Champions - Promulgated Contract Forms

Performance of a Contract

Every contract includes duties that must be performed by the parties. In a real estate sales contract, the seller is obligated to convey satisfactory title at closing, while the buyer's primary obligation is to be ready to pay the agreed price. From contract to closing, both the buyer and seller have other duties to perform as the transaction progresses. If the contract specifies that a duty must be performed by a certain date, every effort should be made to perform on time. If no date is specified, the parties should perform in a reasonable amount of time.

Responding to an Offer

1. Do nothing. An offeree is under no legal obligation to respond to any offer. This is obviously a less than desirable response, but is an option nonetheless. 2. Reject. 3. Accept 4. Counteroffer

Acts of the Parties

Acts of the parties depend on the conduct of the offeror and offeree. The offer, if no time is specified, remains open for a reasonable time and the offeree may accept this offer within the reasonable time period. If there is a specified time period, the offer terminates upon the expiration of the time period. An offer may include language such as "this offer is in effect until 5:00 p.m. (month, date, year)." In any event, an offer may be withdrawn at any time prior to its acceptance by the offeree. If there is not a specified termination time, an offer should be withdrawn in writing if that is the offeror's desire.

Presentation of Offers

All offers must be presented! Some states have specific time requirements for the presentation of offers. The rule requiring that all offers be presented means that an offer must be presented no matter how low or ridiculous it might be. The agent simply does not have the authority to dismiss an offer without presenting it unless the party has given the agent instructions to the contrary. The exception to the "all offers must be presented rule" is that an agent can reject an offer of a certain price if the seller has given the agent written instructions to do so.

Statute of Limitations

All states have a limitation of time in which an individual may file suit in court for damages because a party breached a contract. This time limit may vary depending on the nature of the contract. For example, the time allowed for filing suit for damages may be longer for a written contract than for an oral contract. Failure to fie suit within the time allowed will result in the party losing his or her rights under the contract. This is called the doctrine of laches. In Texas, the ________________ is two years for an oral agreement and four years for a written agreement.

Addenda

An addendum to a contract is an attachment that adds or further describes the rights and duties of the parties. An addendum is an additional form that is attached to and incorporated into the contract.

Option

An agreement between a buyer and seller or landlord and tenant. A seller, in exchange for some form of consideration (an option fee), gives the buyer the right to purchase the property at some preset price and terms for a period of time.

Net Sheet

An estimate of the net proceeds to the seller and should be prepared based upon the offer being considered. The net sheet gives the seller an estimate of what the seller will realize at closing if the offer is accepted as presented. By preparing the net sheet, the license holder is not suggesting that the seller accept the offer as presented; they are simply performing their duty to keep their client apprised of all important aspects of the transaction.

Communication/Notification

An offer becomes a binding contract when it is signed by all parties and the acceptance is communicated to the offering party. Communication is also referred to as notification.

Rejecting an Offer

An offer may be rejected without explanation or comment. This is also a less than desirable response because it does not invite further negotiations. A variation is the "reject with invitation to resubmit", where the offeree rejects the offer, but provides suggestions to the offeror that might be acceptable to the offeree.

Third Party Financing Addendum - PARAGRAPH E. AUTHORIZATION TO RELEASE INFORMATION:

Authorizes lenders to disclose and/or furnish various pieces of information related to financing approval status and/or closing disclosures.

Bilateral Contract

Both parties are obligated to perform.

Parties

Buyer and seller.

1-4 Contract - PARAGRAPH 6.D. OBJECTIONS

Buyer may object to any matters that might prohibit a certain use or activity of the property such as installation of sattelite dish, operating a business out of the home, or parking an RV within view of the street. Whatever the intended use of the property, it must be listed here. If the buyer is using the property as a residence only, many license holders insert the words "residential use" in this paragraph. The Buyer is given a limited number of days in which to object. Because of this limitation, the buyer must make a decision regarding title and survey issues, and may need to seek the advice of an attorney. The number of days for objection is counted from the latest date that the buyer receives the commitment, exception documents or survey. Provided seller does not incur any expense, the seller will cure the timely objections of the buyer or any third party lender.

Seller Financing Addendum - PARAGRAPH A. CREDIT DOCUMENTATION:

Buyer will provide the documentation necessary for Seller's approval of Buyer's creditworthiness.

