Contracts RE 1-12
Paragraph 18 Escrow-
Earnest money and other escrow deposits are strictly regulated. The detailed procedure for dispersal of funds to either party should be carefully reviewed by the seller and buyer before signing a contract of sale. For example, if a buyer has given the seller earnest money, their credit will be applied at the closing of the sale.
Texas Property Code
considers contracts that do not close for an extended period as executory contracts. Usually the purchaser takes possession but does not get legal title until sometime later (often after all payments are made). These types of contracts, including Contracts for Deed, Land Sales Contracts, and Lease with Option to Buy are all considered executory contracts under Texas state law.
Back-Up Addendum
creates an agreement to allow the second buyer to put up their earnest and option money. The effective date of a back-up contract is amended to the date the buyer receives notice from the first seller that the contract has fallen through. Then the back-up contract becomes the primary contract.
Paragraph 6E
deals with notices that the seller must give to the buyer if the property falls under certain categories. For example, whether the buyer will need to pay HOA fees, or extra fees for utilities or public improvement.
Paragraph 1A
describes the third party financing. Under conventional financing there is a space for the amount of financing the buyer is estimated to get. You'll also need info about the interest rate, length of the loan in years, and origination fees. There is also a space to provide information for a second loan if needed.
sales price formula
down payment + financing = sales price.
closing date
has to give the title company, lender, and other service providers in the transaction enough time to get their tasks performed. Thirty days is probably needed from offer to closing, but in some cases, 45 days would be better. A cash transaction can close sooner than one that has a lender involved, but even that type of transaction needs about three weeks to get everything in order at the title company.
Approved forms
have been created for the license holder to use, but they aren't required to be used. Many times, the disclosure that the forms provide is required, but the exact form used to provide it is optional.
exclusion
if the seller wants to take an item with them that would normally stay, the agent will want to be sure it is listed as an exclusion on the sales contract.
TREC number
in the lower right corner of the form tells the agent how many different versions of that form have been approved.
If it is a seller's market
then there is a high demand for homes and the seller will usually not have to concede to any buyer's requests. If it is a buyer's market, then the buyers have more clout in the negotiations because of the low demand for homes. Homes stay on the market longer when it is a buyer's market, and the sellers will probably have to bend more during negotiations to get their home sold.
After all of the parties (to be bound by the contract) have agreed on an offer
they must show their acceptance of the offer by signing the contract. That written acceptance must be communicated to the other party or their agent by some method.
The following information will be needed to fill out the One to Four contract:
Name, address, telephone, e-mail, and fax number of the parties Legal description and street address of the property Type of financing, amount of cash down payment, term, etc. Amount of earnest money Name, address, and contact info for the title company and closer
Parol Evidence Rules
Remember that the parol evidence rule says that only items within the contract can be considered in a court of law. If you filled out the addendum but did not list it as being part of the contract, the courts would not be able to include it in their information. ❗️The addenda being attached to the contract will be made note of in Paragraph 22 of the sales contract.
Promulgated Temporary Leases:
Seller's Temporary Residential Lease Buyer's Temporary Residential Lease
Paragraph 12
Sellers and buyers will each have their own expenses that will need to be processed and paid for at closing.Paragraph 12 delineates each party's financial responsibilities and provides a space for the negotiation of paying for closing costs.Be sure to include any amount from this section when calculating a seller's net proceeds or buyer's estimated closing costs.The buyer may ask the seller to pay for some of their closing costs.
Paragraph 13 Prorations-
Since taxes and many fees are paid in arrears (the year's taxes are paid at the end of the year), the total amount of property taxes and fees can only be predicted. So, the parties will rely on an estimate. If, when the actual taxes become available, there are any discrepancies from the amount paid at closing, the parties will resolve them at the time.
two most common reasons a valid contract becomes unenforceable
Statute of Frauds AND Statute of Limitations
TREC does not regulate
TREC does not regulate home builders. Home builders almost always have their own contract forms created by their attorney. Remember, all sellers have the right to use their own contract if it is created by an attorney, but few actually do it.
Regulators
TREC is the state's regulatory agency for: -Real estate brokers and sales agents -Real estate education providers, instructors, and courses -Real estate inspectors -Real estate inspection course providers -Residential service companies -T-imeshare developers -The Texas Appraisal Licensing and Certification Board
According to TRELA,
Texas Real Estate Commission has the power to require license holders to use contract forms for certain transactions.
