PROMULGATED FORMS
Types of contracts - valid, void, voidable, executory, executed - page 13
Once all the terms of an offer have been agreed to and signed by the parties, and the acceptance communicated to the offeror, the contract becomes binding on the parties. The contract is known as an executory contract from the effective date through the closing. An executory contract is defined as a contract that is binding on the parties, with one or more of the parties having contractual duties that have not yet been performed. The effective date is the date that acceptance was communicated to the offering party. For example, if a seller accepted an offer from the buyer on Monday, January 3rd, and the buyer was notified of the seller's acceptance on Tuesday, January 4th, the effective date of the contract is January 4th.
What are good funds? - page 75
Buyer is to bring "good funds" to closing. Good funds is described as a cashier's check or wire transfer. Title companies may accept a small personal check from a buyer. Check with the title company for their policy
Common amendments to the original contract - page 14
Common amendments include: • 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
Farm and Ranch Contract - crops, accessories, improvements - definitions - page 114‐115
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Addressing environmental concerns - TREC forms - page 69
This box is checked if Buyer wishes to obtain an environmental assessment. The addendum states the buyer "may obtain" the assessment. An example of an environmental assessment would be a site assessment to determine the likelihood of toxic substances on the site.
When does an offer become a contract - page 28
Acceptance of an offer 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. (when its accepted, go to page)
Paragraph 3.B. - contents - page 100
The sum of all financing from all sources. Insert only the amount actually being financed.
Use of the Third‐Party Financing Addendum - page 38
Third party financing is divided into two broad categories: government loans and conventional loans. Government loans are insured or guaranteed by the U.S. Government and are made by lenders. Government loans are often either FHA or VA loans. A conventional loan is best described as any loan that is not a government loan.
Lead Paint - disclosures, dates, timing, buyer's rights, seller's responsibilities - page 68
(lead paint)States that if you are about to buy a residential dwelling that was built before 1978, you are being notified with this addendum that the property may present to the buyer exposure to lead found in the paint. (disclosures)Select the correct box to check that either they do or do not know of lead-based paint or lead-based paint hazards. Likewise, indicate if the seller has provided the buyer with reports, or if the seller has no reports or records pertaining to lead-based paint or lead-based paint hazards. (buyers rights)Buyer to indicate whether Buyer waives the right to conduct a risk assessment or inspection. Otherwise, the buyer may have the property inspected within 10 days of the effective date of the contract.
Requirements of a valid contract - page 11
1. Competent parties 2. Offer and acceptance (mutual consent) 3. Legal purpose 4. In writing (when required by law) 5. Consideration
TREC Form RSC‐2 - purpose and use requirements - page 70
A license holder must use TREC Form RSC-2, Disclosure of Relationship with Residential Service Company, to disclose to a party to a real estate transaction in which the license holder represents one or both of the parties any payments received for services provided for or on behalf of a residential service company licensed under Texas Occupations Code Chapter 1303. Be aware that this disclosure applies to the entire brokerage firm. Brokers should advise all license holders in the firm of any compensation being received from a residential service company and the work that is being performed. (Go to page)
Loan origination vs assumption - page 41
A loan assumption occurs when a buyer assumes and agrees to pay the seller's existing mortgage
Paragraph 20 - Federal Tax Requirements - page 85
A seller who has no social security card or green card is considered a foreign person. The escrow agent will withhold from the sales proceeds an amount sufficient to comply with applicable tax law and deliver the same to the IRS. The contract says the buyer has an obligation to do this, but in reality, the escrow agent provides this service
Possible responses or actions upon the receipt of an offer - page 27
Do nothing, Reject, Accept, Counteroffer
Stigmatized properties - causes and/or features - page 212
Certain disclosures, while not required, can be made at the discretion of the seller or license holder. A property where there has been a murder or alleged haunting is stigmatized. A property can be considered stigmatized if it is in the vicinity of the residence of a known sexual offender. Megan's Law is a federal law requiring all states to release information to the public about known convicted sex offenders, when necessary, to protect the public's safety. Megan Kanka was a 7-yearold girl who was murdered on July 29, 1994, in New Jersey. The law was created in response to her death. License holders are not required to disclose the information but should refer buyers to local information sources if buyers ask about this.
Types of contracts and their features - valid, void, voidable, unenforceable - page 11
Contracts may be valid, void, voidable, or unenforceable. A valid contract is one that meets all of the requirements of law. A void contract is invalid from the beginning and does not affect the parties. A contract to perform an illegal act is a void contract. A voidable contract is one that cannot be enforced against one or more of the parties. Most contracts entered into with minors are voidable at the option of the minor. An 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. Of course, in the real estate business, we prefer to negotiate valid, enforceable contracts.