Five Elements Of A Valid and Enforceable Contract

COLIC 1. Competent parties 2. Offer and acceptance (mutual consent) 3. Legal purpose 4. In writing (when required by law) 5. Consideration

Lease-Purchase Agreement

Combines some of the elements of a sale with a lease. It gives the tenant occupancy in the present time and the right to purchase at a future date. The price is set when the lease agreement is negotiated, which is advantageous to the tenant-buyer. TREC specifically prohibits license holders in Texas from writing any lease with an option to purchase. If a license holder has a client interested in this type of transaction, the assistance of an attorney is required.

Reasonable Time

Contracts contain many dates by which the parties must perform. The parties have a reasonable amount of time in which to perform. If a party fails to meet a required date, the contract is still valid and enforceable if the party has been making a reasonable effort to perform.

Third Party Financing Addendum - PARAGRAPH A.(1) Conventional Financing

Conventional financing includes the possibility of either first mortgage financing, second mortgage financing, or both. e agent will complete the financing information in the appropriate blocks. When completing this addenda be sure and put only the amount borrowed in the dollar amount of the loan in Paragraph A.(1) or A.(2). Do not add any loan fees or other charges to the loan amount. Enter the term of the loan, which is commonly 15 or 30 years.

Broker-Lawyer Committee

Drafts and revises contract forms for use in real estate transactions in the state of Texas. • Has 13 members. • 6 members are appointed by TREC. • 6 members from the State Bar of Texas are appointed by the President of the State Bar. • 1 public member is appointed by the governor. • The Broker-Lawyer Committee writes the contract forms, which are then approved by the Commission. • The Commission promulgates the forms for use by Texas license holders.

Assumption

The buyer assumes the existing loan. In effect, the buyer is using the loan assumption as a credit against the sales price of the property, reducing the amount of cash needed at closing. All existing FHA and VA loans are assumable with no change in interest rates, subject to the credit approval of the buyer.

1-4 Contract - PARAGRAPH 6.E.(2) MEMBERSHIP IN PROPERTY OWNERS ASSOCIATION:

The buyer is advised that the property is or is not subject to membership in a mandatory owners association. The buyer is also advised that the property owners association fee is a forecloseable lien if the fee is mandatory. The Addendum For Property Subject To Mandatory Membership In A Property Owner's Association 37-3 is available for optional use.

1-4 Contract - PARAGRAPH 1. PARTIES:

The document will include the parties - buyer and seller. The seller's name should appear on the document in the same manner in which they took title. The buyer's name should appear in the manner in which he or she intends to take title to the property. If buyers are uncertain as to how to take title, they should be referred to the appropriate legal and/or tax professionals.

Competent Parties

The general rule of law is that all parties to a contract have read it and understand it.

Seller Financing Addendum - PARAGRAPH C. PROMISSORY NOTE:

The interest rate is negotiable, and can be paid in three possible repayment plans: • PARAGRAPH C.(1) A single payment with interest payable at maturity, monthly or quarterly. • PARAGRAPH C.(2) Monthly installments that either include interest or have interest added to them; the most common is monthly installments including interest. • PARAGRAPH C.(3) Payments will be made in a combination of interest-only payments followed by payment of principal and interest.

1-4 Contract - PARAGRAPH 2. PROPERTY:

The land, improvements and accessories are collectively referred to as "property." Paragraph 2.(A) - Land Paragraph 2.(B) - Improvements Paragraph 2.(C) - Accessories Paragraph 2.(D) - Exclusions

Adding Provisions to a Contract

The license holder should add only factual statements and business details that are required for the transaction.

1-4 Contract - PARAGRAPH 6.A. Title Policy

The owner's title policy can be paid for by either Buyer or Seller. In most cases, the title policy is paid for by the seller. e title policy is generally issued by the title company listed in Paragraph 5.

Power of Acceptance

The party to whom the offer was made has the power to bind the offeror to the contract.

Offeror

The person making the offer.

Legal Description

The specifics of the location and size of a property.

1-4 Contract - PARAGRAPH 6.B. COMMITMENT:

The title company has 20 days from the date that they receive the contract to furnish a commitment to the buyer for title insurance. This paragraph also provides for an automatic extension of the delivery period for up to 15 days or 3 days prior to closing if the commitment cannot be delivered within the 20 days allowed.

