Texas Promulgated Contract Forms

Texas Promulgated
Contract Forms
© 2016 Peggy Santmyer All Rights Reserved

Learning Objectives
• To know and understand Contract Law
• Be completely aware of the pre-printed parts of the
promulgated contract forms.
• Be able to fill in the blanks of the forms properly
• Be aware of the business details covered in the contract
• Be knowledgeable regarding addenda.
• Understand when and how to use an amendment.
• Know the difference between addenda and notices and
each of their roles.
• Recognize potential legal problems and know when to
advise clients to seek legal advice.

Texas Promulgated Contract Forms
The text book for this 30 hour Texas Pre-Licensing
Class is available at
www.createspace.com/5249273. Discounts
available for Real Estate Schools. Call Peggy
Santmyer at 214-697-5533 for information.

CHAPTER ONE
 cc
CONTRACT LAW OVERVIEW

Contract Definitions
A contract is a legally enforceable agreement to do,
or not to do a specific thing.
Expressed contracts can be either verbal or written
Implied contracts are created by actions, not in
writing

Elements of a Valid Real Estate Contract
 Competent Parties- (18, sane and sober)
 Mutual Agreement- (Offer and Acceptance)
 Lawful Objective-(Legal Purpose)
 Consideration-(Money or something of
value- NOT earnest money)
 In Writing and Signed-(A requirement of the
Statute of Frauds)

Statute of Frauds
The Statute of Frauds requires that
contracts involving real estate be in
writing and signed in order to be
enforceable.

A Contract may be……
Valid
A valid contract is binding on both parties and enforceable by the court.
Once a valid contract is in place, up until closing, a property is said to be
pending.
Void
A void contract is not enforceable because it doesn’t contain all of the
essential elements of a valid contract.
Unenforceable
A contract that cannot be enforced by the courts is unenforceable.
Voidable
A 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.

Executed and Executory Contracts
Executed- (Duties are completed by both parties-closed)
Executory-(The Contract was signed, but the duties are
not yet complete-pending)
The Texas Property Code consider contracts that do not
close for an extended period executory contracts. Usually
the purchaser takes possession but does not get legal title
until sometime later (often after all payments are made,
etc.) Contracts for Deed, Land Sales Contracts, Lease with
Option to buy, are all included in executory contracts
under Texas state law.

Contracts for Deed, Land Sales
Contracts, Lease with Option to Buy
The Texas Property Code considers an option-to-buy that
includes a residential lease an executory contract.
Do not attempt to use the TREC forms or other such
standard forms to create lease-purchase, lease-option
contracts or contracts for deed aka land sales contracts.
No one in Texas, drafts standard forms for writing
executory contracts. There are significant penalties for a
seller that does not comply with the Property Code.
Advise the consumer to get an attorney to draw the forms
and explain the risk involved in an executory contract.

Bilateral vs. Unilateral
 Bilateral- (a promise exchanged for a promise,
i.e., sales contacts) When acceptance is
communicated the offer becomes valid and
binding. The agreement binds both parties.
 Unilateral- (an option-owner sells the right to
purchase to a prospective buyer- the owner is
obligated to sell under the agreement, but the
buyer may or may not exercise his right to buy-
buyer has no obligation to buy).

Reasonable Time vs. Time is of the Essence
 The promulgated contracts are designed to be reasonable time
contracts.
 The Termination Option paragraph, paragraph 23, is designated as
“time is of the essence”, and it is for that paragraph only
 If a contract was unable to close until two days after the agreed upon
date because the lender was not ready, a court would probably say
that was within a reasonable time.
 When time is of the essence if it says the period ends in five days and
the time is not designated, it ends at midnight on the fifth day. Five
minutes after midnight is too late.
 Licensees should never write “time is of the essence” in their
contracts. Those words change legal rights under the contract.

Amendments and Addenda
 Addenda are materials added and included in the initial contract.
 It is important to include any information regarding the transaction in the
contract.
 The court can only consider what is inside the contract from the beginning to
end of the contract. All agreements must be included in the contract to
survive closing.
 An Amendment changes or makes modifications to an agreed upon
contract.
 All parties must sign amendments.
 Anything that changes after a contract has been fully signed and agreed upon
by both parties, must be changed by use of an amendment.


Performance of a Contract
 Both the buyer and the seller have obligations and rights
under the contract. A lot of the obligations must be
accomplished within a certain time frame, often within a
certain number of days after the effective date of the
contract.
 It is important that licensees keep their clients informed
as to what their obligation are and when they are
due. Most buyers and sellers are going to need help from
their agent to stay on track.
 If one of the parties fails to complete an obligation, that
party is in default. Paragraph 15 of the One to Four Family
Residential Contract describes the party’s rights when the
other party is in default.

Statute of Limitations
 The Statute of Limitations are laws that govern how long
the parties to a contract have to file a law suit after the
contract terminates.
 The law suit may be for specific performance or for fraud
regarding property condition.
 A party considering filing a law suit should seek legal
advice.

Assignment vs. Novation
 Assignment- Transfers contract obligations
to another party, but does not release the
first parties obligations
 Novation- a new contract ; transfers the
obligations of the first contract to the new
party

Reasons for Termination
 The best way for any contract to terminate is to become
fully executed (closed).
 Unfortunately, there are many other reasons a contract
can terminate including the following:
 Paragraph 23 gives the buyer the right to terminate for
any reason, within a limited time frame, if the buyer has
purchased an option to terminate.
 The buyer may elect to terminate by way of language in
the Third Party Financing Addendum for Credit Approval,
if financing is disapproved within the proper time frame.
 The buyer may elect to terminate under the language in
paragraph A of the Addendum for Property Subject to
Mandatory Membership in an Owner’s Association.

More Reasons for Termination
 The buyer may elect to terminate under paragraph 7B2
regarding the Seller’s Disclosure Notice.
 The buyer may elect to terminate under paragraph 6D
Objections in the One to Four Family Residential Contract.
 Either party may elect to terminate if the other party is in
default.
 Either party may terminate if an expense they have
agreed to pay in a specific amount, exceeds that amount
and the other party refuses to pay the excess

Before you go, can you define these terms?
Contract Valid
Void Voidable
Unenforceable Executed
Executory Bilateral
Unilateral Time is of the Essence
Reasonable Time Amendment
Addenda Statute of Limitations
Termination Assignment
Novation Statute of Frauds

Chapter Two
Laws, Rules and Regulations

Texas Real Estate License Act
 Real estate agents in Texas were first licensed through the
Securities Division of the Secretary of State's office,
beginning in 1939 with passage of the Real Estate Dealers
License Act (House Bill 17, 46th Legislature, Regular
Session).
 The act's name was changed to the Texas Real Estate
License Act (TRELA) in 1955

Texas Real Estate Commission
 In 1949, the Texas Real Estate Commission (TREC) was created
to administer the Real Estate License Act (Senate Bill 28, 51st
Legislature, Regular Session).
 The purpose of the Texas Real Estate Commission is to protect
the public through regulation of licensed real estate brokerage
practitioners, real estate inspectors, residential service
companies, and entities offering timeshare interests.
 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.

Section 1101.155 of the Texas Real Estate
License Act, reads as follows:
RULES RELATING TO CONTRACT FORMS (a) The
commission may adopt rules in the public’s best
interest that require license holders to use contract
forms prepared by the Texas Real Estate Broker-
Lawyer Committee and adopted by the commission.

Rules of the Commission
§537.11. Use of Standard Contract Forms.
1) Transactions in which the licensee is functioning solely as a principal, not
as an agent;
2) Transactions in which an agency of the United States government requires
a different form to be used;
3) Transactions for which a contract form has been prepared by the property
owner or prepared by an attorney and required by the property owner;
4) Transactions for which no standard contract form has been promulgated
by the Texas Real Estate Commission, and the licensee uses a form
prepared by an attorney at law licensed in this state and approved by the
attorney for the particular kind of transaction involved or prepared by the
Texas Real Estate Broker-Lawyer Committee and made available for trial
use by licensees with the consent of the Texas Real Estate Commission.
EXCEPTIONS:

More Rules of the Commission
 The licensee has an obligation to submit all offers
 The licensee must convey all known information that will affect
the principal’s decision to make, accept or reject offers.
 The licensee must deal fairly with all parties but owes a duty of
fidelity to his/her principal.
 The licensee has an affirmative duty to keep the principal
informed, at all times, of significant information applicable to
the transaction.
 If the broker receives a deposit or earnest money, the broker
must deposit the money by the close of business, on the second
working day, after the execution of the contract.
 If the broker finds the deposit or earnest money check has been
dishonored by the bank, the broker shall immediately notify the
parties.

