog.

Example: An apartment complex that offers tenants ample, unassigned parking must honor a request from a mobility-impaired tenant for a reserved space near her apartment if necessary to assure that she can have access to her apartment.

Housing need not be made available to a person who is a direct threat to the health or safety of others or who currently uses illegal drugs

Housing Opportunities for Families Unless a building or community qualifies as housing

for older persons, it may not discriminate based on familial status. That is; it may not discriminate against families in which one or more children under 18 live with:

A parent A person who has legal custody of the child or

children or The designee of the parent or legal custodian, with

the parent or custodian's written permission. Familial status protection also applies to pregnant

women and anyone securing legal custody of a child under 18.

Housing for older persons is exempt from the prohibition against familial status discrimination

Many Disclosures are Required. Some examples of required disclosures would

include: Full disclosure about the condition of the property to

all potential Buyers Things that have made the property notorious. (Well

publicized murder/suicide) Things happening in the area that the average

person would want to know (the city is considering a new highway through the area the property is located on)

Anything a normal buyer would want to know about the property that is not specifically exempted from disclosure.

Some Disclosures are not Required, but are Permitted

The law says that the seller and the agent do not have to disclose death on a property that was by suicide, natural causes or an accident unrelated to the property. If the seller chooses to disclose it is permitted.

The law says neither the seller nor the agent is required to disclose anything about registered sex offenders. If the seller decides to disclose that the home down the street is occupied by a registered sex offender, it is permitted.

Some Disclosures are prohibitedNothing can be disclosed regarding: Race Color Religion Sex Handicap (including aids or HIV illnesses- see

information following) National Origin Familial Status (protects children and the people they

live with) + Sexual Orientation for NAR members

DISCLOSURE AND AIDS OR HIV RELATED ILLNESSES

The Texas Real Estate License Act reads: A person is not subject to civil liability or criminal

prosecution because the person did not inquire about, make a disclosure related to, or release information related to whether a previous or current occupant of real property had, may have had, has or may have AIDS, HIV related illnesses or HIV infection as defined by the Center for Disease Control of the U.S. Public Health Service.

NAR’s Disclosure Policy If a prospective buyer ask if a current or former occupant has

AIDS the National Association of REALTORS advises you to respond as follows:

“It is the policy of our firm not to answer inquiries of this nature one way or the other since our firm feels that this information is not material to the transaction. In addition, any response from me or other agents of our firm may be in violation of the federal fair housing laws. If you believe this information is relevant to your decision to buy a property, you must pursue this investigation on your own.”

HUD’s Disclosure Policy It is illegal for real estate agents to make unsolicited

disclosures that a current or former occupant of the property has AIDS. If a prospective buyer directly ask you if a current or former occupant has AIDS and you know that this is true, HUD advises you to not respond.

OCCUPANCY STANDARDSNeither the Fair Housing Act nor HUD has a particular rule regarding occupancy. Both allow for housing providers to comply with reasonable local, state and federal occupancy restrictions. In some cases, housing providers have been permitted to develop and implement reasonable occupancy restrictions on their own.

 

Chapter 9

Practice Makes Perfect

Opportunity to practice what you have learned. Do the two case studies, filling out the forms that follow each, using the things you have learned.

Texas Promulgated Contract FormsThe text book for this 30 hour Texas Pre-Licensing Class is available atwww.createspace.com/5249273. Discounts available for Real Estate Schools. Call Peggy Santmyer at 214-697-5533 for information.