Some areas of the main contract worth familiarizing yourself with as a homeowner or soon to be homeowner. This info is also important for sellers who will need to know the ins and outs of the contract to make sure they're aware of the intricacies of what is being negotiated.
In the state of Texas, the One to Four Family Residential Contract (Resale) is the most prevalent contract used for buying or selling real estate - it was recently updated in February of 2018 to make it more efficient for use by realtors, buyers, and sellers alike. Brokers in other states such as California might call this One to Four Family Residential Contract (Resale) a purchase and sale agreement. Commercial contracts have their own forms, as do purchases for raw land or new construction as well. Known among Texas realtors as the "One to Four" or "Residential Resale" contract - there are many facets of this contract worth getting familiar with if you are a potential buyer or seller of real estate. There are 24 sections of the One to Four Family Residential Contract (Resale), here is a complete breakdown:
Section 1 - Parties: This section simply lists the parties to the contract, the buyer(s) and seller(s). Keep in mind, although agents, title personnel, and mortgage brokers work for the buyer or seller on the contract - they are 3rd parties and are required to remain 'at arm's length' which is a fancy way of saying they don't have a financial interest directly tied to the purchase or sale of the property. For example, it would be unethical for an agent to loan $10,000 to a buyer to help them close the deal in order to insure the deal goes through.
Section 2 - Property: This is where the legal description of the property, comprising the lot, block, addition, city, county and mailing address. There is also a spot for improvements and accessories to the property that will be retained by the seller and are to be removed prior to delivery of possession of the property to the buyer. Note that the reservation of oil, gas, or other mineral, water, timber, or other interests must be made using a separate addendum using a state of Texas promulgated form.
Section 3 - Sales Price: This is where the cash portion, the sum of all financing described in the Third Party Financing Addendum, and the total sum of the cash and financing (if applicable) are filled out.
Section 4 - License Holder Disclosure: This is the section a real estate agent would disclosure if they are "a party to a transaction or acting on behalf of a spouse, parent, child, business entity in which the license holder owns more than 10%, or a trust for which the license holder acts as a trustee."
Section 5 - Earnest Money: This sections is where you put the amount of the earnest money and which title company is going to be used for the transaction. A strong amount of earnest money is typically 1% to 2% of the purchase price. In its simplest form, earnest money is the amount of good faith money a buyer is willing to put up for the seller to accept an offer and take the property off of the market. The buyer's agent must deliver the earnest money to the title company within 3 days after the effective date on the contract. Time is of the essence for this paragraph and it's my general practice to deliver the earnest money immediately to the title company. This guarantees your client has fulfilled their obligations for this portion of the contract.
The earnest money, which is sent to the title company (who has an escrow license and holds the funds) has the option of including a supplemental title policy or not. The supplemental title policy is about 5% of the cost of the regular title policy and covers encroachments relating to boundaries of the property. I always include this addition title policy coverage in offers sent on behalf of my clients, it's inexpensive and one more protection when buying a property. With that said, I recently sat in on a continuing education class taught by a reputable local title company owner who informed us that in 13 years of business he's never once paid out a claim on a title policy. His logic was sound, "If the title company does their job correctly, there shouldn't never be an issue with the title policy."
Section 6 - Title Policy and Survey: Just like every aspect of the contract, who pays for the title policy and which title company is chosen is negotiable between the buyer and seller. Traditionally, the seller paid the title policy, but with the competitive environment for buyers (and the associated low amount of housing inventory) it's becoming more common for the buyer to offer to pay the title policy in order to strengthen their offer.
Surveys, just like everything else, are negotiable - they cost around $425. If the seller has a survey they wish to provide to the buyer, the listing agent will have the seller sign a T-47 affidavit, which is then notarized. The T-47 is an affidavit simply stating that the owner has no knowledge of a change to the footprint of the property. For example, he's declaring there were no material changes such as adding a second story or an add-on addition wasn't built since they've owned the property. This allows the buyers to lean on information found surrounding permits pulled on the property, as well as tax and square footage info to be correct. I adamantly encourage my buyers to get a new survey, as the surveyor is bound to them - if they needed to contact them in the future they would have access to the surveyor. Most importantly, a new survey helps make sure the property doesn't have any encumbrances. Section 6 describes who will pay for the survey and the time frame for the ordering of a new survey (unless the buyer agrees to use the survey and T-47 provided by the seller).
There is also a subsection titled Objections, dealing with any objections the buyer might have, as well as how many days the buyer has to object once the title commitment is issued. It's not uncommon to put 'Single Family Residence' in the objections section, given nobody would want to buy a house if they found out the house was zoned in a manner that prohibited a single family residence.
Section 7 - Property Condition: Whether or not the listing agent provided the seller's disclosure to the buyer's agent, usually through the 'Supplementals' section of MLS - the buyer will state whether they've received the seller's disclosure or state that they haven't and list the amount of days the seller has to provide the document. This section also allows the buyer to state whether they accept the property 'As Is' or the buyer is asking, at seller's expense, to complete specific repairs or treatments.
Section 8 - Broker's Fees: This is a one sentence section simply stating, "All obligations of the parties for payment of broker's fees are contained in separate written agreements."
Section 9 - Closing: Here's where we put the 'on or before' closing date, "or within 7 days after objections made under Paragraph 6D have been cured or waived, whichever date is later (Closing Date)." Interestingly, unlike section Section 5 - time is not of the essence. Meaning, if there is a reasonable delay for a reasonable amount of time, the contract is not negated by simply not being able to close on the exact closing date. An example might be the title company needing an extra day to prepare a document, such as an affidavit of heirship associated with the death of one of the sellers. In this instance, closing would be pushed back the day or two needed to rectify the situation. In these instances, it's best practice to get an amendment between buyer and seller stating the new closing date.