Section 537.11b of the Rules of The
Commission says that a licensee may not:
 Practice law,
 Offer, give or attempt to give legal advice directly or
indirectly
 Give advice or opinions as to the legal effect of any
contracts or any other such instruments which may affect
the title to real estate
 Give opinions concerning the status or validity of real
estate or
 Attempt to prevent or in any manner whatsoever
discourage any principal to a real estate transaction from
employing a lawyer.

Section 537.11
 (c) Nothing in this section shall be deemed to limit the
licensee’s fiduciary obligation to disclose to the license
holder’s principals all pertinent facts which are within the
knowledge of the license holder, including such facts
which might affect the status of or title to real estate.
 (d) A licensee may not undertake to draw or prepare
documents fixing and defining the legal rights of the
principals to a real estate transaction.
 (e) In negotiating real estate transactions, the licensee
may fill in forms for such transactions, using exclusively
forms which have been approved and promulgated by the
commission or such forms as are otherwise permitted by
these rules.

Section 537.11
 (f) When filling in a form authorized for use by this section, the
licensee may only fill in the blanks provided and may not add to or
strike matter from such form, except that licensees shall add
factual statements and business details desired by the principals
and shall strike only such matter as is desired by the principals and
as is necessary to conform the instrument to the intent of the
parties.
 (g) A licensee may not add to a promulgated contract form factual
statements or business details for which a contract addendum,
lease or other form has been promulgated by the commission for
mandatory use.
 (h) Nothing in this section shall be deemed to prevent the licensee
from explaining to the principals the meaning of the factual
statements and business details contained in the said instrument
so long as the licensee does not offer or give legal advice.

Unauthorized Practice of Law
 The Texas Real Estate Licensee Act specifically prohibits
license holders from practicing law. License holders must
not give opinions of title or prepare legal documents.
 Sometimes clients ask questions that are difficult to
answer without falling into the trap of the unauthorized
practice of law.
 Paragraph 24 of the One to Four Family Residential
Contract makes it clear that real estate agents are not
allowed to give legal advice or opinions.
 Agents can state facts and tell clients their options but
never tell a client what they should do.
 If the clients do not know what to do, tell them to seek
legal advice.

A Required Notice to the Buyer
 Licensees are required legally to advise the buyer to
obtain an Abstract of Title on the property, examined by
an attorney of their choice, or a Policy of Title Insurance.
 Notice number one in paragraph 6E of the One to Four
Family Residential Contract provides the notice to the
buyer regarding this requirement.
 The Broker-Lawyer Committee and The Real Estate
Commission have put a notice in the contract to help
agents ascertain they provide the notice.
 The notice is also in TREC form OP-C Notice to Prospective
Buyer and the TAR Buyer’s Representation Agreement.

Common Mistakes
 Anything that changes the legal rights of the buyer or the
seller is the unauthorized practice of law. For example
when agents write that the contract is contingent upon
inspections, appraisals, etc. that is changing legal rights
and is the unauthorized practice of law.
 When an agent writes something into the contract instead
of using an addendum promulgated by the Texas Real
Estate Commission that is the unauthorized practice of
law.
 Adding or striking things from the preprinted portion of
the contract (unless it is specifically requested by the
parties) is the unauthorized practice of law.

The Broker-Lawyer Committee
 One of the advisory committees that exist under the Texas
Real Estate Commission is the Real Estate Broker-Lawyer
Committee.
 The committee is comprised of six Real Estate Commission
appointees (who are licensed real estate brokers) and six
lawyers, appointed by the president of the State Bar of
Texas, and one public member, appointed by the
Governor. They serve staggered six-year terms.
 The Broker-Lawyer Committee drafts and edits real estate
forms for use by real estate licensees. The purpose is to
expedite real estate transactions and reduce controversies
while protecting the interests of the parties involved.

NOTICE
 The Broker-Lawyer committee drafts and
edits contract forms.
 The Texas Real Estate Commission
approves and promulgates contract
forms.

Definition of “promulgated”
 When TREC approves and promulgates a contract it means
they have approved the form and require that form to be
used by licensees in all situations that it fits.

Use of Promulgated Forms
 TREC has approved and promulgated six sales contract
forms.
 Each contract is written as close to the One to Four
Family Residential Contract and still fit the situation.
 For example the Condo Contract does not include the lot
so the legal description of the property is different than
the other contract forms.
 The New Home Contracts cover a required disclosure
regarding insulation that is not required in the other
forms.
 In Chapter Six you will learn about many of the other
differences.

Promulgated Addenda
 The Promulgated Addenda are created to add to
the contract forms to make them work for many
different situations.
 Any of the contracts can be used as a back-up
contract, a short sale contract, etc. by adding an
addendum.
 In addition to attaching the addendum, it is listed
in Paragraph 22 of the contract making the
addendum part of the offer and acceptance.

Approved Forms, Notices and
Disclosures
 Approved forms have been created for the
licensee to use but are not required forms.
 Many times the disclosure is required (such as the
Seller’s Disclosure) but the form to use to provide
the disclosure is optional.
 Disclosures and Notices are not part of the
Contract and should not be listed in paragraph 22.

Presenting Offers and Multiple Offers
 Until an offer is accepted, the seller is free to consider any
and all offers.
 The seller has no legal duty to respond to any offer.
 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.
 The seller has no duty to respond to the offers in any
particular order. If the Seller has three offers, he/she may
reject the offers that were received first and second and
accept the third.

More about Offers
 Good business practice dictates that listing agents keep
other agents informed about their offers.
 Instead of countering an offer the seller could send an
invitation to the buyer to submit a new offer. The
invitation must make it clear this is not a counter offer.
The invitation is simply an invitation to continue
negotiation at terms a seller would find more favorable.
This allows the seller to keep his/her options open.
 Remember, an offer or counteroffer, remains open until
accepted, rejected or withdrawn.
 If the Seller has countered one offer and then a better
offer comes in, the Seller must be careful to withdraw his
counteroffer to buyer #1 before making a counteroffer to
the second buyer.

When Does the Offer Become a
Contract?
 The offer becomes a contract when all parties have agreed to all
terms of the offer and have signed the offer.
 Four things must take place in order for it to become binding and
effective (becoming the effective date in the contract). The four
elements are:
(1) 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).
 The promulgated contract forms instruct the agent acting for the
broker to fill in this date of final acceptance.

Before You Go…
 Can you name the four things required for the offer to
become a contract?
 Who drafts and edits Texas real estate contract forms?
 Who approves and promulgates Texas real estate contract
forms?
 Do you know the difference between explaining contract
forms and crossing the line into the unauthorized practice
of law?

Chapter Three
Parties, Properties and Financing

Information Needed to Complete the
Contract Form
 Name, address, telephone, e-mail and fax number of the parties.
 Legal description and street address of the property.
 Type of financing, cash down payment, term, etc.
 Amount of earnest money.
 Name and address of Title Company, telephone, e-mail, fax, Closers
name
 Who will pay for the title policy?
 Does the buyer want the survey amendment to the title policy and
who will pay for it?
 Is the seller going to furnish the existing survey and affidavit or will
there be a new survey? If a new survey, who will pay for it?

 Is there any specific thing the buyer wants to be able to
do at the property after closing that they need time to
research? If so it needs to be listed as an objection
possibility under paragraph 6D. I.e. add a swimming pool,
park an RV in their driveway, keep their five dogs, etc.
 How many days after the buyer receives the Exception
Documents, the Commitment and the Survey does the
buyer need to make objections?
 Is the property in a Mandatory Home Owner’s Association?
 Has the buyer received and reviewed the Seller’s
Disclosure Notice? If not when?
 Was the property built before 1978?
 Are there any specific treatments or repairs the buyer
wants to ask for to be included in the offer price?
 When do the parties plan to close?

 Will possession be at closing and funding or is a temporary lease
needed?
 Are there any factual statements or business details that need
added to Special Provisions?
 Is the Seller willing to pay any of the buyer’s closing cost?
 Where and how do the parties want any notices regarding the
contract to be sent?
 What addenda will need to be added to the contract?
 Does the buyer want an option to terminate? The parties will need
to agree on the amount of option money and the number of days
for the right to terminate.
 Do the parties want their attorneys listed?
 Name and license number of both brokers.
 Name, office address, telephone, fax and e-mail for both agents
 Name and telephone for the licensed supervisors of both agents
 The representation each broker has with their client.

The date in the right-hand
corner is the date that TREC
approved and promulgated the
form. Licensees must be
aware of the date and
ascertain that they are using
the current form. To use an
old form is a violation of the
License Act.