Valid contracts
are legal agreements meeting all the essential, basic requirements of the law. They accurately reflect the contracting parties' intentions, making them legally binding and legally enforceable for all parties involved. Of course, a valid contract is the preferred type of contract of real estate license holders.
examples of a void contract
1.A contract entered into only because one party threatened the business of another 2.A contract that requires an individual to steal someone else's property in exchange for a promise 3.A contract that requires an individual to embezzle money
lev4 When it comes to contracts, your role as a license holder is to:
1.Fill out only TREC approved contracts 2. Explain what the contract fields mean (and only that) 3. Ensure the proper contracts and addenda get filled out by all the appropriate parties
One to Four Family Residential Contract (Resale) title tells us
1.It's for resale, not new construction. 2. It only applies to residential properties that house up to four families. 3. It should not be used for condominium sales. License holders must be aware of the date and ensure that they are using the most current form, which is updated every two years.
TREC does NOT provide:
1.Listing agreements 2. Buyer's representation agreements 3. Property management agreements
Four things must take place for a contract to become binding and effective (becoming the effective date in the contract):
1.The contract 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). At this point, the agent who has the contract form should enter that date as the effective date of the contract.
Broker-Lawyer Committee,
13-member, part of the Texas Real Estate Commission, drafts and edits the contract forms. The real estate commission reviews the forms and then adopts them onto their list of approved and promulgated forms.
Para 23 Termination option- Paragraph24 -
23-the option fee and option period are negotiated. 24-consult attorney Paying an option fee creates an option period, which is a negotiated amount of time after executing a purchase agreement where the buyer can terminate the contract for any reason. It allows time to conduct inspectio
Amendment:
: Items that are attached to the original document and should never be changed after the document has been signed and accepted
earnest money deposit
A buyer's earnest money deposit will be held in escrow by a third party such as an escrow agent. Typically in residential property transactions, the title company will act as escrow agent and disperse funds as instructed by the executed agreement. If the buyer and seller agree to additional earnest money deposits, the terms should be noted in this section. The buyer has 3 days from the date of contract execution to deliver the initial earnest money deposit to the escrow agent.
Promulgated Contract:
A contract that has been approved and is required to be used by license holders In Texas, contracts are promulgated by either the Texas Real Estate Commission (TREC) or the Texas Association of REALTORS® (TAR).
Contract:
A legally binding and enforceable agreement to do or not to do a specific thing/Express contracts are either verbal or written, while implied contracts are created by actions, not in writing.
Recourse Loan:
A loan in which the lender is allowed to seize the collateral property, and could also go after the borrower's other assets if the sale of the property doesn't cover the whole amount owed to the lender
Offer
A promise made by one party requesting something in exchange for that promise with the intention that the offeror will be bound to the terms if the offer is accepted//Because of the statute of frauds, in Texas all real estate offers must be in writing.
Loan-to-Value Ratio (LTV):
A ratio that represents how much of the sales price is covered by the mortgage loan
Statute of Frauds
A state law establishing the features of a valid contract. The law generally requires certain types of contracts to be set out in writing and written contracts be signed by all the parties bound by the contract.
What Is the Statute of Limitations?
A state's statute of limitations is a law establishing a time limit for civil suits, setting a maximum period of time to elapse between the dates an injury occurs or the basis for a legal claim is discovered and the date a civil lawsuit is filed. **Statute of limitations are laws created by state or federal legislatures.
Statute of Limitations:
A state's statute of limitations is a law establishing a time limit for civil suits, setting a maximum period of time to elapse between the dates an injury occurs or the basis for a legal claim is discovered and the date a civil lawsuit is filed. There are also federal statutes setting maximum time limits regarding federal crimes and suits filed in federal courts. All claims must be filed prior to the statutory deadline, or the legal right to press a claim is barred. For example, in Texas, claims on a misdemeanor bad check (for an amount less than $1,500) must be made within two years.
Unenforceable Contracts
An unenforceable contract was once a valid contract, but its enforcement is now barred by the statute of limitations, a change in law, or the doctrine of laches (basically, its legal time limit is up). So, it is essentially a contract without any legal remedy because the time allotted for enforcement has elapsed.
amendments vs addmenda
Anything that changes after a contract has been fully signed and agreed upon by both parties must be changed by use of the TREC promulgated Amendment to Contract.Again, amendments are put in place after a contract has been signed and agreed upon. Addenda are added to the contract BEFORE the contract has been signed. Amendments are added afterwards.
