Texas Residential Sales Contracts

The most commonly used residential sales contract in Texas is the One to Four Family Residential Contract (Resale) promulgated by the Texas Real Estate Commission as form no. 20-7. It was revised in 2006 and is available at www.trec.state.tx.us. All licensed salespersons and brokers are required to use this contract and other TREC promulgated forms and their various addenda. References to “the contract” in this paper are references to this form.

Why, might one ask, involve an attorney in preparing or advising on a residential sales contract when these contracts are available online without charge and will be completed by your realtor who is trained and licensed to do the job? TREC licensees, however, must be careful not to engage in the practice of law when preparing such contracts (See paragraph 24: “Real estate licensees cannot give legal advice.”). Generally, realtors are limited to checking the appropriate boxes and filling in the blanks. They are not permitted to materially alter the text of the contract. That is a task for lawyers only.

The typical TREC promulgated form is designed to be a neutral “one-size-fits-all” document. The reality is that these contracts may often be “one-size-fits-none.” There is some opportunity for the realtor to slant the contract in favor of one party or the other, but this is limited; and while certain optional terms can be added or deleted, the actual language of any such clause may not be altered unless your realtor also has a license to practice law.

Another logical question: Why alter these contracts at all? After all, they were prepared by a state-appointed broker-lawyer committee composed of experienced, practicing professionals. The answer is that, capable as the broker-lawyer committee is, it cannot anticipate ever condition or circumstance; and while many transactions are similar, no two are ever identical - nor are every buyer and seller identical. Circumstances vary. The goals of sellers and buyers vary. Every home sale is unique. While some may say, “It’s just the standard form, it’s OK to sign it,” no attorney worth his or her salt is ever satisfied with any standard form. Most importantly, no party to a real estate transaction should be satisfied unless the contract is, to the greatest extent practicable, negotiated and drafted with his or her best interests in mind.

For a relatively modest fee an experienced real estate lawyer will look at a proposed sales contract and offer suggestions about how it might be revised or improved to more fully protect the best interests of the client. Sometimes (although rarely) no changes need to be made. In such cases the client has at least satisfied himself that his or her contract is as good as it can be. This is a form of inexpensive but valuable insurance that contributes to peace of mind in what is often the largest financial transactions of a client’s lifetime.

Unfortunately, many realtors attempt to steer their clients away from attorneys, fearing that attorney involvement will result in unreasonable conditions or demands that will “kill the deal.” This is almost never the case, at least as to experienced, board-certified real estate lawyers. They know the difference between what is “reasonable” and what is not - and they could not stay in business if they got a reputation for being unreasonable or for killing deals. Likewise, meticulous and ethical realtors will often see the wisdom of suggesting that a client obtain legal advice, particularly when a transaction has non-standard aspects. This benefits the client and also shifts potential liability away from the realtor.

It is particularly important for persons who are using an “intermediary” realtor (ie., there is only one realtor in the transaction) to get independent advice and opinion. Who else is going to exclusively represent the interests of either party, without any other stake in the transaction?

How should revision of the TREC 20-7 contract be accomplished? The most convenient and effective method is to attach a “special provisions addendum” that supersedes conflicting provisions in the contract. In this way only items to be altered are mentioned and other provisions are left as they are. This method of modifying the contract has an obvious advantage in negotiations: it is immediately apparent to everyone which terms are being changed and which are not.

Another advantage to the addendum method is that brokers may be more comfortable with it, since the actual text of the contract to which they are accustomed has not been changed. They can plainly see what the proposed changes are, and they are therefore less likely to feel compelled to suggest that their client also get an attorney. This avoids needless polarization of the transaction.

When adding an addendum of this nature, the wording “See attached special provisions addendum, attached hereto and incorporated herein” should be inserted in paragraph 11 of the contract. Also, in paragraph 22 (Agreement of Parties), the box “other” should be checked and “special provisions addendum” inserted in the line that follows.

A further note as to Paragraph 11 (Special Provisions): it is available for extra comments, but it is limited to “factual statements and business details applicable to the sale” - ie., not modification of text or addition of provisions that are primarily legal in nature. It is therefore not the appropriate place to insert provisions that have legal implications, nor is it an acceptable substitute for the addendum under discussion here.