Paragraph 1 Parties
 Licensee must carefully list the legal names of the parties
 Name should match their ID
 Original documents of the seller can give good information
 Texas is a community property state; title company will
need to know the marital status of the parties

Name Styling Examples
 Sue Smith, an unmarried person
 John Jones, a widower
 Jim Johnson and wife Susan Johnson
 Steve Swan, as separate property (Steve is married)
 Sue Smith and John Jones as Tenants in common (2
unmarried people)
 Tom Harold, Executor of the estate of (deceased name)
 Business Name, a Texas Corporation
 Business Name, a Texas Partnership

Legal Description
 The Statute of Frauds requires any agreement affecting the
title to real estate to have a valid legal description.
 If the property is located within a city, it will probably have
a legal description that is part of a recorded plat. For
example Lot 12, Block 15, Greenwich Subdivision, City of
Carrollton, County of Dallas.
 The street address and zip code are added for convenience
and are required by the TREC form.
 If the property is not within a city, use “Unincorporated” or
“None” on the form for City.
 If the property has a metes and bounds legal description,
put N/A in the blanks for lot and block and add an
attachment to the contract with the description. Refer to
the attachment in paragraph 2.

Improvements and Accessories
 Licensees need to be knowledgeable about what stays
with the property.
 Para 2B Improvements are items that are attached to the
property.
 Para 2C Accessories are not attached, but still remain with
the property
 Any item listed that will not remain with the property,
needs to be listed under Paragraph 2D Exclusions.
 If the parties want to add additional items of personal
property to stay with the property, you can attach the
Non-Realty Items Addendum. Notice it is an approved
form, not promulgated.

 If this is an all cash offer, 3A and 3C will be the same
amount. 3B will be -0-. If all cash no boxes will be checked
and no addendum will be added.
 If there will be financing on a portion of the sales price, the
total of all the financing will be reflected in Paragraph 3B.
 Paragraph 3B gives three different financing possibilities.
(1) Third Party Financing (2) Loan Assumption and (3) Seller
Financing. Each of these requires a different Addendum to
be attached to the contract.
 Paragraph 4 reminds us that if you are acting for a spouse,
parent, child or business in which you own more than 10% it
must be disclosed to the other party in the transaction. If
you or any of the listed parties are acting as a trustee for
the benefit of any of the parties that also must be disclosed.

Paragraph 3B Third Party Financing
 Third party financing is any type of new financing that is
done by anyone that is a third party (not the seller or the
buyer).
 Be sure to check the box in 3B to indicate that this is third
party financing.
 Keeping the first lien mortgage at or below 80% of the
sales price saves the buyer the cost of Private Mortgage
Insurance. If the buyer is obtaining two third party loans,
such as an 80% first lien mortgage and a 10% second lien,
the two will be added together for the amount in
paragraph 3B.
$100,000 Sales Price with 10% down= $10,000 in 3A
80% first lien + 10% 2nd lien = $90,000 in 3B
$10,000 down + $90,000= Sales Price $100,000 in 3C

Third Party Financing Addendum
 The first paragraph of the Third Party Financing Addendum clarifies that the
buyer is going to apply for the financing promptly and will provide the lender
with the documentation needed to make a loan decision.

 Paragraphs A1 through A6 describe the third party financing. Notice that in
A1b, conventional financing, it provides for a 2nd lien if being used.

The Terms Described Here Must be Available
 Interest is a “not to exceed figure”
 If this is a fixed rate mortgage, interest will be the same for the
entire term of the loan. Therefore, the “interest not to exceed ___%
per annum for the first 30 years of the loan” if the loan has a 30 year
term.
 If it is an adjustable rate mortgage that will adjust in one year, it will
be “per annum for the first one year of the loan.”
 Any adjustment caps or lifetime caps for an adjustable rate mortgage
will need to be described in Special Provisions, paragraph 11 of the
contact.
 Agents should learn about each loan program and ascertain they have
a lender on their team that can help the buyer with any of them.
 Buyer’s circumstances dictate which program is best for them.

Buyer Approval + Property Approval =
Loan Approval

Buyer’s Right to Terminate
 Paragraph B1 gives the buyer the right to terminate and receive a
refund of earnest money, if the lender says they do not meet the
buyer requirements and it is within the number of days agreed to by
the parties.
 The buyer must act to terminate within that certain number of days
or they lose their right to terminate under this addendum, and there
is no longer any financing contingency on this contract. If the loan
fails after this date because of the buyer the buyer will be in
default.
 Paragraph B2 describes the property approval. Notice that property
approval can take up to the closing date. It is not limited to the
time for buyer approval. If the property does not meet the lenders
requirements the Buyer may terminate.
 Paragraph B3 “time is of the essence for this paragraph”. This is
one of only six places these words are used in the promulgated
forms.

 Paragraph C describes the vendor’s (seller’s) lien that will be on
the property. The seller has a lien until he/she is paid in full.
 Paragraph D is language required by FHA and VA. They want to
ascertain that their buyers are not penalized if the property
does not appraise.
 The buyer is not obligated to purchase the property if the
appraisal is not enough for the lender to make the loan
described here.
 If the property is not approved by the lender (appraisal,
insurability and lender required repairs) the buyer has the
option to terminate and receive their earnest money back.
 If the buyer elects to go forward with a smaller loan amount,
the buyer will be paying the difference in the cash down
payment. Another option is that the seller may be willing to
reduce the sales price to the appraised value.
 Under new legislation the lender may require real estate agents
to have written authority from the buyer to review the loan
documents or closing statement. Paragraph E gives the agent
that written authorization.

Let’s Practice
1,2 and 3
Practice what you have learned by
completing paragraph 3 and the
Third Party Financing Addendum.

Paragraph 3 Loan Assumption Addendum
Paragraph 3 of the contract provides for the
possibility of the buyer assuming the seller’s
existing loan. If the assumption of the seller’s
existing loan is the choice being used be sure to
check Loan Assumption and attach the Loan
Assumption Addendum.

Paragraph A of the Loan Assumption Addendum gives
the parties an opportunity to negotiate for the buyer
to provide the seller with a variety of items to
establish creditworthiness. The items must be
delivered to the seller within the limitation of time
negotiated in the blank.

Paragraph B starts off by giving the seller the right to terminate if the
items are not received within the time frame. If the seller is going to
terminate he/she must notify the buyer within seven days after
expiration of the time for delivery and the seller receives the earnest
money.
The seller also has the right to terminate if the items are received within
the time frame, but the seller determines that the buyer’s credit is not
acceptable. Seller must terminate within seven days after expiration of
the time for delivery. In this event, buyer receives the earnest money.
Notice that if seller does not terminate within these seven-day
periods, seller loses their right to terminate and is deemed to have
approved the buyer’s creditworthiness.

Paragraph C describes the Note(s) that is/are being assumed and cautions the buyer that
the obligations imposed by the deed of trust securing these notes will continue.
(1) Describes any first lien note being assumed and (2) describes any second lien note
being assumed. In both cases, the buyer’s first payment will be the first payment due
after closing.

The paragraph at the bottom of section C talks about what will
happen in the event the principal balance varies from the balance
stated when the contract was prepared.
(1st) It discusses what will happen if the balance varies. Since the
cash + the loan balance = the sales price, if the loan balance varies,
either the cash or the sales price must be adjusted. The parties
check the appropriate box to make that choice.
(2nd) It gives either party the right to terminate if the variance
exceeds $500, unless the other party elects to pay the excess. If the
parties terminate the contract for this reason, earnest money will be
refunded to the buyer.

Paragraphs D and E protect the buyer in the event the Lender
should charge an assumption fee or an interest rate more than
what was agreed to or refuses to consent to the assumption.
In any of these events, the earnest money will be refunded to
the buyer.

Paragraph F protects the seller in the event the lender does not
release the seller from liability. The seller would have a lien on
the property and the ability to pay any delinquency and get the
property back. The Vendor’s lien is released when the lender
relieves the seller of future liability.
Paragraph G protects both parties. If there is a deficiency in
the Tax and Insurance escrow account, the seller has to pay the
deficiency. The buyer reimburses the seller for the amount in
the account so if there is any overage in the account the seller
is paid for it.

Both the buyer and the seller need to read and pay
attention to the important information in the above notices.
These are things that sometimes the parties do not
understand and it is critical information.

Let’s Practice #4
Practice what you have learned by
completing paragraph 3 of the sales
contract and the Loan Assumption
Addendum.

Paragraph 3 Seller Financing
 Paragraph 3 of the contract provides for the
possibility of the seller doing the financing and
becoming the lender. If seller financing is the
choice being used be sure to check Seller
Financing in paragraph 3 and attach the Seller
Financing Addendum.