1-4 Contract - PARAGRAPH 5. EARNEST MONEY:

There is no standard for the dollar amount of earnest money, but it is often in the range of 1% of the purchase price. Insert the amount of the earnest money and the name and address of the title company. If additional earnest money is required, enter the amount and the number of days.

Novation

When a new contract is substituted for an existing one.

Accessories

While not necessarily permanently installed or built-in, are commonly conveyed to the buyer in the sale.

Common Amendments

• Changes to the closing date • Changes to the sales price, down payment and/or amount financed • Repairs that the seller agrees to perform • Removal or waiver of contingencies

Reasons For Contract Termination

• Mutual agreement • Partial performance • Substantial performance • Impossibility • Operation of Law • Breach of contract

Evaluation of Offers

In most cases, the initial offer is prepared by the agent working with the buyer. The offer is delivered to the listing agent (seller's agent) who presents the offer to the seller. When a seller receives an offer, "What is the bottom line?" is one of the first questions asked. Sellers are most interested in what they are going to net at closing. When presenting an offer to a seller, the listing agent should prepare a net sheet. The net sheet is an estimate of the net proceeds to the seller and should be prepared based upon the offer being considered.

In Writing

In order to comply with the Statute of Frauds, contracts for the conveyance of an interest in real estate or leases for a term of more than one year must be in writing.

Seller's Contribution

In some cases a buyer might ask for a ___________ _________________ to the buyer's closing costs. ____________ _________________ to the buyer's closing costs reduce the amount of cash needed by the buyer at closing.

Third Party Financing Addendum - PARAGRAPH D. FHA/VA REQUIRED PROVISION:

In transactions where financing involves FHA-insured or VA financing, this paragraph makes clear that the Buyer is not obligated to purchase the property in question if either the Buyer has not received a written statement of value from an approved source (Certificate of Reasonable Value for VA loans only), OR the purchase price or cost exceeds the reasonable value of the property, as established by the Department of Veterans Affairs.

Title Policy

Insurance policy against losses resulting from defects in title.

Void Contract

Is invalid from the beginning, and has no effect on the parties. A contract to perform an illegal act is a ______ contract.

Voidable Contract

Is one that cannot be enforced against one or more of the parties. Most contracts entered into with minors are ________ at the option of the minor

Unenforceable Contract

Is one that cannot be enforced due to some flaw in the contract, passage of time, or other issues that make enforcement impossible.

Unauthorized Practice of Law

License holders adding complex provisions to a contract.

Offer Acceptance

Means that the accepting party does so with no change to the contract whatsoever. Any change, no matter how trivial, turns the offer into a counteroffer.

Government Loans

Mortgages insured or guaranteed by the US Government. Includes FHA, VA, and USDA loans.

Mutual Consent

Often referred to as a "meeting of the minds."

Partial Performance

One party to a contract may accept the partial performance of the other and terminate the contract. For example, a tenant signs a one-year lease for an apartment, and moves out after ten months. The landlord could accept the tenant's partial performance of the contract and terminate.

Valid Contract

One that meets all of the requirements of law.

Unilateral Contract

Only one party is obligated to perform. A unilateral contract is said to lack mutuality.

Operation of Law

Operation of law may terminate an offer. The law terminates the offer upon the death of either party prior to acceptance, bankruptcy of either party, or a change in the law that renders the proposed contract illegal.

1-4 Contract - PARAGRAPH 3. SALES PRICE:

PARAGRAPH 3.A. The down payment is always the difference between the sales price and the sum of all financing PARAGRAPH 3.B. The sum of all financing from all sources. PARAGRAPH 3.C. The Sales Price is the sum of 3.A and 3.B.

Non-Realty Items

Personal property included in a sale.

Mutual Agreement

Reason for contract termination. If the parties agree, a contract may be terminated at any time.

Consideration

Something of value given in exchange for a promise.

1-4 Contract - PARAGRAPH 4. LICENSE HOLDER DISCLOSURE:

States that a license holder who has a familial relationship with a party to the transaction must disclose this information to the other parties before entering into a contract.

