Contract Review

CONTRACT FROM A SELLER'S PERSPECTIVE

Many times when a person sells their home, they leave all the contract knowing to their agent. Don't get me wrong, at Boot Team Realty - we also take care of all that contract stuff. We do, however, like our clients to understand some important points about the contract they will be entering with a buyer. Below you can find information on some of the points most asked about.

 

ONE TO FOUR FAMILY RESIDENTIAL CONTRACT

This is a promulgate form made by TREC to be used in the resale of a home. At the bottom of the page there is a button to view a blank contract.

PARAGRAPH 2. PROPERTY

  • A. Defines what “Property” the seller is selling to the buyer. According to the contract, the seller is conveying “the land, improvements and accessories.”

  • B. Improvements include the house, garage, and all other “fixtures” and improvements attached to the real property. The contract lists several items that may be considered “improvements,” however, the items must be “permanently installed and built-in” for them to automatically convey to the buyers.

  • C. Accessories do not have to be permanently installed. All the items listed under Accessories are conveyed to buyer as part of the property under the contract.

  • D. Exclusions: If a seller intends to keep an item that would normally convey to a buyer, such as fixtures and improvements, the item must be listed as an “exclusion” under this paragraph, otherwise it will convey to buyer as part of the property.

WHAT IS CONSIDERED PERMANENTLY INSTALLED AND BUILT-IN?

Whether a particular item on a property is “permanently installed and built-in” is a factual issue determined on a case-by-case basis. There is no universal rule that states a particular item, such as a security system, is always permanently installed and built-in.

WHAT IS CONSIDERED A FIXTURE?

A fixture is an item that began its life as personal property, but was then attached to the real property in such a manner that it became part of the real property. Therefore, when sellers convey their real property, they are also conveying the fixture along with it.

Unfortunately, what is or is not a fixture is not a simple question to answer. Texas courts look at three factors to determine if an item is a fixture:

  • Did the party that installed the item intend the item to become a permanent part of the real property (intent)

  • Was there a real annexation of the item to the real property (attachment)?

  • Was the item adapted to the uses or purposes of the real property (customization)?

Buyers and sellers should discuss any questionable items before executing a contract, so that all parties have the same understanding as to what items will stay with the property and which items the sellers will take with them.

PARAGRAPH 5. EARNEST MONEY

What Is Earnest Money?
Earnest money is an amount of money you put down to show you’re serious about purchasing a home. It’s also known as a good faith deposit.
When a buyer and seller enter into a contract, the seller takes the home off the market while the transaction moves through the entire process to closing. If the deal falls through, the seller has to relist the home and start all over again, which could result in a big financial hit.
Earnest money protects the seller if the buyer backs out. It's typically around 1% - 3% of the sale price and is held in an escrow account until the deal is complete. If all goes smoothly, the earnest money is applied to the buyer’s down payment or closing costs.
If the deal falls through due to a failed home inspection or any other contingencies listed in the contract (we’ll look at those contingencies in a bit), the buyer gets their earnest money back. The practice of depositing earnest money can decrease the likelihood of a buyer placing offers for multiple homes, then walking away after the sellers take the homes off the market.

PARAGRAPH 6. TITLE POLICY AND SURVEY

This is a pretty hefty section of the contract covering nearly two pages (out of nine). The title policy is insurance against any claims on the land or home by anyone else after the sale. For example, if a husband and wife owned the property jointly and one of them sold the property to someone without the other spouse’s knowledge, a title policy would protect the buyer against the claim when that person found out and claimed their interest in the property.

PARAGRAPH 7. PROPERTY CONDITION 

Covers all aspects of a property’s condition, disclosures, and repairs.

  • Section A: covers access, inspections, and utilities. In it, the seller gives the buyer (and their agent) permission to enter the property for inspections and it requires the seller to have all utilities on during the period of the contract.

  • Section B: talks about the Seller’s Disclosure. In this section there are several options; the buyer has received the seller’s disclosure, the buyer has not received the notice, and the seller is not required to give a disclosure. If the buyer has not received the disclosure, the seller has a negotiable amount of time to provide the document. Failure to do so gives the buyer the right to cancel to the contract and receive their earnest money back. Once the buyer receives the seller’s disclosure notice, they have seven days in which they may terminate the contract and receive their earnest money back. There are instances where the seller is not required to give a seller’s disclosure notice, the most common sellers that are excluded from the requirement are; a builder of a new home, a trustee or executor of an estate, and a lender who has foreclosed on a property. There are 11 exemptions in the law, but these are the three you’ll see most often.

  • Section C: denotes that all properties built before 1978 require a disclosure of lead based paint and lead based paint hazards. This is a federal law.

  • Section D: accepting the property “as is” – this however, does not remove the right of the buyer to have the property inspecting during the option period and negotiate repairs or terminate the contract during this time. A buyer can elect to add items into D.(2) that require specific repairs prior to the repair negotiations typically done during the option period. A buyer should use this section wisely however, because delineating items prior to a contract’s acceptance could lead to a seller refusing to accept the offer.