Paragraph A of the Seller Financing Addendum gives
the parties an opportunity to negotiate for the buyer
to provide the seller with a variety of items to
establish creditworthiness. The items must be
delivered to the seller within the limitation of time
negotiated in the blank.

The seller has the right to terminate if the items are not
received within the time frame. The seller must terminate
within seven days, by notice to the buyer and the seller
receives the earnest money.
The seller also has the right to terminate if the items are
received within the time frame, but the seller determines that
the buyer’s credit is not acceptable. Seller must terminate
within seven days after expiration of the time for delivery. In
this event, buyer receives the earnest money.
Notice that if seller does not terminate within these 7-day
periods, seller loses their right to terminate and is deemed
to have approved the buyer’s creditworthiness.

Paragraph C of the Seller Financing Addendum describes
the rate of interest for the loan, Buyer’s right of pre-
payment of the loan and Seller’s right to collect late
charges.
C1, 2, and 3 provide the parties with three choices of ways
the loan can be repaid.

Paragraph D (1) discusses what will happen if the property
is sold. Most sellers will want the right to give their
consent to any sale of the property while they still have an
outstanding loan secured by the property. D(1) (b)describes
the seller’s right to declare the balance of the loan due if
the property is sold without consent.

Paragraph D (2) gives the parties the option to negotiate a requirement for
a tax and insurance escrow account.
Paragraph D (3) protects the seller by making a default on any superior lien,
a default under the seller’s lien. This protects the seller by enabling him to
foreclose if any superior lien gets into default. Seller can foreclose and
take the property subject to the superior lien.

Let’s Practice #5
 Practice what you learned by completing
paragraph 3 of the sales contract and the Seller
Financing Addendum.
 Notice in this study the seller financing is only for
a portion of the financing.
 A new Third Party Financing Addendum will also
be needed.

Conventional Loans
 Mortgages can be defined as either government-
backed or conventional.
 Mortgage loans that are not guaranteed or insured by
the government are called conventional loans.
 Some conventional loans are insured by private
mortgage insurance and paid for by borrowers.

Texas Veterans Loans
 The State of Texas honors Texas Veterans in a very
unique way. Funds are set aside to help Texas
Veterans buy a home at interest rates below the
market rates.
 -Lower fixed rates
 -Lower closing costs
 -Easier approval process
 -Lower payments
 NOTE: The loans are made by lenders using FHA,
VA or Conventional financing. Texas Veterans
purchase the loan after closing.

FHA Loans
 FHA loans are popular with mortgage borrowers
because of lower down payment requirements
and less stringent lending standards.
 An FHA loan is a mortgage insured by the Federal
Housing Administration, a government agency
within the U.S. Department of Housing and Urban
Development.
 Borrowers with FHA loans pay for mortgage
insurance, which protects the lender from a loss if
the borrower defaults on the loan

VA Loans
 A VA loan is a mortgage loan guaranteed by the
U.S. Department of Veterans Affairs (VA).
 The loan may be issued by qualified lenders.
 The VA loan was designed to offer long-term
financing to eligible American veterans or their
surviving spouses (provided they do not remarry).

USDA Loans
 Texas USDA mortgage loans (Rural Development)
may be the client’s best choice.
 USDA loans are government guaranteed home
mortgages for borrowers living in rural and
suburban communities in Texas.
 Low fixed rates and no mortgage insurance
 NO MONEY DOWN home loans!

Reverse Mortgage Financing
 A reverse mortgage is special financing for people over the age of 62
 They have a low loan to value ratio based on the borrowers age. Up-
front fees can be large.
 The property must remain owner occupied. Taxes and insurance must
be paid.
 There are no monthly payments. Interest is being added to the loan
balance monthly so the balance increases rather than decreases each
month.
 The buyer does not have to qualify.
 The owner still owns the property and it passes to the heirs at the
time of death. The heirs can pay off the mortgage and keep the
property or let the lender take it back.
 It is a non-recourse loan so all the lender gets is the property.
 It may enable your buyer with $100,000 cash to buy a much more
expensive home and still have no monthly payments.
 Frequently used as a cash out refinance.

Before You Go
 Because we are a community property state the title
company will need to know the parties ____________
_____________.
 If the buyer wants to ask the seller to leave the free
standing bookcase for a small amount of money the proper
form to use is the _________ _________ ________
_________.
 If the financing for the offer includes the seller financing
a portion of the price the ______________ __________
Addendum will be attached.
 If the financing is an FHA or VA first lien mortgage the
_______________ __________________________
Addendum will be attached.

Chapter Four
Covenants, Commitments and Notices

 The parties agree upon the amount of earnest money.
 Earnest money is not an essential element of the contract.
 If the parties agreed upon a contract with no earnest money,
it would be a valid contract.
 Rules of the Texas Real Estate Commission say the agent must
deposit the earnest money check with the escrow agent, by
the close of business on the 2nd working day after the contract
is fully executed.
 Notice that if the buyer fails to deposit the earnest money,
buyer will be in default.

Caution…
Be cautious about telling the buyer they will get
their earnest money back if the transaction does not
close
When the buyer gets the earnest money back it is
not always all of the earnest money.
Paragraph 18B allows for unpaid expenses to be
taken out of the earnest money by the escrow agent
when the transaction does not close;

• Paragraph 23 of the Contract gives the buyer the
opportunity to offer the seller money to allow
the buyer to have a certain number of days to
terminate the contract for any reason.
• If the seller agrees and accepts the money it
gives the buyer time to do their due diligence in
getting inspections, getting bids for insurance,
etc.

More about Option Money
 The amount of the option money and the number
of option days are agreements of the parties.
 The money must be delivered to the seller within
three days after the effective date.
 The termination must be delivered to the seller
by 5 PM on the final day.
 Time is of the essence for this paragraph.
 The option fee can be credited to the sales price
at closing if the box in the 2nd to last sentence is
checked.

More about Option Money
 If the money is not delivered with the three days,
paragraph 23 will not exist. The contract is still
valid but buyer has no option to terminate.
 If the option money is delivered to the listing
agent, it is as though it was delivered to the
seller and is in compliance.
 Never deliver option money to a third party such
as the title company..
 Option money is never refundable.

6A Title Policy
 The parties negotiate who will pay for the Owner’s Title Policy and
which Title Company will be used.
 The decision of which title company to use must be left to the
decision of the parties.
 Agents need to be familiar the exceptions to the Title Policy. The
items listed in 1-8 are things that are not covered by the title
policy.
 Choices must be made in exception number 8. If the title policy is
to be amended, only excepting shortages in area, the parties
negotiate who will pay for that. The correct boxes must be
checked.
 Amendments to the standard coverage in the Title policy can be
made by the use of endorsements.

The Title Company will send a commitment for title
insurance to the buyer and the agent.
It will be sent to the buyer to the address listed in Paragraph
21 of the contract.
Double check the names of the sellers, the legal description
of the property, and any issue that will not be cleared up at
closing.
The buyer will want to determine if anything is being
reserved by the seller i.e. mineral rights.

Restrictive Covenants
( example Deed Restrictions)
 The buyer will also receive a copy of the restrictive covenants and
other deed restrictions that are in place for the real estate your buyer
wants to buy. The restrictions dictate how the buyer can and cannot
use the property. Notice that restrictive covenants are an exception to
the title policy under paragraph 6 A1.
 Restrictive covenants usually apply to a group of homes or lots, or
property that's part of a specific development or subdivision. They are
normally put in place by the original developer and are different for
every area of homes.
 Restrictive covenants nearly always stipulate the minimum size
residence allowed, how many homes may be built on one lot, and
what type of construction the homes must (or must not) be.

More Topics in Restrictive Covenants
 Setbacks (how far homes must be from streets and interior lot lines).
 Easements (such as a pathway for power lines or roads).
 Fees for road maintenance or amenities.
 Rules regarding changing or voiding the covenants.
 Rules about pets and other animals (for instance: no breeding for profit, no
livestock, and no unchained pets).
 Regulations dealing with in-home businesses and home rentals.
 Rules that limit tree-cutting
 Clauses that dictate what type of fencing can be used, or that forbid all
types of fencing.
 Clauses to reduce clutter on lots, such as prohibiting owners from storing a
vehicle that doesn't run within view of others, or parking a recreational
vehicle on the property.

Paragraph 6C2 and 6C3 are both used for
obtaining a new survey. The only difference is
that in C2 it is at the buyer’s expense and in
C3 it is at the seller’s expense.