Usually, the seller usually has the simpler side of the transaction. First and foremost the seller wants to make sure that a buyer is serious and capable of following through. For this reason, the seller should always require the buyer to submit a pre-approval letter with a contract. Given the ease with which such letters can be obtained, this is not an unreasonably burdensome requirement.

Other concerns include the following:

Each of the above-listed items is important, some critically so. There may be other things to consider based on the unique nature of the particular transaction. Each item can be effectively addressed by a customized addendum to the contract.

Query: What happens if, in a seller-financed or wraparound transaction, the buyer (for whatever reason) declines to sign the note and deed of trust as presented by the seller at closing? May the seller declare a breach, terminate the contract, and claim the earnest money unless there is authorizing language contained in an addendum?

Note that Property Code Sec. 5.016 requires that both the lender and the buyer must be given notice at least seven prior to closing if the transfer is to be made without consent of the lender.

As an aside, it should also be noted that the TREC One to Four Family Contract should never be used as a substitute for a contract for deed or other executory device. Given changes to Sec. 5.061 of the Property Code (relating to executory contracts) this practice, always dubious, is now out of the question.

Is the average first or second-time homebuyer equipped to do this job for themselves? What about the realtor? Even if the realtor is aware of the factors mentioned above, he or she is not licensed to do the job and can get into real trouble for attempting to do so. Hiring a real estate attorney is the sensible solution.

Query: Is a seller obligated to disclose repaired defects and conditions? What about recent inspection reports? No, to both of these questions UNLESS the seller is directly asked about these by the buyer. However, a word of caution to both sellers and brokers: the prudent rule is “disclose, disclose, disclose.” If a condition could reasonably affect the decision by an ordinary buyer to buy or not buy, then it must be disclosed, even if the conveyance is to be made “as is.” Failure to do so could arm the buyer with a suit against the seller for violation of the DTPA (the Deceptive Trade Practices-Consumer Protection Act, Sec. 17.41 et seq. of the Texas Business and Commerce Code). However tempting it may be for a seller to avoid disclosure of a material fact, it is not worth risking treble damages plus attorney’s fees. There is also potential liability under HB 716 (Texas Mortgage Loan Fraud Act) passed by the 80th Legislature.

The buyer’s concerns are usually more complex. Generally, the buyer should want to know everything there is to know about the property, whether that information is derived from the buyer’s own due diligence efforts, from a title commitment, from a survey, from disclosure by the seller, from information provided by a broker, or even from neighbors. The phrase “buyer beware” still has considerable meaning in the law as it relates purchases of real estate. There is no excuse for failing to do one’s homework or failing to read documents before signing them. We live in an information-oriented society. Not putting forth a minimum effort to obtain information about the house one is buying (not having it inspected, for instance) looks more and more . . . well, stupid. And judges and jurors are likely to see it that way. Yet there continue to be suits by buyers who claim that they were absolved from their duty to read documents before signing them because they were “pressured” by others.

Specific items of concern to the buyer:

(1)The third-party financing contingency (as set out in paragraph 4 and in the Third Party Financing Condition Addendum) should be a true contingency governed by specific parameters, not a vague notion subject to dispute by a seller who may argue that the buyer "did not try hard enough" to get a loan. The Financing Condition Addendum requires the buyer to "apply promptly" and "make every reasonable effort." What does "promptly" mean? Does this language require application to one lender or four? The TREC-approved text is silent. Moreover, nowhere in the contract or in the Financing Condition Addendum is it spelled out what exactly constitutes adequate evidence of failure to get financing. Can the buyer be sure that the seller will take the buyer's word for it and agree to the return of the earnest money? Does failure of the property to adequately appraise constitute denial of the buyer's loan application, or should it be considered a failure to "satisfy the lenders' underwriting requirements" as addressed in paragraph 4.A.(1)? These issues may not be so compelling if the earnest money at stake is only $500 - but what if it is $5,000 or $10,000, which is not uncommon in sales of higher-end homes?Clearly, the buyer would prefer more time rather than less in order to secure financing approval. It is also to the buyer’s benefit to specify that providing a “turn down letter” shall be conclusive, indisputable evidence that financing was denied.