Section 10 - Possession: This section deals with whether the buyer will take immediate possession of the property upon closing and funding or if there is a leaseback being offered to the seller. Most home purchases transfer possession of the property upon closing and funding, but it's not too uncommon for the seller to ask for a 3 to 7 day leaseback in order to move out once the property closes.
Section 11 - Special Provisions: This is essentially a blank section designed to allow the buyer to insert any special language or conditions for the sale of the property. It's critical that an agent never fill this box out, rather the verbiage should be directly from the buyer's lawyer or a title attorney. An agent providing verbiage in this section is akin to giving legal advice and is against the tenets of the realtor code of conduct in the state of Texas.
Section 12 - Settlement and Other Expenses:This section gives the buyer the ability to request further settlement or closing cost expenses from the seller. A typical mortgage company will allow up to 3% seller-related settlement expenses. This allows the buyer to increase their offer by 3% in section 3 of the contract and ask for the same 3% back for settlement costs. Though at first glance this might sound counter-intuitive, there's strategy behind this move. It allows the buyer to have to put less money up front to close, as 3% of the purchase price will be applied to closing costs allowed by the lender, with any extra left over to be applied to future private mortgage insurance (PMI) if applicable.
Section 13 - Prorations: Stating that taxes will divided equitably between the buyer and seller based on the date of closing and the taxes owed.
Section 14 - Casualty Loss: If there is damage such as a fire while the house is under contract, the seller will restore the house to the previous condition or the buyer can terminate the contract and receive the earnest money back, or extend the time for performance up to 15 days with the closing date extended accordingly, or the buyer has the option to accept the property as is with an assignment of insurance proceeds.
Section 15 - Default: Specifies the options available to the seller and buyer if either of them defaults on the contract and doesn't perform.
Section 16 - Mediation: Simply states that the state of Texas "encourages resolution of disputes through alternative dispute resolution procedures such as mediation." Costs for mediation are to be split evenly between the buyer and seller. In case the two parties are unable to resolve their dispute, the mediation clause does not preclude either party from suing the other from a "court of competent jurisdiction."
Section 17 - Attorney's Fees: In the state of Texas a "buyer, seller, listing broker, other broker, or escrow agent who prevails in any legal proceedings related to this contract is entitled to recover reasonable attorney's fees and all costs of such proceedings."
Section 18: - Escrow: Lays out that the escrow company is not a party to the contract and doesn't have liability for the performance or non-performance of the buyer or seller. The earnest money will be applied to the down payment or closing costs, all excess funds will be refunded to the buyer. If there is a demand for the release of funds being held after closing, both parties must sign off on the release (if both parties don't sign off, the process for disbursement is described). Deals with the process of rectifying any damages post-closing.
Section 19 - Representations: The contract itself survives closing and any representations in the contract are in place. The seller has the right to continue to show the property in order to "receive, negotiate and accept back up offers."
Section 20 - Federal Tax Requirements: Deals with purchases by a 'foreign person' - requiring reporting to the IRS for certain sized transactions.
Section 21 - Notices: This is where the contact info for the buyer and seller goes. Most of the time it's the real estate agent's email that's put in this spot. I like to put my client's email address with instructions to 'carbon copy agent' - to be sure I'm aware of any notices being delivered by the other side of the transaction. Keep in mind that if multiple forms of notice are present (such as phone number, email, and address) the opposing agent must only send notice to any one of these pathways. This is why I prefer to only have my client's name and email address with instructions to include me on the email. Rather than my client potentially missing a call or not checking their mail in time, the other side is forced to email us both with any notices being delivered.
Section 22 - Agreement of Parties: In this section you'll note the addendums attached to this main contract, such as the Third Party Financing Addendum or a seller's temporary residential lease (aka seller's leaseback).
Section 23 - Termination Option: This is where you'll describe the cost and length of the option period. The standard option fee is $100 for 7 days, but these two numbers can be manipulated in order to achieve different desires.
Section 24 - Consult an Attorney Before Signing: Keep in mind a seller can have his own attorney write up a contract, or a seller can have his attorney amend any of the traditional forms put out by the state of Texas. Lawyers are notorious for adding, deleting, or manipulating contracts given to them to suit their client's needs. Especially with commercial real estate, having a lawyer review and make changes to documents is common and arguably needed given the complexities surrounding commercial real estate transactions. Section 24 of the 1-4 Family Residential Contract (Resale) states, "Consult an attorney before signing: TREC rules prohibit real estate license holders from giving legal advice. Read this contract carefully." There is then a space to fill out the buyer or seller attorney's information.
Having bought and sold dozens of residential properties for my clients, I've never seen an offer put in with an attorney's name listed on it. Very likely it could be viewed as a 'poison pill' of sorts to unnecessarily list a lawyer on the contract. It's not the norm to include an attorney on the document, and doing so could raise unwanted or unintended red flags.
A previous sales manager of mine within the company said that with over 10 years of experience running a firm, herself nor any of her agents had ever been involved in a real estate related lawsuit. It's the duty of a good agent and brokerage to work hard, be honorable in all of their endeavors, stick up for the client in any and all ways; in an ideal world this will help steer clients free of anything litigious in nature. It is critical that a Texas real estate agent doesn't give legal advice to a client, instead, always referring them to speak with their lawyer.