What About C1?
 If the seller wants to furnish the existing survey, as per paragraph
6C1, the listing agent must ascertain that the survey is available. A
Residential Real Property Affidavit promulgated by the Texas
Department of Insurance must also be furnished. The number of days
to deliver both those items are limited by what the parties negotiated
in the blank in paragraph 6C1.
 The seller needs to get the Affidavit signed and notarized and provide
it to the listing agent along with a copy of the survey soon after listing
the property.
 If the seller agrees to 6C1, he/she must furnish the survey and the
affidavit or the buyer will obtain a new survey, and it will be at the
seller’s expense.
 If the seller furnishes the survey and the affidavit timely, but the
buyer’s lender or the title company says that the existing survey is not
acceptable, the parties negotiate in paragraph 6C1 and agree on who
will pay for a new survey.
 Check the box regarding payment when using paragraph 6C1.

Does the Buyer want to do anything that could be
restricted by deed restrictions, easements, POA docs,
etc? ( Add a swimming pool, park his truck in his
driveway, add a 2nd story, etc.) Use the blank in para
6D to make the restriction a valid objection.

Time Limitation to Objections
 The buyer has a limited number of days to object to the items
you listed in paragraph 6D and to things found on the
commitment, exception documents and survey or he/she loses
their right to object.
 The things on Schedule C of the Title Commitment must be
cleared. Clearance of those items is required by the title
company and cannot be waived by the buyer.
 According to paragraph 6D of the contract form, the closing
date can be extended if necessary, to allow the seller time to
cure any timely objections made by the buyer or the lender.
 After the seller receives the objections, he/she has 15 days to
cure them or the contract is terminated, and earnest money is
refunded to the buyer, unless buyer waives the objections with
lender and title company approval.

The Notice in 6E (1) is a requirement of the Real Estate
License Act. Every licensee is required to give this written
notice to every buyer, even if they are getting a Title Policy.
Agents have three ways they may give the notice:
(1) If you are using any TREC Promulgated Contract form, it is
in the form.
(2) If you are using the TAR Buyer’s Representation
Agreement, it is in the form.
(3) There is a separate approved TREC form, Notice to
Purchaser that can be used to give the notice.

Notice that the first sentence in 6E2 requires a box to be checked.

Six More Notices Required by Law

 Every buyer has the right to do inspections
 Hydrostatic testing must be authorized separately in writing by
the seller.
 The seller is responsible for turning on utilities and keeping them
on until closing.
 The buyer and the buyer’s agent have access to the property at
reasonable times

 The Seller’s Disclosure Notice is required by the Texas Property Code and
gives the parties three choices for negotiations.
 Be certain the seller completes the form and not the agent. It must be the
seller’s knowledge.
 If seller does not know the correct answer, the answer is “unknown”.
 Sellers can limit their future liability by disclosing everything they know
about the property.
 Buyers need to review the Seller’s Disclosure before making an offer so that
they know what they are making an offer on, in “as is” condition.

Review the
Seller’s Disclosure
Approved

More About the Seller’s Disclosure
 The seller’s disclosure is mandatory, the form to give the
disclosure is optional.
 The TREC Seller’s Disclosure form includes only the things
required by the Texas Property Code.
 All of this required information is also on the Texas
Association of REALTORS® (TAR) Seller’s Disclosure form as
well as other variations of the form.
 Some of the forms, including the TAR Seller’s Disclosure,
include many things of value, even though the property
code does not require them.
 The intent is to protect sellers and agents by encouraging
full disclosure to the buyer.

 Choice number (2) in paragraph 7B is for the buyer’s agent
that is preparing an offer but has not been able to get a
copy of a completed Seller’s Disclosure from the listing
agent. The buyer can make an offer and ask the seller to
provide the Notice within a certain number of days. This
is risky for the seller.
 The risk for the seller is that even if he/she delivers
Sellers’ Disclosure Notice within the proper time frame,
the buyer can terminate the contract, for any reason,
within 7 days after receipt of the Notice and receive their
earnest money back.
 If the seller never delivers the Notice, the buyer has the
right to terminate and receive their earnest money back
up to the day of closing.

Choice number (3) is for the seller that (by law) is not
required to furnish the Notice. The sellers that do not have
to furnish the Notice are:
 (1) pursuant to a court order or foreclosure sale;
 (2) by a trustee in bankruptcy;
 (3) to a mortgagee by a mortgagor or successor in
interest, or to a beneficiary of a deed of trust by a trustor
or successor in interest;
 (4) by a mortgagee or a beneficiary under a deed of trust
who has acquired the real property at a sale conducted
pursuant to a power of sale under a deed of trust or a sale
pursuant to a court ordered foreclosure or has acquired
the real property by a deed in lieu of foreclosure;

Sellers that do not have to furnish the Notice are:
 (5) by a fiduciary in the course of the administration of a
decedent's estate, guardianship, conservatorship, or trust;
 (6) from one co-owner to one or more other co-owners;
 (7) made to a spouse or to a person or persons in the lineal line
of consanguinity of one or more of the transferors;
 (8) between spouses resulting from a decree of dissolution of
marriage or a decree of legal separation or from a property
settlement agreement incidental to such a decree;
 (9) to or from any governmental entity;
 (10) transfers of new residences of not more than one dwelling
unit which have not previously been occupied for residential
purposes; or

A Lead Based Paint
Disclosure is required
on all residential
property built before
1978. See Paragraph
7C.

Seller must check one of the boxes in each section of
paragraph B.

 Buyer must check boxes in both paragraph C and D.
 The buyer’s agent should have furnished the buyer with a
booklet called Protect Your Family from Lead in Your
Home. Buyer must acknowledge receipt of the booklet in
paragraph D.
 Paragraph C2 explains the buyer’s right to do inspections
within ten days and right to terminate within 14 days.

Paragraph F certifies that everyone who signs this,
including buyers, sellers and both agents are giving
information “to the best of their knowledge”.
Paragraph E explains the broker’s obligation, including
the obligation to maintain a copy of the addendum for at
least three years.

Condition
 The first paragraph in 7D says, “Buyer accepts
the Property in it’s as is condition”. It describes
“as is” as with any and all defects and without
warranty.
 When the buyer closes on the property it is in
it’s as is condition with all defects and no
warranties.
 The buyer has an obligation to check everything
out before closing.
 There is space to negotiate for items the buyer
can already see in 7D2.

Buyer must Understand
 The important thing for the buyer to
understand is that they are offering a
certain price for the property in it’s as is
condition plus the repairs agreed to in
paragraph 7D2.
 If buyer has an option to terminate and
new problems are discovered during
inspections those become negotiable or the
buyer has the right to terminate.

Inspections
 Paragraph 7A says the buyer has the right to do inspections and
the buyer and their agent have the right to access to the
property at reasonable times.
 If they learn about some new problem with the property, they
can send an amendment to the seller asking for those repairs to
be made. The seller can agree to the repairs or say no.
 If the seller says no and the buyer has an option to terminate
under paragraph 23, the buyer can terminate the contract, and
the earnest money will be refunded to the buyer.
 A seller who refuses to do the repairs and has the buyer
terminate the contract, must be aware that the seller’s
disclosure will need to be updated with the new information for
any future potential buyers.

Repairs
 The seller is never obligated to do any repairs.
 The seller is obligated to disclose everything they know.
 Buyers have protection under the contract.
 Every buyer should do inspections and any other research
they deem necessary and make a decision if they want to
(1) continue or want to (2) terminate before their option
days expire.
 Neither party is obligated to do lender required repairs.
If neither party will do the lender required repairs,
paragraph 4A1 says if property does not satisfy the
lender’s underwriting requirements, buyer may terminate
and receive the earnest money.

Repairs
 If the seller agrees to do any repairs, either in the
original offer or later in an amendment,
paragraph F explains that any repairs agreed upon
will be done by professionals and completed
before closing.
 Buyer’s agent should take the buyer for a final
walk through inspection right before closing.
 Once Buyer closes they own the property as is.

Paragraph 7H informs the buyer of their right to choose a
policy from a Residential Service Company and to negotiate
for the seller to reimburse for the cost of that policy.
 Many different companies offer residential service
contracts.
 Coverage and exclusions differ from one company to
another.
 It is the buyer’s responsibility to review and choose the
coverage.

Brokers’ Fee Agreements are not in this contract. Where are
they??
 Listing Agreements
 Buyer Representation Agreements
 Agreements between Brokers (usually through the MLS
system)
Broker's fees are NOT designated on the last page of this
contract; this will be discussed further in Chapter 6.

Before You Go….
 Once a contract is accepted, the agent must deposit any
earnest money in their possession with the escrow agent by the
close of business on the ____ working day.
 Option money must be delivered to the ________ or their agent
within three days after the effective date of the contract.
 When a contract is in writing, the parties have agreed to
everything, all signatures and initials are in place and the
acceptance has been communicated to the other party or their
agent you can fill in the _______________ ______________.