(2) If the transaction is an assumption, seller-financed, or a wrap, there is always the issue of the specific content of legal documents the buyer will be asked to sign at closing. The TREC Loan Assumption Addendum and Seller Financing Addendum are reasonably detailed, but what if the seller’s attorney includes an unexpected “zinger” or two in the note? There is no approved addendum for a wrap, and yet lots of details need to be addressed. Is the buyer fully informed about the particulars of the wrapped indebtedness? How can the buyer be sure the seller will pass payments along to the first-lien lender? Will the buyer have the right to contact the lender or periodically receive written evidence that payments are current? What happens if the lender exercises the “due on sale” clause and accelerates the wrapped note? Basic wrap issues should be addressed in an addendum to the contract, followed by a detailed wraparound agreement that should be drafted and examined well before closing. Additionally, wrap deals often include seller-financing in the form of a second or third lien. What will the seller-financed note and deed of trust look like? The buyer’s attorney should see all this coming. Ideally, no buyer should be ambushed at closing with legal documents that he has neither seen nor agreed to.

(3)Disclosure of material conditions affecting the property is usually the biggest single concern of the buyer. Section 5.008 of the Property Code states "A seller of residential real property comprising not more than one dwelling unit located in this state shall give to the purchaser of the property a written notice as prescribed by this section or a written notice substantially similar to the notice prescribed by this section which contains, at a minimum, all of the items in the notice prescribed by this section." Section 5.-8(d) goes on to say that the "notice shall be completed to the best of seller's belief and knowledge as of the date the notice completed and signed by the seller." Note that the requirements of Sec. 5.008 do not apply to previously unoccupied new homes.

The TREC promulgated form of this notice tracks the statutory language and requirements but does not exceed them – and the statute specifically leaves open the possibility that a higher and broader form of disclosure may be agreed to between buyer and seller. It is up to the buyer to avail himself of this opportunity

The buyer should have several problems with the statutory notice and the TREC form. Firstly, disclosure of defects and conditions is limited to the seller’s actual knowledge and awareness - not the highest standard out there. What the buyer is concerned with is not what the seller knows or says he knows, but with what is actually true about the property. It is just too easy for an unethical seller to later say, “Oh, I didn’t know about that.” Sometimes problems can be discerned by inspections and other due diligence, sometimes not. Often, the truth is discovered only after subsequent conversations with neighbors who report that not only did the seller know about water penetration behind that faux stucco, he personally patched and painted it to conceal the damage! Not only does the buyer want to know about any such repairs, but a thorough buyer should want to see the contractor paperwork in order to determine the exact nature and extent of the repairs (ie., whether the repairs were sufficiently thorough or if more work may be needed in the future) as well as whether or not there is a transferable warranty (as is often the case with foundation repairs). Therefore, what a buyer wants, is something stronger – an actual representation and warranty by the seller that certain negative conditions do not exist.

Secondly, at the top of the first page of the Seller’s Disclosure, in uppercase type, the statute and the TREC form tell us that “IT IS NOT A WARRANTY OF ANY KIND BY SELLER OR SELLER’S AGENTS.” That is disappointing for the buyer. If the buyer cannot rely upon the Disclosure as a representation and warranty by the seller, its utility for the buyer is certainly diminished, as is its basis for a future DTPA lawsuit if seller deception is later discovered. Therefore, a goal in drafting the Contract for a buyer should be to convert the contents of the seller’s disclosure into a set of express representations and warranties.

Finally, at no point does the seller state, swear, or affirm that the Disclosure of Property Condition is true and correct. Most everyone in the real estate business assumes that this is indicated by the seller’s signature. But the form does not say that. This is another disappointment for the buyer. From a buyer’s point of view, there is no substitute for maximum, unconditional disclosure backed up by recourse against the seller that survives closing.

What about previous inspection reports? There is no obligation on the part of the seller to provide them. The buyer should therefore always request copies of these.