Disclosures and Notices Not Included-
Disclosures and notices are NOT part of the contract and should not be listed in Paragraph 22. The license holder must be diligent in determining which of the six promulgated contract forms should be used and which addenda should be attached. The license holder must also be acutely aware that writing things into a contract form or creating an addendum that changes either parties' legal rights is the unauthorized practice of law.
"time is of the essence"
But if a contract includes the phrase "time is of the essence" (in the termination option paragraph, for example), when it says the option period ends in five days, it will end at 5:00 p.m. sharp on the fifth day. Five minutes after 5:00 p.m. is too late. It is due as soon as possible!Failure to act within the specified time required would equal a breach of the contract.In short, reasonable time is flexible. "Time is of the essence" is not.
Non-Realty Items Addendum
But if the parties want any additional personal property to stay with the property (that are not already listed in Paragraph 2B or 2C), they can attach the Non-Realty Items Addendum to the sales contract.This addendum will outline items that will convey with the property as well as the additional price that the buyers will pay for them
Loan APPROVAL
Buyer approval: the lender is satisfied with the buyer's ability to repay Property approval: the lender will accept the property as sufficient collateral for the loan Loan approval: the lender approves the buyer for the loan for the property Buyer approval + property approval = loan approval
3RD Party Financing & Loan Assumption Addendum
CHAPTER 3
Para14 casually loss
If a subject property is damaged after execution of a sale contract, the buyer and seller are provided several alternatives that allow the transaction to move forward.
listing broker.
In Texas, all listings belong to the listing broker. A contractual agreement to the contrary would probably stand up if signed and agreed to by both parties in the policy manual. If a broker does not follow their own policies, they may lose the right to enforce them.
Valid contract
Mutual assent (100% agreement) Legally competent parties (18, sane, and sober) Consideration (an exchange of something of value) Lawful objective (the purpose of the contract must be legal) In writing (a written and signed offer and acceptance)
Approved Addenda:
Lead Based Paint Addendum Non-Realty Items Addendum
TREC has two addenda that are approved but not promulgated:
Lead Based Paint Addendum Non-Realty Items Addendum
When to commit
License holders need to make buyers aware that while they are countering, the property is still available and the seller is free to sell it to someone else. Once the contract becomes an effective executory contract, the parties are committed to performing the contract. After this point, if the seller wants to negotiate with another buyer, it will need to be as a back-up contract.
Addenda:
Materials added to and included in the initial contract that provide more information on the transaction
Most civil fraud in real estate falls into one of these forms:
One party knowingly makes a material misrepresentation One party makes a false statement with the intent to mislead One party recklessly makes a false statement without any knowledge of the truth One party makes a misrepresentation intending the other party to rely on the information
Title Notices
The Broker-Lawyer Committee and The Real Estate Commission have put the previous notice into the contract to help agents ensure they provide the notice.If they are not using a TREC contract form (i.e., builder's contract on a new home), license holders must give the notice by another means. The notice is also in TREC form OP-C Notice to Prospective Buyer, which can be seen here.
TERMINATION PERIOD
The buyer must turn in the written notice within this termination time period in order to get their earnest money refunded. Otherwise, the seller can terminate the contract and keep the earnest money.
effective date
The effective date of contract execution begins the countdown for several duties to be completed by both parties. Begin counting calendar days at the beginning of the next 24-hour period. Real estate brokers can only add material facts or business details to a TREC sales contract.
Contract & earnest money receipts -
The escrow agent, possibly a title company, will confirm receipt of the earnest money deposit and executed sales contract. Brokers for both parties to the transaction should promptly review this section for accuracy to avoid any client disputes before closing.
Effective date:
The final date of acceptance, when the contract becomes binding between the parties An offer becomes a contract when all parties have agreed to all terms of the offer and have signed the offer and initialed any changes that took place during negotiations. That final date of acceptance, better known as the effective date, is the date on which the contract becomes binding between the parties.
The Commission
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.
T-47 Property Affidavit
The purchase contract provides the parties some options with regard to delivery of the survey.If the seller is able to provide an existing survey, a notarized T-47 Property Affidavit should be attached and given to the buyer. If no survey exists, or the existing survey is not acceptable to the title company and buyer's lender, the buyer or seller can be selected to purchase a new survey. The objections section allows a buyer to explicitly state defects, encumbrances, and other things that will allow them to terminate the contract without penalty.
OPtion fee receipt-
The seller or listing broker should confirm timely receipt of the option fee from the buyer by completing this section.The buyer has three days from contract execution to deliver the fee to the seller.