Chapter Five
Closing, Possession and More

The parties negotiate the closing date in Paragraph 9A.
Once the offer is agreed upon this closing date is an on or
before date. So if the parties agree, they can close
earlier but not later. If the closing date needs to be
extended to later, it will require all parties to sign an
Amendment to the contract.

Paragraph 9B discloses some of the buyer’s and the seller’s
obligation at the time of closing.
Paragraph 9B5 defines what happens when a leased property is sold.
Seller delivers a copy of the lease and the security deposit to the
buyer. Buyer acknowledges amount and receipt of the deposit
money to the tenant.

The seller is to convey title with a general
warranty deed, according to paragraph 9B1
 A general warranty deed is a type of deed where the
grantor guarantees that he or she holds clear title to a
piece of real estate and has a right to sell it to the
grantee.
 The guarantee extends back to the property's origins.
 Seller guarantees no liens or other encumbrances since
the beginning of time.
 A special warranty deed only guarantees no liens or
other encumbrances put against the property during this
seller’s ownership.

Possession is negotiated in paragraph 10 of the sales
contract. Notice that if the parties agree that
possession will be other than “upon closing and
funding” a Temporary Lease Agreement must be used.

Temporary Lease Agreements
 Paragraph 10A of the sales contract, is important for the parties to
read.
 Both need to consult their insurance agent and ascertain their
interest are protected.
 If closing takes place on Tuesday, and the seller is still living in the
property when it is destroyed by fire on Thursday it brings up several
questions.
 Since the sellers are no longer the owner, their Homeowners
insurance may no longer exist. Does the seller still have coverage on
the personal items in the property?
 And since the buyers have not moved in yet, is the dwelling covered
by the buyer’s new Homeowners policy?
 Both parties need to negotiate the appropriate Temporary Lease
Agreement and contact their insurance agent to ascertain coverage

 Paragraph 10B establishes how an existing lease on
the property being sold will be handled. The seller
furnishes the buyer with a copy of the lease, move in
condition form and the security deposit. The buyer
acknowledges amount and receipt of security deposit
to the tenant.

Paragraph 11, Special Provisions
 Only to be used to add factual statements or business
details as desired by the principals, to conform to the
negotiations.
 Factual statements and business details are
clarifications of something in the contract. They are
true, factual and simply expand on a subject elsewhere
in the contract. Not a new negotiation.
 If there is an addendum that covers the detail, the
addendum must be used in lieu of paragraph 11.

Paragraph 12A defines all of the various costs and who is
responsible for payment. If the seller is willing to help the buyer
with the buyers’ cost in addition to paying the sellers’ cost, the
amount can be negotiated in 12A1b.

Since property taxes, in Texas, are paid in arrears,
many times the tax pro-rations are based on last
year’s tax amount because the current year’s tax
amount is not yet available. If, when current
amounts are available, there is a variance from what
is pro-rated; paragraph 13 says the parties will work
that out on their own.

Paragraph 14 makes it clear that the seller is
responsible for the property up until the closing date. If
the property is damaged and the seller is unable to
repair it by the closing date, the buyer has several
options including terminating and recovering their
earnest money.

Both parties have the same rights if the other party
defaults under the contract:
Enforce specific performance, or seek such other
relief provided by law
OR
accept the earnest money as liquidated damages,
releasing everyone under the contract

Paragraph 16 says the parties agree to mediate if a problem arises
they cannot solve by discussion and that they will share the cost of
the mediation equally.
Paragraph 17 has been used in several court cases to award the
cost of attorneys’ fees and the cost of proceedings to the
prevailing party. Many of those cases involved real estate agents
that recovered their cost in law suits they prevailed in.

Paragraph 18C covers two different situations:
Either party can send a release of earnest money form to the other party. If the
parties agree on how and to whom the money should be released, and they both
sign the release, the escrow agent can release the earnest money.

What if the Parties Do Not Agree?
 Either party can send a written demand to the
escrow agent for the money.
 The escrow agent will then send a copy of the
demand to the other party.
 After 15 days, if the escrow agent does not receive an
objection from the other party, escrow agent may
refund the money to the party making the demand
 Notice that the expenses that have been incurred
on behalf of the party receiving the money will be
withheld from the earnest money,

Paragraph 18D relates to the party who wrongfully
refuses to sign a release and makes them liable for
damages for the earnest money, plus attorneys’ fees
and court cost.
18E reminds us that all notices must be sent in
compliance with paragraph 21.

Paragraph 19 tell the parties that all representations
and warranties in the contract will survive closing.
Notice that the last sentence says the seller may
continue to show the property for back-up offers.

 The buyer is to comply with IRS rules in the event
seller is a foreign person. The escrow agent
(usually the title company) checks to be sure the
transaction is in compliance with the regulations.
 If the cash, in the transaction, exceeds a certain
amount, the escrow agent will file a required
report with IRS.

Paragraph 21 provides the addresses, telephone numbers,
fax numbers and e-mail addresses of both the buyer and
the seller. It is important to note that notices from one
party to the other party are only effective if in writing
and delivered by one of these methods.

All parts of the agreement must be made a part of the
contract. Paragraph 22 gives the opportunity to make
the addenda part of the agreement. Only the things in
the contract can ever be considered by the court.

Notices and Disclosures are NOT Addenda
 Notices and Disclosures do not get listed in
paragraph 22.
 These forms are for information only and are not
part of the agreement between the parties.
 Many notices ride around with the contract but
are not part of the contract.

 Paragraph 23 provides a method for the buyer to purchase
time to do his/her due diligence and then walk away if they
do not like what that investigation shows.
 The option money for the purchase has to be delivered to
the seller (or their agent) within three days after the
effective date or paragraph 23 is not a part of the contract.
 Time is of the essence for this paragraph.
 The option ends at 5 PM on the final date.

Executing the Contract and
Finalizing the Agreement
 Both the buyer(s) and the seller(s) need to sign a contract at the bottom
of page 8. Signatures need to be the same names as listed in paragraph
one of the contract. All changes that were made to the original offer
need to be initialed by all parties.
 The agent getting the final signature, or initials should fill out the
executed (effective) date on behalf of their Broker.
 The executed date is the date (1) everything is in writing (2) the parties
have totally accepted all of the terms (3) the contract is signed and all
changes are initialed, and (4) the written acceptance of the final
agreement has been communicated, by some method, to the other party
or their agent.
 Names of attorneys are not required, but can be included at the request
of the parties.

Licensed Supervisor
 On the last page of the contract, it asks for the name of
the licensed supervisor for each agent.
 The licensed supervisor is the Broker of Record or the
licensee, designated in writing by the Broker of Record,
that has been given the authority to monitor the
agents’ business practices.
 The Broker may not relinquish overall responsibility for
the supervision of licensees sponsored by the broker.

More About Page 9
 The last page also makes it clear this page is not
part of any agreement. Buyer and seller’s signatures
ended on the previous page. This page says “Print.
Do Not Sign”.
 This page is not what determines commission.
Listing Agreements, Buyer Representation
Agreements and Agreements between Brokers
(usually in MLS) are what determines commission.

Strassman to Applewhite Case Study
 Read the case study carefully and then complete
the forms that follow.

Chapter 6
 The Remaining Promulgated Contract Forms

Condominium Contract
 Differences in Paragraph 2,12, and 14
 Paragraph 2 is different because the legal
description is different. (No Lot included)
 Paragraph 12 includes information
regarding the HOA fees
 Paragraph 14 is different. The seller owns
the unit only (not the lot) that has to be
defined.

Farm and Ranch Contract
 Differences in Paragraph 2,3,6,7 and 13
 Paragraph 2 is different because the legal description is
different and it includes many additional accessories.
 Paragraph 3 is different in the Farm and Ranch
Contract because the sales price can be adjusted by
variances in the survey.
Contract to allow for information regarding Exception
Documents and Surface Leases.
 Paragraph 6G7 in the Farm and Ranch Contract
discusses the Texas Agricultural Development District.
There is no notice regarding property owners
associations in paragraph 6.

Farm and Ranch Contract
Contract. Different seller’s disclosures are required by
this type property and are contained in these
paragraphs.
Contract because there is a possibility of the
assessment of roll back taxes. Roll back taxes can be
assessed when the property zoning is changing.
Encourage the parties to investigate and understand
roll back taxes and the amount of the assessment
before agreeing to be responsible for them.