Accessories in the real estate contract - definition, features, disposition - page 36
Describes accessories, which, while not necessarily permanently installed or built-in, are commonly conveyed to the buyer in the sale (go to page)
Paragraph 5 - features - page 53
Earnest money is a "deposit" paid upfront by Buyer to show that he or she is serious in his or her intent. 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 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. Time is of the essence for this paragraph
The broker's responsibility in handling multiple offers on a single property - page 28
If a broker receives more than one offer, all offers must be presented to the seller unless instructed otherwise by the seller. 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.
Required used of TREC forms and exceptions to required use - page 24
If the license holder properly uses TREC-promulgated forms, the unlawful practice of law issue is more easily avoided. The use of a form by license holders, which was prepared and approved by a licensed Texas attorney for the particular transaction involved or a form prepared by the property owner or prepared by an attorney and required by the property owner, is also authorized. (Go to page)
Lender required repairs as addressed in the sales contract - page 62
Lender required repairs, if any, are a negotiated expense item between the parties. If the lender repairs exceed 5% of the sales price, the buyer may terminate the contract and receive a refund of earnest money. Seller must complete all agreed to repairs prior to closing, or the closing date may be extended up to 5 days to complete repairs.
Paragraph 4 - disclosure of agency coupled with an interest and family relationships - page 100‐101
Paragraph 4 states that a license holder with a relationship with a party to the transaction must disclose this information to the other party before entering into a contract.
TREC rules regarding the buyer's use of inspectors - page 61
Seller permits Buyer access to the property at reasonable times for inspections. Seller will turn on utilities and leave utilities on during the time covered by this contract. Seller is to permit the buyer to perform as many inspections as the buyer deems necessary, provided they are done at reasonable times. The inspector is to be a TREC licensed inspector or another person otherwise allowed by law. This would seem to allow engineers and other professionals to perform inspections even if they are not licensed by TREC. The exception to this is the performance of hydrostatic testing, which must be authorized separately by the seller in writing.
Assignment and when is it possible/not possible - page 15
The assignment of a contract 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, most contracts are assignable; however, there are 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. Purchase contracts are not assignable if they are contingent upon the buyer obtaining credit or some other contingency that makes assignment impossible. Unless otherwise prohibited, leases are assignable, and the new lessee is bound to the original terms of the lease.
The effective date of the contract - page 87
When the last party signs and acceptance has been communicated to the other party's agent, the date of final acceptance is filled in. The broker is responsible for ensuring that the effective date is filled in. All contracts must have an execution date filled in. The contract has many provisions that require compliance "within X days after the effective date of this contract...." Failure to enter an execution date can obviously cause considerable problems when trying to determine if a party is in compliance.
Earnest Money - definition, purpose, amount - page 53
Earnest money is a "deposit" paid upfront by Buyer to show that he or she is serious in his or her intent. 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 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. Time is of the essence for this paragraph.
Features of the Lead Based Paint disclosure form - page 68
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The unlawful practice of law - specific examples - page 24
TREC can suspend or revoke a license suspended on proof that the license holder drew a deed, note, deed of trust, will, or other written instrument that transferred or affected the title to or an interest in land. Likewise, TREC can suspend or revoke a license if the license holder is found to have advised or counseled a person as to the validity or legal sufficiency of an instrument or as to the validity of title to real estate.
Broker‐Lawyer Committee duties and purpose - page 24
The Texas Real Estate Broker-Lawyer Committee was created to draft and revise contract forms capable of standardization for use by real estate license holders. These contract forms expedite real estate transactions and reduce controversies while containing safeguards adequate to protect the interest of the principals to the transaction. The Broker-Lawyer committee has 13 members. Six members are licensed brokers appointed by TREC, and six members are licensed attorneys appointed by the president of the State Bar. One public member is appointed by the governor.
The parties to the contract specifically as noted in paragraph 18.A. - page 84
The escrow agent is not a party to the contract, and has no liability for the performance of either party. The title company performs two primary functions: escrow services and title insurance. Escrow services are performed when something of value, such as a deed, money, or written instrument, is put into the custody of a third person to be retained until the occurrence of a contingency or performance of a contract. The title company is the escrow agent, the trusted third party that will receive and hold a deed signed by the seller. They will also have the buyer's earnest money and loan funds released to them by the lender
Number of days for the title company to deliver the title commitment - page 55
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
TREC temporary lease forms - use and limits - page 77
This lease is used when the buyer moves before closing. Allowing the buyer to move in prior to closing carries considerable risk for the seller, and the decision must be made with great care. One significant risk is the possibility of the buyer's credit approval being withdrawn before closing, resulting in a buyer who is unable to close. Note that the rental to be paid is "per day," reflecting the short-term nature of this lease.