Novation:
The substitution of a new contract for an existing contract, relieves the original party of liability
Sometimes, one or more of the parties involved in a contract want to withdraw from it without actually terminating the contract. In cases like these, the contracting parties have the option of transferring their rights and duties to a third party.
The transfer of rights to a third party is known as assignment...An assignment usually does not relieve the original party of liability. The transfer of duties to a third party is known as delegation.
Details of OFFER
These details include things like: How the buyer wishes to finance the purchase Who will pay the closing costs What inspections will be performed What personal property will be included in the sale The terms of cancellation
Short Sale Addendum:
This addendum creates an agreement to allow a purchaser to put up their earnest money and option money and then wait for the sellers' lender to approve the short sale prior to proceeding with further performance. The effective date of the contract is amended to the date the buyer receives notice from the seller that the lender has approved the short sale.
Third Party Financing Addendum:
This common addendum creates a financing contingency for the purchaser on the contract for a limited period of time.
The Broker-Lawyer committee drafted a new promulgated form and TREC approved it for mandatory use beginning October 1st. An agent continued to use the old form after October 1st. The agent is guilty of _____.
To use an old form is a violation of the License Act. The date in the right-hand corner is the date that TREC approved and promulgated the form. License holders must be aware of the date and ascertain that they are using the current form.
Quitclaim Deed:
Transfers ownership of whatever the grantor owns but make no guarantee of ownership and no promise to defend
TREC's Promulgated Contracts
Unimproved Property Contract One to Four Family Residential Contract (Resale) New Home Contract (Incomplete Construction) New Home Contract (Completed Construction) Farm and Ranch Contract Residential Condominium Contract (Resale)
Four Types of Contracts
Valid Contract: Legal agreement that has all the essential elements of a contract. Void Contract: Agreement that lacks one or more of the essential elements of a contract; never was a legal contract. Voidable Contract: Has all the essential elements to a contract but one of the parties may rescind the contract because they signed a contract as a minor, were a victim of fraud or misrepresentation, or were subject to duress. Unenforceable Contract: Has all the essential elements to a contract, but cannot be enforced by court due to a technicality of law (such as statute of limitations).
Notice of Buyer's Termination of Contract
When the buyer has elected to terminate the contract, they will fill out the Notice of Buyer's Termination of Contract and select the motivation for terminating the contract.
Paragraph 2
allows the buyer to decide if the sales contract will be contingent on buyer approval or not. Lenders will screen each borrower to determine first if the buyer qualifies for the requested loan, and then will review details of the property for final approval. This can include surveys, appraisals, or inspection reports. The buyer's agent must push to make sure the application for the loan and any additional documentation is submitted to the mortgage company on time.
Paragraph 6D
allows the buyer to object to any deficiencies, restrictions, or clouds on the title, revealed in the title commitment that could prevent the property from being used for a specific purpose. Objection! If the property transaction involves a cash buyer, they may not be required to obtain a title policy or commitment before closing. However, the buyer's representing broker should advise the client to have an attorney review these documents.
Novation
alternative of assigment, is the substitution of a new contract for an existing contract. Once the substitution has been made, the parties bound by the contract can cancel the old contract. The new contract is subject to the same standards as the old contract. novation relieves the original party of liability.
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. Voidable contracts are those entered into with one party not competent to make a contract. So, if a contract is entered into with a minor,
Contracts for Deed and Leases for an Option to Buy
are considered executory contracts in Texas. There are no promulgated forms for a real estate license holder to prepare a Contract for Deed or a Lease with an Option. Those contracts must be created by an attorney.
practice of law
is a general term that encompasses the actions of giving legal advice to clients, drafting legal documents for clients, and representing clients in legal negotiations and court proceedings such as lawsuits. But because law is used everywhere, there is often an overlap between the practice of law and other, non-attorney professions — most often in professions where a client is represented by an agent. (Real estate [That's us!], banking, accounting, and insurance are all good examples of this
offeree
is a person to whom an offer to enter into a contract is made. The person making the offer is known as the offeror.If the offeree does not like the terms of the contract, they can make a counteroffer. This means that they will modify the terms that the offeree does not agree to and present it to the offeror.