  • Section E: deals with lender required repairs. According to the contract, neither party (buyer or seller) is responsible for paying for lender required repairs. If the buyer and seller cannot come to agreement as to who will pay for these repairs, the contract can be terminated and the buyer will receive their earnest money back. The buyer may also terminate and receive their earnest money back if the total cost of lender required repairs exceeds 5% of the sales price.

  • Section F states that all repairs must be performed prior to the closing date. This section also contains new language regarded who should make the repairs – repairs must be made by someone licensed to do such work or, in the case where a license is not required, someone who does those types of repairs commercially (ie, not your cousin who knows a few things about the repair, but does not work in that field). This section also states that all permits shall be obtained to do such work, that any transferable warranties will go the buyer at their expense, and if the seller fails to complete the repairs before closing, the buyer may elect to extend the closing date up to five days or seek remedies found in Paragraph 15 of the contract.

  • Section G: advises the buyer about environmental matters that may affect the buyer’s intended use of the property. Items such as wetlands, toxic materials, and endangered species can affect the way a property is handled in the future, so buyers are given notice here.

  • Section H: allows the buyer to ask the seller to pay for a residential service contract, also know as a home warranty. A buyer needs to put a specific value into this section, so it is advised that they research the various types of coverage available so that they know the price of the home warranty they wish to purchase.

PARAGRAPH 9. CLOSING

The closing date of the contract is set in

  • Section A of this paragraph. If the transaction doesn’t close on this date, it can be extended for seven days if objections were made under Paragraph 6.D. A closing date can also be amended if necessary and both parties agree to it. Failure to close on the date specified in this paragraph can put the seller or buyer in default of the contract.

  • Section B covers all the items necessary to close: (1) seller shall give the buyer a general warranty deed to the property and show tax statements that there are no delinquent taxes, (2) buyer must pay the sales price in good funds that are accepted by the escrow agent (title company), (3) both parties agree to sign and deliver any documents necessary required for title policy and the closing of the sale, (4) that there will be liens or assessments against the property that are not paid off at or before closing, and (5) if there is a current lease associated with the property, all security deposits will be transferred to the buyer and the buyer will deliver to the tenant a signed statement acknowledging receipt of those funds and that they are responsible for the return of the security deposit (subject to standard rules regarding security deposits).

PARAGRAPH 10. POSSESSION

Two checkboxes here to pick from:

  • The buyer takes possession of the property upon closing and funding OR 

  • The timing of possession goes according to a temporary residential lease.

The paragraph also notes that the parties should consult with their insurance agent regarding any temporary leases as they can affect insurance coverage. In regards to other leases, the paragraph also states that a seller may not enter into any lease agreement after the effective date of the contract and that if there is a current lease, the seller must deliver to the buyer copies of the residential lease and the property condition and move-in form.

PARAGRAPH 11. SPECIAL PROVISIONS

What can REALTORS® write in Paragraph 11, Special Provisions?

The short answer? Very little. If clients absolutely want or need a special term to be written into their contract, you should advise them to consult an attorney.

Both The Real Estate License Act and the REALTOR® Code of Ethics prohibit REALTORS® from engaging in the unauthorized practice of law. Unless also a licensed Texas attorney, agents and brokers are crossing the line into the unauthorized practice of law by preparing or drafting a legal document or language for their clients.

The Special Provisions Paragraph provides instructions to only insert “factual statements and business details.” But what is the difference between a factual statement or business detail and language that could be considered the unauthorized practice of law?

TREC Rule 537.11(b)(5) provides guidance: “A license holder may not … draft language defining or affecting the rights, obligations or remedies of the principals of a real estate transaction, including escalation, appraisal or other contingency clauses.” In other words, if a party has the right or is obligated to do something under the terms of the contract, an agent or broker cannot draft language changing that right or obligation. Therefore, it would not be considered a “factual statement” if the language inserted into special provisions requires a party to do something they didn’t have to do, or prohibits a party from doing something they could otherwise do under the terms of the contract.

PARAGRAPH 12. SETTLEMENTS AND

Para 12(A)(1)(a) is where the contract lays our inherited sellers expenses that must be paid off by the seller before the sell of the property. This are usually paid for at closing out of the sellers proceeds. 


Para 12(A)(1)(b) is where the seller concessions are contained in the contract.  This contract language states that the seller is going to pay “an amount not to exceed $_______” toward certain closing costs enumerated in the contract.  In the event the buyer does not have costs that equal more than included in this paragraph the remaining funds are not remitted to the buyer via a check from the seller.  I seller cannot pay any amount towards the down payment. 

Para 12(B) is defining what "Buyers Expenses" are. 