Buyers should also be aware of the existence of the Comprehensive Loss Underwriting Exchange (CLUE), an insurance industry database that includes the claims history of individual properties. Personal property losses would not be of concern to a buyer, but fire, flood, and mold claims would. This report is available to homeowners at choicepoint.com for $12.95. It is a valuable double-check on the veracity of the seller’s Disclosure of Property Condition. The buyer should require the seller to provide a copy of this report and perhaps even make the sale contingent on the report being satisfactory.

(4) The buyer may also have an interest in the wording of the warranty deed. For example, unless otherwise instructed, title company attorneys will list the grantee as “John and wife, Mary,” creating a tenancy-in-common. Many clients assume that rights of survivorship are included (not so) and that a will is not required to vest title in a surviving spouse (not always the case). Property vests in the surviving spouse only if the property is community property and the deceased had no children or, if there are children, all of them are the result of the marriage between John and Mary. Tex. Prob. Code Sec. 45. Accordingly, if it is the desire of the buyer to use the deed to do some basic estate planning, the grantee should be listed as “John and wife, Mary, as joint tenants with rights of survivorship, and not as tenants in common.” This adds value for the buyer at no cost to the seller.

(5) Often investor buyers will want to take title to the property “subject to” the existing indebtedness. Express language, both in the buyer’s addendum and in the deed, to the effect that buyer will not be assuming the obligation to pay the existing debt (and therefore seller will not be released from the debt until it is paid) is useful in forestalling subsequent claims by remorseful and litigious sellers who suddenly realize that they are still on the hook for the loan with no control over whether or not the current owner makes the monthly payments.

(6) The survey deserves consideration from the perspective of the buyer. More often than not, for example, it is in the buyer’s best interest to delete the “survey exception” to title insurance coverage (and ask the seller to pay the fee for this service) by requiring that “The standard printed exception as to discrepancies, conflicts, shortages in area or boundary lines, encroachments or protrusions, or overlapping improvements shall be amended, at seller’s expense, to read, “shortages in area.” The buyer also wants flexibility as to whether or not to order a new survey if the seller fails to deliver the existing one. The Contract says the buyer “shall” order a new survey; but this may not be necessary and the buyer should not be compelled by the Contract to do so. Alternatively, the buyer may want to specify that failure by the seller to supply the existing survey shall, at buyer’s election, be an occasion for termination of the contract and return of the earnest money. It may be advantageous to have a clean “out” for the buyer rather than a mere seller default.

An additional consideration for the buyer is the standard for the survey. The Contract says it shall be “made by a registered professional land surveyor and be acceptable to the Title Company and any lender.” The TAR commercial contract has more specific, itemized standards, and the buyer may want to consider moving that language into this Contract.

(7) Because of the buyer’s concern with full disclosure concerning the property, he may not be satisfied with the language of paragraph “19. Representations.” This paragraph is really about representations and warranties of seller, not buyer, and it could benefit from significant expansion. No liens is a good thing, as is avoiding default in any loan to be assumed, but what about other potential issues – eg., warranting that the seller is not common-law married to someone not mentioned in the Contract? That there is no pending or threatened litigation litigation that could affect the property? That seller has made full disclosure of any item that could materially affect buyer’s decision to buy or not buy? Or what about openly declaring that the Seller’s Disclosure of Property Condition is true and correct?

The last sentence of paragraph 19, indicating that seller untruthfulness is only a “default,” should be particularly objectionable to a careful buyer. Seller deception happens, and it is sometimes uncovered before closing. The problem is that the standard language deprives the buyer of a critical opportunity to weigh the seriousness of the seller’s deception and, at buyer’s option, declare the Contract terminated. In such event, buyer should be entitled not just to full return of the earnest money but also to compensation for inspection fees, appraisal fees, survey, attorney’s fees, and the like.

Applicable restrictions should not be overlooked as part of the buyer’s due diligence. Title companies like to provide these at closing, if at all. However, if a specific use is key to the buyer’s intentions for the property, then a request for a copy of the restrictions should be made during the option period.

Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is retained and expressly retained in writing to do so.