Unimproved Property Contract
 Differences in Paragraphs 2,7 and 13
 Paragraph 2 is different because there are no improvements.
 Paragraph 7 is different in the Unimproved Property Contract.
Different seller’s disclosures are required by the type property
and are contained in these paragraphs.
 Paragraph 13 is different in the Unimproved Property Contract.
There is a possibility of the assessment of roll back taxes. Roll
back taxes can be assessed when the property zoning is
changing. TREC contracts forms say the party changing the
usage is responsible for the roll back assessment. Encourage the
parties to investigate and understand roll back taxes and the
amount of the assessment before agreeing to be responsible for
them.

New Home Contract-Complete Construction
different. Improvements are new.
 Paragraph 7 is different in the New Home Contract.
Different seller’s disclosures are required by the type
property and are contained in these paragraphs.
 Paragraph 13 is different in the Unimproved Property
Contract. There is a possibility of the assessment of roll
back taxes. Roll back taxes can be assessed when the
property zoning is changing. TREC contracts forms say
the party changing the usage is responsible for the roll
back assessment. Encourage the parties to investigate and
understand roll back taxes and the amount of the
assessment before agreeing to be responsible for them.

New Home Contract-Incomplete Construction
different and the improvements are not complete.
Contract. Different seller’s disclosures are required by the
type property and are contained in these paragraphs.
Contract. In each of these transactions there is a
possibility of the assessment of roll back taxes. Roll back
taxes can be assessed when the property zoning is
changing. TREC contracts forms say the party changing
the usage is responsible for the roll back assessment.
Encourage the parties to investigate and understand roll
back taxes and the amount of the assessment before
agreeing to be responsible for them.

Chapter 7
Promulgated Addenda, Notices and Other Forms

ADDENDUM FOR
SALE OF OTHER PROPERTY BY BUYER
 The form to use if the buyer is unable to buy a new property unless
their existing property is sold and closed.
 Paragraph A gives a date by which the funds from the sale of an
existing property must be received.
 Notice that paragraph E says that, for this addendum, “time is of the
essence.”
 Paragraph 19 of the contract says that the seller can continue to
market the property for back up offers and receive, negotiate and
accept a back-up offer.
 Paragraph B in the Sale of Other Property Addendum discusses what
will happen if the seller accepts a back-up offer.
 Paragraph D cautions the buyer not to waive the contingency unless
they are certain they can close even if their first property does not
close. Otherwise, the buyer will be in default.
 In paragraph C, the parties can agree upon the amount of additional
earnest money that must be paid if buyer #1 waives the contingency.

ADDENDUM FOR
“BACK-UP” CONTRACT
 This Addendum enables the seller to negotiate with a
second buyer and agree upon terms that will be used for
the back-up buyer in the event the first buyer’s
transaction falls through.
 This addendum can be win-win
 It is a win for this buyer because if the first contract
terminates for any reason, this buyer does not have to
compete for the home the next time.
 It is a win for the seller, who is free to continue to work
with the first buyer in a good faith attempt at getting to
closing, but now has the power of knowing there is
another buyer wanting their home.

More About the Back Up Addendum
 Paragraph A simply says that the back-up buyer is going to put
up the earnest money and the option money and wait to see if
the first transaction terminates.
 The parties negotiate the contract and execute it, deposit the
earnest money with the escrow agent, pay the option money to
the seller and wait…..
 Paragraph B and C make several points:
 If the first contract does not terminate by a dead line date
negotiated by the parties, this back-up contract will terminate
and the earnest money will be refunded to the buyer.
 Seller is free to continue to work with the first buyer and an
amendment of the first contract does not terminate the first
contract.

What If the First Contract Terminates?
 If the first contract does terminate, the seller must
notify the back-up buyer immediately.
 The effective date of the back-up contract is
amended to the date the back-up buyer receives
notification of termination of the first contract.
 Paragraph D relates that if the back-up buyer has the
option to terminate:
(1)The right to terminate begins on the original
effective date of the back-up contract.
(2)The right to terminate continues after the amended
effective date for the number of days agreed to in
paragraph 23 of the contract.
 Paragraph E tells us time is of the essence.

Test Your Know How
A back-up contract was originally executed on April 19th.
The parties agreed to a ten day option period in paragraph
23. On April 25th the back-up buyer received a notice from
the seller that the first contract has terminated.
When does the back-up buyer’s option period end?
At 5PM on _________________. (Fill in the blank)

Addendum for Oil, Gas and Other Minerals
Information regarding the most important and probably
the most misunderstood part of the transfer of mineral
rights is contained in the Notice section of the form.

More About Mineral Rights
 Records were not maintained on the transfer of mineral
rights the same way they were maintained on the transfer
of property.
 Unless someone has researched who owns the mineral
rights, the information may be unknown to the seller.
 Since title policies do not guarantee mineral rights, it is
possible the seller bought the property after the mineral
rights had already been sold, and the seller was never
aware that he never acquired the mineral estate.
 If the parties have concern about the mineral estate, it is
important they seek advice from an oil and gas attorney.
 Paragraph A of the addendum defines what the term
“mineral estate” does and does not include.

Paragraph A of the addendum defines what the term
“mineral estate” does and does not include.

Paragraph B defines what portion of the mineral estate
the seller is reserving and what portion the seller is
transferring to the new owner. Pay particular attention
to the NOTE at the end of B2. It is essential buyer read
and understand this.

The Title Company will
probably request the parties
also sign a release of earnest
money.
Notice that only the buyer has
to sign this document.

Mutual Termination of Contract
 Contracts terminate sometimes for reasons that are not in
the contract. For example if something has happened in
either the buyer or the seller’s life that causes them to
want out of the contract and the other party agrees to
release them, they would do a mutual termination that
releases everyone from any liability under the contract.
 NOTE: The seller may have liability for the listing
commission under the Listing Agreement.
 The Title Company can provide the parties with a form,
for each of them to sign, for the release of contract and
addresses what will happen with the earnest money,

The public has a right to use
the beach area.
If the property comes to be on
the beach area because of
storms and erosion of the soil,
the state can require the
owner to remove the structure
at their own expense.
Purchaser needs to do their
due diligence in checking
rates of erosion, discussing
with an attorney, etc. before
signing a contract.

 This addendum is used
with contracts on
properties that share a
boundary with the
submerged lands of the
state.
 That boundary may
change because of
erosion. A survey is the
only way to establish the
boundary.
 Because of erosion the
boundary will probably
change again later.
 No structure can be over
the state’s property.

Addendum for Property Subject to Mandatory
Membership in an Owner’s Association.
 The term “Subdivision Information” includes the (1) current copy of
restrictions (2) bylaws (3) Rules of the Association and (4) Resale
Certificate.
 If the buyer does not require the Subdivision Information, they would check
number 4. This is risky. The buyer needs to know what he/she can do with
the property and what financial responsibilities they are acquiring.
 The best option for the seller is number 3 because it does not give the buyer
the opportunity to terminate. For that to be possible the seller is going to
have to obtain the documents prior to having an offer.
 Both number 1 (Seller shall obtain, pay for and deliver) and number 2
(Buyer shall obtain, pay for and deliver) give the buyer 3 days to terminate
the contract after they receive the subdivision information.
 Notice that the title company must receive the required fee before they will
obtain the Subdivision Information for the parties

The transfer fees to the buyer are limited in paragraph C. Seller
will pay any excess.
The Notice to the Buyer Regarding Repairs By the Association puts
the buyer on notice to not sign a contract before they are
satisfied with the condition of the property.

Short Sale Addendum
 Paragraph A protects the seller by describing “net proceeds” and giving the
seller an out under the contract if their lender will not accept their net
proceeds as full payment.
 Paragraph C verifies that this is a binding contract and that the earnest money
and option money must be deposited the same as on any contract.
 Paragraph D tells us the final date the purchaser is willing to wait for the seller
to receive approval from their lender. If that date comes, the contract will
terminate, and earnest money will be refunded to the buyer.
 Option money is never refunded. The option money pays for the right to
terminate the buyer received beginning with the original effective date.
 Paragraph D also explains that if the seller receives approval from the lender
and the seller notifies the buyer of that approval, the effective date of the
contract will be amended to the date the buyer receives that notification.

More About the Short Sale Addendum
 Paragraph F explains that if the buyer has the option
to terminate, the number of days for the option
period in paragraph 23, will begin on the amended
effective date.
 The right to terminate began on the original effective
date and keeps running until there is an amended
effective date. The option days begin to run on the
amended effective date and end when the number of
days is gone.
 Time is of the essence for this addendum.

Promulgated
Resale Certificates

Addenda Workshop
 Find the letter, with the answer that
corresponds with the blank for the
situation. Letters can be used more than
once or not at all.

