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Texas is a Buyer Beware State Part 1

If you did not already realize, Texas is a buyer beware state when it comes to purchasing real estate.  Thus, an Earnest Money Contract necessary in a real estate transaction.  Once you have settled on a home or commercial property you want to buy and have negotiated the basic terms of the purchase, your agreement with the seller will need to be set forth in a contract for purchase.  Most contracts for purchase used in Texas are Earnest Money Contracts.  In such a contract, both the buyer and the seller obligate themselves to buy and sell the property at some time in the future.  In order for the contract to be enforceable, it must be in writing and signed by all parties.

While there is no “standard form” for earnest money contracts in Texas, state law requires that if a broker prepares the contract, he or she must use earnest money contract forms promulgated by the Texas Real Estate Commission (TREC) when applicable to a particular transaction.  There is no requirement that TREC forms of contracts be used if a buyer or seller wishes to prepare or have an attorney prepare another form of contract.

This week and next I will go over the more pertinent provisions of the earnest money contract.  I am not a fan of “forms,” however, since the TREC forms are most often used, and their terms are fairly standard for most real estate transactions, I will use the TREC form for a one to four family residential contract as my outline.  The TREC forms are revised and updated periodically and this particular form was revised and implemented on February 1, 2023 and may be found at trec.texas.gov.  It contains twenty-four sections relating to different aspects of the transaction.

Section 1 of the contract deals with the parties to the transaction.  It identifies the seller and buyer.

Section 2 of the contract deals with the property.  In most residential transactions, the county map or plat records, not to be confused with the tax plat, establish a lot and block legal description of the property, if it is in a subdivision.  If the property is not in a platted subdivision, a metes and bounds description, or a description by reference to an existing recorded document will be required.  An address, by itself, is never a sufficient legal description.  It is a prudent business practice to obtain the legal description from the previous deed to the property.  An improper legal description can render the entire contract unenforceable.

Section 3 deals with the sales price.  This section breaks the total sales price down into the amount which will be cash and the amount, if any, which will be financed.

Section 4 deals with the financing aspects of the sale.  It will identify, in the particular transaction, whether a third party lender (i.e., bank, mortgage company, etc.), assumption of the seller’s current note, or seller financing will be utilized.  Typically, this section identifies the amount to be financed and the interest rate desired.

Section 5 deals with the earnest money.  The earnest money or escrow deposit, as it is sometimes called, should be held by a neutral third party as escrow agent.  This is one of the roles of the title company.  The typical seller wants to require as much earnest money as possible as a show of good faith by the buyer that the buyer is serious and will not walk away from the transaction.  Your broker can assist you in negotiating the amount of earnest money.

Section 6 deals with the title policy and survey.   It is very important for the buyer to have an adequate opportunity to review title and to receive adequate title assurances. Although it is a negotiable item, the contract usually provides that the seller furnish an owner’s policy of title insurance.   If a survey is required by the lender or the title company, the lender and the buyer should have an opportunity to review it prior to closing.  Another negotiable item is whether the buyer or seller pays for the survey.  The title company issues a Comittment for Title Insurance before closing.  The buyer MUST review this document and any deed restrictions or items listed.  You may also have to ask for the deed restrictions to read them personally.  This is the only way you will know before you buy what you can and can’t do on the property (i.e. run a business, raise animals) or who has the responsibility for maintenance of roads and community aminities.

Section 7 deals with the property condition.  This section deals with inspections of the property as well as disclosures by the seller of the property’s condition.   This is usually done with a Property Condition Addendum.  To prevent undue hardship on the seller, however, the contract form does contemplate an agreed limit as to how much any repairs required to be made by the seller may cost.  It is the buyer’s obligation to have inspections of the property done and I can’t stress this enough.

Section 8 refers to the parties’ agreement as to their brokers’ fees.  This is generally a separate agreement between each party, seller and buyer, and their respective broker.

Section 9 deals with the date of the closing.  It also explains what each parties’ duties and responsibilities are at closing.

Section 10 states when the seller will turn possession of the premises over to the buyer.  This is commonly done at closing, but may be earlier or later if a temporary residential lease is involved.

Section 11 allows the parties to insert any special provisions or terms of their sale, such as: an “as is” provision; a provision that certain personal property, i.e., drapes, refrigerator, shutters, will be conveyed with the real property; or, that the expenses will be paid differently than is preprinted in Section 12.

Section 12  identifies what expenses of the sale each party to the contract will pay.  Although the TREC form specifies the usual or standard split of expenses between buyer and seller, these are negotiable.

Next week I will review the remaining sections of the typical TREC earnest money contract form.

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