TREC temporary lease forms - use/situations - page 77
This lease is used when the buyer moves before closing. Allowing the buyer to move in prior to closing carries considerable risk for the seller, and the decision must be made with great care. One significant risk is the possibility of the buyer's credit approval being withdrawn before closing, resulting in a buyer who is unable to close. Note that the rental to be paid is "per day," reflecting the short-term nature of this lease.
Loan assumption - features and requirements - page 42
When a purchaser assumes an existing mortgage, the original borrower is not necessarily released from on-going liability for repayment. 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. The TREC Promulgated form, Release of Liability on Assumption of FHA, VA or Conventional Loan (TREC No. 12-2) is used to make a contract contingent on the lender releasing the seller upon the assumption by the buyer. When negotiating an assumption, a license holder representing the seller would be wise to suggest that the contract include the release contingency
Mediation vs arbitration or lawsuit - page 83
Buyer and Seller agree to mediate in the event that the parties have a dispute that cannot be settled through informal discussion. The cost of mediation is shared equally between Buyer and Seller. Mediation does not in any way imply a waiver of the right to file a suit if a party is unhappy with the results of mediation
The purpose and use of Paragraph 6 - page 56
Buyer may object to any matters that might prohibit a certain use or activity of the property, such as the installation of a satellite dish, operating a business out of the home, or parking of 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 for a residence only, many license holders insert the words "residential use" in this paragraph. The Buyer is generally given a limited number of days in which to object. Because of this limitation, the buyer must decide on 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 that the seller does not incur any expense, and the seller will cure the timely objections of the buyer or any third party lender. (Go to page)
Closing costs or settlement expenses - page 81
Buyer's and Seller's expenses and settlement costs are stated. Even though printed in the form to be paid by one party or the other, they are negotiable
Items to be retained by the Seller as specified in the contract - page 36
Enter exclusions to the sale. If an item is to be excluded, give it a name and a location. For example, "dining room chandelier" would be an adequate name and location. Excluded items are to be "removed prior to delivery of possession."
Paragraph 23 - features, numbers of days - page 110
For a detailed discussion of the termination option, see Chapter 5. Enter the option fee amount and the number of days. Check the box to indicate that the fee will or will not be credited to the sales price at closing
Requirements of a valid option - page 87
For a valid option to exist, the following are required: 1. All of the blanks in Paragraph 23 must be filled in. 2. The option fee must be paid within three days after the effective date of the contract. 3. Buyer must pay the option fee directly to Seller or the listing broker. Do not pay the option fee to a third party, such as a title company. Buyer probably does not have a valid option if the fee is paid to anybody other than the listing broker or Seller.
Promulgated loan forms and their use - page 44
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Short sale vs foreclosure vs Deed in lieu of foreclosure - page 190
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TREC contract forms and their uses - page 35
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Items typically prorated/ the proration process - page 82
Proration is the process of dividing ongoing expenses between the buyer and the seller at closing. Prorations are generally calculated through the day of closing for taxes, maintenance fees, and rents, if any, that the seller pays for on the closing day. Tax prorations may be calculated to take into consideration any change in exemptions that will affect the current year's taxes
Broker/seller commission agreements - page 208
Real estate brokerage fees are negotiated between the broker and the client. Fees are not set or recommended by the government or by any local, state, or federal organization. Any attempt to fix brokerage fees is a violation of the Sherman Act and the Clayton Act. License holders should never suggest that the fees that they charge are "customary," "mandatory," or "recommended."
Features of lease provisions - right of first refusal, option to buy, lease purchase - page 25
Some leases contain a right of first refusal. Th is provision in a lease gives the tenant the right to purchase the leased property by matching or bettering any offer before the property will be sold to someone else. Another possibility is a lease with an option to purchase, often called a lease-option. it gives the tenant occupancy in the present time and the right to purchase at a future date. In an option to purchase, the price is set when the lease agreement is negotiated, which is advantageous to the tenant-buyer. TREC does not have promulgated forms for a right of first refusal or a lease with the option to purchase. TREC specifically prohibits license holders in Texas from writing any lease with an option to purchase or a right of first refusal. If a license holder has a client interested in this type of transaction, the client must be referred to an attorney.
Provisions of an addendum vs the original contract - which prevails - page 15
Sometimes a provision in an addendum contradicts a provision in the main body of the contract. In such a case, the provision in the addendum prevails. For example, some contract forms provide that the seller will provide to the buyer a general warranty deed at closing. An attached addendum may provide that the seller will provide to the buyer a special warranty deed at closing. In such a case, the seller will provide the special warranty deed because the addendum requires one.