Chapter 8
Other Real Estate Matters

Real Estate Fraud
 Real estate fraud is a losing proposition.
 Mortgage lenders are usually the ones being
cheated,
 Their losses result in inflated appraisals and
property values and bogus documents recorded in
public records.
 You and I and other consumers end up paying the
price for this loss.

Flipping
 A property is purchased and then quickly resells at
a value that is artificially inflated by false
appraisals
 First buyer purchases the home for $400,000
(which is the actual value) and then resells it at
$600,000, with a phony appraisal, to a straw
(phony) buyer, they might each pocket $100,000.
 No payments are made on the $600,000 loan and
when the lender forecloses they find the property
is only worth $400,000.
 The lender takes a loss, their cost increase, and
we all pay.

Buyer Rebates
 Anything that causes money to go back to the buyer, either at
or after closing, without the knowledge of the lender, is illegal.
 Anything being paid by any party in the transaction must be
disclosed in the contract and on the HUD statement.
 For example $20,000 to be paid to ABC Home Improvements for
future improvements. ABC Home Improvements is owned by a
friend of the buyer and after closing the friend and the buyer
split the $20,000. No improvements are made; no payments
are made, and the lender has to foreclose and finds the
property worth less than the loan amount.
 Almost everyone involved in a home buying transaction could be
involved. The agents, the mortgage broker, the appraiser, the
Title Company. The lender is usually the victim.

Red Flags of Fraud
 Inflated price or appraisal
 Frequently you are being asked to remove the property from
MLS (that is a violation of MLS rules) or being asked to
increase the price in MLS to a higher price to match the sales
price.
 False financial statements by the buyer
 Contract calling for future improvements.
 High fees to the Mortgage Broker, Real Estate Broker or both
 No fee for a title policy on the HUD statement
 A title company you have never heard of before
 Last minute amendments to the contract, increasing the
sales price

Risk Management
 Document everything
 Disclose everything to the lender (representing the
Buyer does not include helping them cheat the
lender)
 Be sure everything is accurate on the HUD
statement.
 If you believe your transaction is involved in illegal
activity withdraw from the transaction. Tell the
seller that if he/she intends to continue with the
transaction, they need to seek legal advice.

You Would Like to Be Paid
So where are these separate written agreements?
(1) The Listing Agreement-an agreement between seller and
broker.
(2) A Buyer’s Representation Agreement- an agreement between
buyer and broker.
(3) The Sales Contract-an agreement between buyer and seller.
(4) An agreement between brokers- either a written
agreement/registration or through the MLS system.

This statement is NOT an agreement
between brokers
This statement is NOT an agreement between brokers,
it only affirms what the agreement is. If the property
is in MLS the amount in this blank should be the same
as Seller Agency Compensation (SAC) or Buyer Agency
Compensation (BAC) in MLS.

When the Property is in MLS
 When a listing broker enters a property in MLS and enters
an amount under SAC (Sub-agency Compensation) or BAC
(Buyer Agency Compensation) that is an offer to selling
agents to participate in the sale and be compensated in a
certain amount.
 When a selling agent shows the property and writes an
offer, the listing broker’s offer of compensation has
been accepted.
 Agents cannot try to change that offer by filling in
something on the last page of the contract that does not
exist.

When the Property is Not in MLS
 If the property is not in MLS, there is no offer of
compensation.
 A buyer’s agent would want to get a
Registration/Agreement between Brokers signed
before showing the property to be clear on the
offer of compensation.
 The Statute of Frauds says anything regarding real
estate must be in writing to be enforceable.

FAIR HOUSING LAWS
 The Fair Housing Act covers most housing
 The Act exempts owner-occupied buildings with
no more than four units, single-family housing
sold or rented without the use of a broker, and
housing operated by organizations and private
clubs that limit occupancy to members.
 An owner that is exempt from the Fair Housing
Act may still be liable for racial discrimination
under the Civil Rights Act of 1866. There are
no exceptions under that act.

Protected Classes
 Race
 Color
 National origin
 Religion
 Sex
 Familial status
 Handicap
 The NAR Code of Ethics has added Sexual Orientation as a
protected class for REALTORS®
 States and cities can also add protected classes. Be
familiar with your market area.

In the Sale and Rental of Housing:
No one may take any of the following actions based on protected classes:
 Refuse to rent or sell housing
 Refuse to negotiate for housing
 Make housing unavailable
 Deny a dwelling
 Set different terms, conditions or privileges for sale or rental of a
dwelling
 Provide different housing services or facilities
 Falsely deny that housing is available for inspection, sale, or rental
 For profit, persuade owners to sell or rent (blockbusting) or
 Deny anyone access to or membership in a facility or service (such as
a multiple listing services) related to the sale or rental of housing

Additional Protection if ….
 If you or someone associated with you:
 Have a physical or mental disability (including
hearing, mobility and visual impairments, chronic
alcoholism, chronic mental illness, AIDS, AIDS
Related Complex and mental retardation) that
substantially limits one or more major life
activities
 Have a record of such disability or
 Are regarded as having such a disability

Your landlord may not:
 Refuse to let one make reasonable modifications to the dwelling or
common use areas, at their expense, if necessary for the disabled
person to use the housing.
 Refuse to make reasonable accommodations in rules, policies,
practices or services if necessary for the disabled person to use
the housing.
 Example: A building with a "no pets" policy must allow a visually
impaired tenant to keep a guide dog.
 Example: An apartment complex that offers tenants ample,
unassigned parking must honor a request from a mobility-impaired
tenant for a reserved space near her apartment if necessary to
assure that she can have access to her apartment.
 Housing need not be made available to a person who is a direct
threat to the health or safety of others or who currently uses
illegal drugs

Housing Opportunities for Families
 Unless a building or community qualifies as housing for
older persons, it may not discriminate based on familial
status. That is; it may not discriminate against families in
which one or more children under 18 live with:
 A parent
 A person who has legal custody of the child or children or
 The designee of the parent or legal custodian, with the
parent or custodian's written permission.
 Familial status protection also applies to pregnant women
and anyone securing legal custody of a child under 18.
 Housing for older persons is exempt from the prohibition
against familial status discrimination

Many Disclosures are Required.
 Some examples of required disclosures would include:
 Full disclosure about the condition of the property to all
potential Buyers
 Things that have made the property notorious. (Well
publicized murder/suicide)
 Things happening in the area that the average person
would want to know (the city is considering a new
highway through the area the property is located on)
 Anything a normal buyer would want to know about the
property that is not specifically exempted from
disclosure.

Some Disclosures are not Required, but are
Permitted
 The law says that the seller and the agent do not have
to disclose death on a property that was by suicide,
natural causes or an accident unrelated to the
property. If the seller chooses to disclose it is
permitted.
 The law says neither the seller nor the agent is
required to disclose anything about registered sex
offenders. If the seller decides to disclose that the
home down the street is occupied by a registered sex
offender, it is permitted.

Some Disclosures are prohibited
Nothing can be disclosed regarding:
 Race
 Color
 Religion
 Sex
 Handicap (including aids or HIV illnesses- see information
following)
 National Origin
 Familial Status (protects children and the people they live
with)
 + Sexual Orientation for NAR members

DISCLOSURE AND AIDS OR
HIV RELATED ILLNESSES
The Texas Real Estate License Act reads:
 A person is not subject to civil liability or criminal
prosecution because the person did not inquire
about, make a disclosure related to, or release
information related to whether a previous or
current occupant of real property had, may have
had, has or may have AIDS, HIV related illnesses
or HIV infection as defined by the Center for
Disease Control of the U.S. Public Health Service.

NAR’s Disclosure Policy
 If a prospective buyer ask if a current or former occupant has
AIDS the National Association of REALTORS advises you to
respond as follows:
 “It is the policy of our firm not to answer inquiries of this
nature one way or the other since our firm feels that this
information is not material to the transaction. In addition, any
response from me or other agents of our firm may be in
violation of the federal fair housing laws. If you believe this
information is relevant to your decision to buy a property, you
must pursue this investigation on your own.”
HUD’s Disclosure Policy
 It is illegal for real estate agents to make unsolicited
disclosures that a current or former occupant of the property
has AIDS. If a prospective buyer directly ask you if a current or
former occupant has AIDS and you know that this is true, HUD
advises you to not respond.

OCCUPANCY STANDARDS
Neither the Fair Housing Act nor HUD has a
particular rule regarding occupancy. Both allow for
housing providers to comply with reasonable local,
state and federal occupancy restrictions. In some
cases, housing providers have been permitted to
develop and implement reasonable occupancy
restrictions on their own.

Chapter 9
Practice Makes Perfect
Opportunity to practice what you have learned. Do
the two case studies, filling out the forms that
follow each, using the things you have learned.

Texas Promulgated Contract Forms

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