Time is of the essence
is a phrase in a contract that means that performance by one party at or within the period specified in the contract is necessary to enable that party to require performance by the other party. Note: "Time is of the essence" appears in promulgated contracts in two places: Paragraph 5 (earnest money) Paragraph 23 (option money)
Paragraph B Non-Realty Items Addendum
is about seller representation, which means that the owner actually owns the items. The seller should only be conveying items that are fully paid for and owned outright. The buyer should not be inheriting any loan payments or credit lines for these items.The item that's most commonly listed in the Non-Realty Items Addendum, believe it or not, is the refrigerator.The buyers, in their initial offer, could request anything that the sellers currently have in the house
Doctrine of Laches
is based on legal common law. This pretty much means that it's up to the discretion of the judge whether or not the plaintiff provided an "undue delay in seeking relief." The Doctrine of Laches is based on the idea that the courts should NOT help people who take an inordinate amount of time to raise their claims, whether that time is specified in codified law or not. The Doctrine of Laches is based on common law, while Statutes of Limitations are written and codified.
Paragraph A of the Non-Realty Items Addendum
is for recording the items to be conveyed with the property. The seller and buyer can determine the appropriate price for the listed items to convey. Be specific when describing items that will convey to buyer.
listing broker
is responsible for writing in the effective date.
Paragraph 11
is sacred ground that can change the legality of a contract. An agent should not write anything in this paragraph unless they are absolutely positive it belongs. And still, consulting a lawyer is a good idea before adding anything.
Subagency
means that the agent working with the buyer is not representing the buyer. Therefore, the buyer is a customer. The listing broker may have an office policy that says sales agents in the office will not work with subagents.
void contract
no legal effect; this means that the stipulations and conditions in the contract cannot be legally enforced. A void contract is an attempt to create a legally binding agreement. However, it does not impose any legal rights or satisfy the requirements of a legally valid contract. Typically, void contracts are unenforceable because they call for an illegal act, fraud, misrepresentation, duress, or undue influence.
executory contract.
property is "pending." In fact, if the listing has been entered into the MLS system by the listing agent, they will move that property into the "pending" category.)
Paragraph 7C
says if the property was built before 1978, a Lead-Based Paint Addendum should be attached to the contract.
Buyer's agents job
should double check with their title company before closing and confirm that Non-Realty Items Addendum additional funds are included on closing statements. If they are not, the buyer may need to find another way to confirm receipt of the additional sum by the seller.buyer's agent should include all appliances and fixtures that will convey with the sale
Section 1101.155:
states that the commission can adopt rules that require license holders to use TREC approved and promulgated forms.Second, it states that the commission cannot prohibit a license holder from using a form that is prepared by the property owner or prepared by a lawyer and required by the property owner. Remember, an agent cannot use a form prepared by their broker for agents to fill in the blank.
If a license holder suspects
that a person is trying to sell something that they do not own, the agent should recommend (insist) that the buyer get an abstract of title (and have it examined by an attorney) and a title insurance policy before purchasing the property. The license holder is free to explain to the principals the meaning of the factual statements or business details contained in the contracts as long as the license holder does not offer or give legal advice.
Third Party Financing Addendum
the buyer clarifies that they are going to apply for the financing promptly and will provide the lender with the documentation needed to make a loan decision.
Under Buyer Approval,
the buyer is given a negotiated deadline for giving the seller a written notice in case they fail to obtain Buyer Approval.
Paragraph 6 : title Policy-Non-Realty Items Addendum
title policies are insurance plans that protect the buyer should there be an issue with the title of a home. The reason the lender or the title company wants a survey is to see if there are any boundary issues (which would be a title issue). For example, a detached garage may have been added to the property since the current owner bought the home. That improvement might be so close to the property lines that it violates deed restrictions. Hence, a problem, and why lenders and title companies want to look out for these issues.
80-10-10 program
to purchase a home. This means that the buyer will pay 10% of the sales price as a down payment and then get two loans to cover the rest: one for 80% of the sales price and the other for the remaining 10% of the sales price.This method is a way for the buyer to avoid paying mortgage insurance. It also allows the buyer to get into the property with a down payment lower than 20% of the sales price.
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.Remember, an offer or counteroffer remains open until accepted, rejected, or withdrawn. (Again, sort of like dating.)
license holder is free to explain t
to the principals the meaning of the factual statements or business details contained in the contracts as long as the license holder does not offer or give legal advice.
offer becomes a contract
when all parties have agreed to all terms of the offer and have signed the offer and initialed any changes that took place during negotiations. That final date of acceptance, better known as the effective date, is the date on which the contract becomes binding between the parties.
If you are the seller's agent and you receive an offer that says there is a Third Party Financing Addendum attached but you did not receive a copy of the addendum,
you will need to get it before the seller accepts the offer.A court would probably say the seller accepted an offer saying the addendum was attached. The seller must have seen the addendum