PARAGRAPH 13. PRORATIONS

All yearly fee associated with the property are prorated between the seller and buyer based on the closing date. These fees include taxes. If they are not paid prior to closing then the buyer is responsible for paying the current years taxes.

PARAGRAPH 14. CASUALTY LOSS

This paragraph protects the buyer if the property is destroyed or damages after the Effective Date of the contract by fire or any other casualty. The seller is responsible for restoring the property to the conditions it was in before the casualty. If the seller cannot to this due to factors beyond their control, then the buyer has some options. See contract for options.

PARAGRAPH 15. DEFAULT

If the buyer default on the contract, this gives the seller the right to sue the buyer to force them to buy the property OR (the more likely option) allows the seller to keep the buyers earnest money.

PARAGRAPH 16. MEDIATION

This is simple. Before you can file a lawsuit, you must try to resolve the issue through mediation.

PARAGRAPH 17. ATTORNEY'S FEES

If it does become a lawsuit, whoever loses has to pay everyone's attorney fees.

PARAGRAPH 18. ESCROW

  • A. The escrow agent (usually the title company) is not liable for anything in the contract, nor the earnest money they are holding if the bank they use fails.

  • B. This is what authorizes the earnest money to be applied toward the buyer’s closing costs, and specified how the title company does it on the Closing Disclosure (financed deals) or HUD (cash deals).

  • C. What if the contract is terminated, but there is a dispute over who gets the earnest money? (e.g. the buyer thinks the seller defaulted and the seller thinks the buyer defaulted).  They buyer does not need the seller’s signature to terminate a contract.  They just sign and send the termination notice.  But they do need the seller’s signature (and agents’ signatures) on the Release of Earnest Money form (TAR-1904).  If the seller refuses or (more often) ignores it, the buyer can ask the title company to send a notice to the seller.  If the seller doesn’t respond to the written notice in 15 days, the title company will release the earnest money to the buyer without a signature.  If the seller does respond and protests, this is covered in the next paragraph. 

  • D. This explains that the seller isn't signing the releases in the stated time frame (within 7 days of receipt) and they are at fault then they can be liable for “damages” for not doing so. Withholding your signature as a seller out of spite for the buyer can hurt you in court.

  • E. This just specified when notices are considered “effective” - they must be in compliance with paragraph 21. 

PARAGRAPH 19. REPRESENTATION

The seller promises that everything agreed to in this contract will be resolved by closing.  
Also, the seller CAN continue showing the property to buyers and negotiate back up offers even while under contract.  In a buyer’s market, most sellers do not do that.  But in hotter markets, it is very customary to have back up offers.

PARAGRAPH 20. FEDERAL TAX REQUIREMENTS

There are tax implications to selling a home if the owner is not American.  This is an issue the title company should resolve, ensuring that the seller is American and, if foreign, making the necessary tax accommodations.

PARAGRAPH 21. NOTICES

Throughout the contract were several instances in which notices are required to be delivered.  But to where? This paragraph is where both buyer and seller officially state where they can be reached at.

PARAGRAPH 23. TERMINATION OPTION

The option period is typically used by the buyer as a timeframe in which they can get inspections done and go back to the seller to negotiate repairs.

Four important items in this paragraph:

  1. Is there an option? If there is no amount in the blank then there is no option period or if the buyer fails to pay the fee within three days - meaning the buyer has no right to terminate under the Termination Option. 

  2. How much is the option going to cost the buyer? This is the amount in the first blank in this paragraph - it must be delivered and receipted by the sellers or sellers by 5pm on the third day following the execution date of the contract. 

  3. How long will the option last? 
    The amount of days the option will last is filled in on paragraph 23. The first day of option begins the day following the contracts executed day. For example, if the option is 5 days and contract was executed Jan 22 - day 1 of the option is Jan 23 and the last day is Jan 27. The buyers’ right to terminate the contract ends on the last day of the option period at 5 p.m. local time where the property is located. This is the only deadline in the entire contract that has an actual time of day for performance. For all other deadlines, a party would have until the end of the day (11:59 p.m.) to perform.

  4. Will the option money be credited back to the buyers at closing? We will typically see "will apply". 

Repairs are negotiated during this time - see next section. 

REPAIR AMENDMENTS

Since the contract is an “As Is” contract, the seller only has to make repairs to the property that they agree to either within the contract or after it’s executed with an amendment. If buyers are going to request seller make repairs during the option period, buyer’s agents should not wait until the last day of the option period to submit an amendment.
A repair amendment is not binding on the sellers until sellers sign it. The termination deadline is not automatically extended just because the buyers and sellers began repair amendment negotiations before the deadline. If the sellers haven’t signed the amendment by the last day of the buyers’ option period, the buyers must either send notice of termination by 5 p.m. local time where the property is located, or remain in the contract without the sellers agreeing to make any repairs.

 
 

Click for additional resources.

  

 

©2020 by Boot Team Realty. Proudly created with Wix.com