Fair Housing terminology and prohibited acts - page 209
Steering, also known as channeling, is taking buyers or renters to, or away from, a particular area based on the race, religion, etc. of the buyer or renter, and is the most common cause for complaint under the law. Steering can be blatant or quite subtle. Blockbusting is any attempt to induce panic selling in a neighborhood for financial gain
TREC contract forms and their uses - page 24
TREC has promulgated sales contract forms for most residential properties, including: 1. One-to-Four Family Contract (Resale) 2. New Home Contract (Incomplete Construction) 3. New Home Contract (Completed Construction) 4. Unimproved Property Contract 5. Residential Condominium Contract (Resale) 6. Farm and Ranch Contract
Paragraph 24 - use and timing - page 87
TREC rules prohibit real estate license holders from giving legal advice. Enter attorney contact information if applicable. Some states require that an attorney represent the parties. In other states (like Texas), representation is optional. If one or both of the parties are being represented by an attorney, the attorney's contact information is generally included in the contract. The execution date follows Paragraph 24. When the last party signs and acceptance has been communicated to the other party's agent, the date of final acceptance is filled in. The broker is responsible for ensuring that the effective date is filled in. All contracts must have an execution date filled in. The contract has many provisions that require compliance "within X days after the effective date of this contract...." Failure to enter an execution date can obviously cause considerable problems when trying to determine if a party is in compliance.
IABS - required uses - page 199
Texas law requires all real estate license holders to give the following information about brokerage services to prospective buyers, tenants, sellers and landlords. (go to page)
Imputed Notice - definition/example - page 25
Texas recognizes the legal doctrine of 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 disciplined by TREC.
A party used to conceal the identity of a buyer - page 207
The Straw Buyer is a person who is used to buy property in order to conceal the actual owner. The straw buyer does not intend to occupy the property or make payments and often deeds the property to the other individual immediately after closing. The straw buyer is usually compensated for the use of his or her identity. MORTGAGE FRAUD R
Purpose of the Notice to Prospective Buyer form - page 60
This notice complies with the provision of the Texas Real Estate License Act that requires that license holders advise buyers to have an abstract examined or obtain title insurance. All of the TREC-promulgated contracts have this notice in Paragraph 6 in the Title Notices section. This form could be used when a TREC contract is not being used or could be used anytime that the broker wants the buyer to acknowledge receipt of this advice.
Requirements for buyer approval according to the TREC Third Party Financing Addendum - page 39
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.
Offers and the communication of offers - page 25
What constitutes an offer? Under ideal circumstances, an offer on a residential property is presented in writing on the required forms, including addenda. On the other hand, circumstances are not always ideal, and any offer must be presented, even if it is an oral offer. All offers must be presented! This means that an offer must be presented, no matter how low or ridiculous it might be. The agent does not have the authority to dismiss an offer without presenting it unless the party has given the agent instructions in writing to the contrary
Default - definition - page 82
When a party to a contract fails to perform under the contract, they are in default. Failure to perform is also commonly referred to as a "breach of contract." When a party is in default or breach, the other party is known as the "injured party." In responding to the default, the injured party has a number of options available to them. The options are somewhat different depending on whether the buyer or the seller is in default
The T‐47 affidavit - purpose and use - page 59
When using the seller's existing survey, the seller is given a number of days to deliver the survey and a T-47 affidavit to the Buyer and the title company. In Paragraph 1, the Affiant states that they are the owner of the property. If they are not the owner, they indicate their relationship to the property (manager, tenant, etc.). The date of the existing survey is entered into Paragraph 4. Also included would be any changes to the property since the date of the existing survey. The T-47 must be signed in the presence of a notary. If the use of an existing survey is anticipated, listing agents should have the T-47 completed when the listing is taken. The contract states that both the T-47 and the survey must be delivered within the negotiated number of days.
Features of the option fee vs the earnest money deposit - page 86
While no mention is made of inspections in this paragraph, the option period is the time allowed for inspections that Buyer may want. Recall that in Paragraph 7.D Buyer is purchasing the property "as is." Because of this, the Buyer is strongly urged to obtain inspections. Based upon the inspection findings, Buyer can simply proceed to closing, attempt to negotiate repairs with the seller, or terminate the contract. If Buyer chooses to terminate under the option, they will receive a refund of earnest money, but will not receive a refund of the option fee. The option fee is the consideration paid to Seller for taking the property off the market for a period of time while Buyer decides whether or not he or she wants to finalize the purchase of the property.
Paragraph 23 - features, numbers of days/time - page 86
While no mention is made of inspections in this paragraph, the option period is the time allowed for inspections that Buyer may want. Recall that in Paragraph 7.D Buyer is purchasing the property "as is." Because of this, the Buyer is strongly urged to obtain inspections. Based upon the inspection findings, Buyer can simply proceed to closing, attempt to negotiate repairs with the seller, or terminate the contract. If Buyer chooses to terminate under the option, they will receive a refund of earnest money, but will not receive a refund of the option fee. The option fee is the consideration paid to Seller for taking the property off the market for a period of time while Buyer decides whether or not he or she wants to finalize the purchase of the property.