1-4 Contract - PARAGRAPH 6.E.(1) ABSTRACT OR TITLE POLICY:

The Texas Real Estate License Act requires that license holders advise the buyer to have the abstract examined by an attorney or to obtain a title insurance policy.

Rejection of the Initial Offer

In most cases, a counteroffer is a rejection of the original offer. As such, the original offer is no longer available for acceptance by the offeree.

TREC Promulgated Lease Forms

1. Buyer's Temporary Residential Lease 2. Seller's Temporary Residential Lease

Legal Requirements of an Offer

1. Communicated to a specific offeree. 2. Intended to be a serious offer. 3. Definite and certain enough to be accepted by the offeree.

The buyer has three options if credit approval has not been obtained within the allotted time:

1. Terminate the contract by providing written notice of the buyer's inability to obtain credit approval. 2. Allow the allotted time to run out without first obtaining credit approval. This would be risky, exposing the buyer to possible loss of earnest money or other liability under the contract if they fail to close. This option would presumably be used if the buyer had the ability to close without financing or was absolutely certain of his or her ability to obtain credit prior to closing. 3. Request an extension of time for obtaining credit approval from the seller. Of course, the seller would be under no obligation to agree to an extension. If an extension is given, be sure to get the extension in writing, and signed by both the buyer and the seller.

Earnest Money

A "deposit" paid upfront by the buyer to show that he or she is serious in his or her intent.

Survey

A Measurement of boundaries and land area required in some sale contracts.

Endoresement

A change made to a standard insurance policy.

Legal Purpose

A contract for an illegal purpose is void, and the law treats the contract as if it were never created. An example of a void contract would be one to have somebody killed or to deliver illegal drugs.

Immpossiblity

A contract may be terminated if performance becomes impossible. Impossibility may be due to the death of one of the parties if the contract is for personal services. War or natural disaster may result in performance becoming impossible.

Executory Contract

A contract that is binding on the parties, with one or more of the parties having contractual duties that have not yet been performed.

Substantial Performance

A contractor performs are modeling contract, completes the job and fails to perform some minor paint touch up. The job has been substantially completed, and the contractor is due final payment with the possibility for an adjustment for his failure touch up the paint.

New Offer

A counteroffer communicated to the other party becomes a new offer. Note that a working counteroffer does not change the list price of a property.

Counteroffer

A counteroffer is made when a party changes an offer in some way and communicates that change to the other party. The counteroffer is actually a two-step process: the rejection of the original offer coupled with a new offer. The counteroffer is normally done by one party striking out the provision that is not acceptable and writing the acceptable term next to it. The changed term will then be initialed and sent back to the other party.

Fixed-Rate Mortgage

A mortgage loan in which the interest rate stays the same for the life of the loan. Most of these loans are fully amortized

Offeree

A person to whom an offer is made.

Offer and Acceptance

A valid contract must be based upon the consent of the parties. The contract must therefore reflect the intent and wishes of the parties. Mutual consent is often referred to as a "meeting of the minds." For a contract to exist, there must have been a meeting of the minds (offer and acceptance) between the parties. The determination of mutual consent is usually a question of fact and is completed by the process of offer and acceptance.

Accepting an Offer

Acceptance of a contract must include full acceptance of the entire offer without change. Any change, no matter how minor, becomes a counteroffer.

Time is of the Essence

For the important milestones in a contract that must be performed on time the language ___________________ is often inserted into the relevant provision of the contract. The phrase, "___________________" means that the time for performance will be literally interpreted, and that performance must be complete by the day stipulated. In the past, license holders have erroneously inserted the words "___________________" in a contract, making every date one that must be strictly interpreted, with a failure to perform amounting to a material breach of the contract. Because the words "_____________________" change the legal effect of a contract, license holders who add this language may be engaging in the unlawful practice of law.

AUTHORIZATION TO FURNISH TILA-RESPA INTEGRATED DISCLOSURES

Form TAR-2516, Authorization to Furnish TILA-RESPA Integrated Disclosures, should be completed by the buyer or seller, and indicates to lenders, title companies, and/or escrow agents that the buyer or seller has signed an exclusive agreement with a particular broker, and authorizes these entities to disclose and furnish any documents or information pertinent to the transaction to the broker or broker's agent.

Seller's Disclosure

Form stating known facts and defects concerning a property.

Promulgated Forms

Forms published by TREC that are mandatory for license holders to use in real estate transactions in the state of Texas. These contract forms expedite real estate transactions and reduce controversies to a minimum while containing safeguards to adequately protect the interest of the principals to the transaction.

Multiple Offers

If a broker receives more than one offer, all offers must be presented to the seller unless instructed otherwise. No offer has a priority of presentation over another. The broker should submit all offers promptly. For example, if a license holder receives an offer at 9 a.m. and presents it to the seller and then receives a second offer at 3 p.m. (before the seller has accepted the first offer), the license holder has the duty to submit the later offer to the seller. In the same example, if the agent representing the second buyer is aware that multiple offers have been received, the listing agent should notify the agent representing the first buyer that multiple offers have been received. The same would be true regardless of the number of offers. The listing agent should keep the terms and conditions confidential so as not to give one buyer a significant negotiating advantage over another. A broker is obligated to place the client's interest first and is also obligated to treat other parties to the transaction honestly.

Exclusions

If an item is to be excluded, give it a name and a location. Excluded items are to be "removed prior to delivery of possession."

Termination of Offers

If an offer has been made, it can be terminated prior to acceptance by the offeree due to: • The acts of the parties • Operation of law

Seller Financing Addendum - PARAGRAPH B. BUYER'S CREDIT APPROVAL:

If the documentation is not delivered to Seller, he or she has the right to terminate the contract provided he or she gives Buyer the required notice. Credit approval is at the sole discretion of Seller.

Seller Liability on Assumed Loans

If the seller does not receive a release of liability, the buyer assuming the loan "joins the original borrower" on the note, leaving both with liability for repayment of the loan. If this is the case, the seller could be liable for repayment of the loan if the purchaser defaults.

Third Party Financing Addendum - PARAGRAPH A. TYPE OF FINANCING AND DUTY TO APPLY AND OBTAIN APPROVAL:

In Paragraph A, the buyer agrees to apply for financing promptly and to make a good faith effort to obtain credit approval. Note that this addendum addresses the credit approval of the borrower, and is independent of the lender's approval of the property itself. Paragraph A.(1) - Conventional Financing Paragraph A.(2) - Texas Veterans Loan Paragraph A.(3) - FHA Insured Financing Paragraph A.(4) - VA Guaranteed Financing Paragraph A.(5) - USDA Guaranteed Financing Paragraph A.(6) - Reverse Mortgage Financing

Breach of Contract

The breach of one of the parties may terminate a contract. The party who breaches a contract is the party in default. The other party, known as the injured party, has a number of possible remedies. The injured party may sue for damages in court. Some contracts provide for the injured party to collect liquidated damages, thereby releasing all parties from further obligation under the contract. An example of liquidated damages in a real estate contract would be the acceptance of the buyer's earnest money deposit by the seller. Another possible remedy for breach would be a suit for specific performance where the injured party asks the courts to order the defaulting party to perform.

ADDENDUM FOR RELEASE OF LIABILITY ON ASSUMED LOAN AND/OR RESTORATION OF SELLER'S VA ENTITLEMENT

This form serves a dual purpose. In some cases, when assuming Seller's existing loan, Seller remains liable for repayment in the event that the purchaser defaults. In Paragraph A, Seller and Buyer agree that they will seek to have Seller released from the loan after the assumption is complete. In Paragraph B, Seller will attempt to obtain a restoration of Seller's VA entitlement. If a VA loan is assumed by Buyer without sufficient VA entitlement, Seller's entitlement remains with the existing loan. As a result, Seller's entitlement cannot be fully restored. If Buyer has sufficient VA entitlement, Buyer's entitlement may be substituted for Seller's entitlement. After closing, Seller can then apply for a full restoration of entitlement from the VA.

NON-REALTY ITEMS ADDENDUM

This optional form is used when personal property is to be included in a sale. Indicate the price agreed to between the parties for the property in Paragraph A. Some brokerage firms and the Texas Association of REALTORS® have created their own form for dealing with personal property included in a sale.

Third Party Financing Addendum - PARAGRAPH B. APPROVAL OF FINANCING:

This paragraph gives the buyer a specific number of days in which to obtain credit approval. The number of days allowed for credit approval varies, but sufficient time should be allowed. For the purposes of this addendum, time is of the essence. This means that, if the buyer has been given twenty days in which to obtain approval, the approval must be obtained within the allotted twenty days. The days are calendar days, and the counting of days begins on the day following the effective date of the contract.

1-4 Contract - PARAGRAPH 6.E. TITLE NOTICES:

This section includes a number of notices relating to issues that may or may not apply to the real estate being sold. Most of these notices are required by statute.

Assignment

Transfers all of the rights related to the contract to another party known as an assignee. The assignee assumes primary liability for performance under the contracts, and the assignor, unless released, remains secondarily liable. Unless otherwise provided in the contract, all contracts are assignable with some exceptions. Contracts for personal services are not assignable. Therefore, a buyer's representation agreement or listing agreement would not be assignable. Mortgages generally have a clause that prohibits assignment (assumption) without prior approval.

Imputed Notice

Under this concept, an offer is presumed to have been delivered to the principal when it is delivered to the agent. A license holder who fails to communicate an offer in a timely manner may be subject to a lawsuit by the seller, and may be disciplined by the real estate commission that issued the license.

1-4 Contract - PARAGRAPH 6.C. SURVEY

• PARAGRAPH 6.C.(1) Seller has an existing survey that he or she intends to use. Enter the number of days that the seller has to deliver the survey. If the survey is unacceptable to the title company or lender, a new survey will be obtained at either Buyer's or Seller's expense. If the survey is not delivered within the time specified, Buyer will obtain a new survey at Seller's expense. • PARAGRAPH 6.C.(2) A new survey is to be obtained at Buyer's expense. It would be advisable to ensure that Buyer has obtained credit approval prior to paying for a survey if the survey is to be obtained at Buyer's expense in either 6.C(1) or 6.C(2). • PARAGRAPH 6.C.(3) A new survey is to be obtained at Seller's expense. • Either a new or existing survey can be used. If a new survey is to be obtained, the license holder must be aware of the lead time for ordering one in their market. In most urban areas a survey can be obtained in a few days. In many rural markets it might take several weeks.

Seller Financing Addendum - PARAGRAPH D. DEED OF TRUST

• PARAGRAPH D.(1) PROPERTY TRANSFERS: If D(1)(a) is selected, the property may be sold to a future buyer who assumes the loan without the consent of the seller. If D(1)(b) is selected, any assumption of the loan must be approved by Seller. D(1)(b) is essentially a "due on sale" clause, and is the preferred choice of most sellers. • PARAGRAPH D.(2) TAX AND INSURANCE ESCROW: Escrow is either required or not. If escrow is not required, Buyer must furnish Seller each year with evidence of taxes being paid and must provide Seller with evidence of paid-up casualty insurance naming Seller as a mortgagee loss payee. • PARAGRAPH D.(2) PRIOR LIENS: Default on a superior lien will constitute a default under the deed of trust securing the note. For example, the deed of trust is in second position behind a first mortgage on the property. Seller could foreclose on this deed of trust if the first mortgage becomes delinquent, even if the note in this transaction is up to date.

Offers Can Be Communicated By:

• Phone • Fax • E-mail • Letter • Hand Delivery

Common Addenda Forms

• Property owner association information • Environmental disclosures • Oil and gas reservation addenda • Lead-based paint disclosures • Back-up contract • Financing contingencies

Concerns Regarding Loan Assumption

• Seller's liability. The seller, who is the original borrower on the loan assumed, may continue to be liable along with the buyer. The sale can be made contingent on the release of the seller using the TREC-promulgated form Release of Liability on Assumption of FHA, VA or Conventional Loan. • Time to process. Processing a loan assumption is not a core business activity of lenders. The assumption department may be overworked and understaffed, resulting in long processing times.

Benefits of Loan Assumption

• The buyer is possibly assuming a loan at a rate that is not currently available. • The assumption of an existing loan is substantially less expensive than obtaining a new loan. Assumption fees are generally less than $500. • Even if the rate on the seller's existing loan is somewhat higher than a rate that is available today, the loan assumption might still make sense considering the savings in fees associated with a new loan.

The heading of the contract contains:

• The date the contract form was approved by the Commission. Failure to use the most current version is a violation of the License Act. • The title of the form, which reveals its intended use.