Real Estate Real Fast Episode 13 Cover

Texas Real Estate Contracts and Addendums: A Guide for Home Sellers and Buyers

Episode Summary

In this episode, Aaron Jistel (Broker and Co-Founder at ListingSpark) focuses on how recent changes to Texas Real Estate Commission’s contracts and documents may affect home sellers and buyers. He covers topics such as cash payments, mud, WCID and PID notices, Section 7D of the TREC contracts, HOA transfer fees, special provisions and third party financing addendums.

Episode Highlights

  1. Overview of changes to the Texas Real Estate Commission’s primary contracts and documents
  2. Definition of “cash” in the one to four contract
  3. Requirement of MUD, WCID, or PID notices from sellers
  4. Section 7D of the Texas Real Estate Commission’s contracts
  5. HOA transfer fees
  6. Special provisions
  7. Third party financing addendum
  8. Buyer approval and property approval
  9. Amendatory clause documents for FHA or VA Loans

Episode Links

Key Takeaways

[00:00:57] Understanding and Discussing the Changes to the Texas Real Estate Contracts

The Texas Real Estate Commission is introducing changes to the primary contracts and documents used in real estate transactions in Texas. These changes will go into effect February 1st. The purpose of this podcast is to make sense of the changes and how they may affect home sellers and buyers, as well as to discuss some sections of the contracts that haven’t been changed, but should be.

“My goal here is to try to make sense of some of these changes, kind of talk through how that may affect a home seller or home buyer, and then also go through some sections of these contracts that haven’t been changed that I think maybe should and kind of talk through some things that are still, I think, can be very confused without putting a little color around them and explaining them.”

[00:02:55] Changes to the TREC One to Four Contract Explained

TREC’s new definition of “cash” in the one to four contract states that the cash portion of the sales price does not include proceeds from borrowing of any kind or selling other real property except as disclosed in this contract. This makes it more difficult for buyers to use hard money or other loans as a down payment, and it may have repercussions if the buyer is found to be using something other than actual cash. As a seller, this can help to ensure that buyers have the actual cash they are claiming they have.

“The first big change to keep an eye on is what exactly is cash? In the first page, section three, they make a change to what is called the cash portion of the sale, or this is a buyer’s down payment. If they’re paying cash, they’re going to have the entirety of the purchase price listed on that first line. And so they put a little bit of a more defined definition of what cash needs. So before it just said cash portion of sales price payable by buyer at closing. So what they’re adding is the term cash portion of the sales price does not include proceeds from borrowing of any kind or selling other real property except as disclosed in this contract.”

[00:07:04] The TREC Amendments to the One to Four Family Residential Contract Add Clarity to Notices Requirement

The Texas Real Estate Commission (TREC) has added a new section to their contracts that requires the seller to provide any applicable MUD, WCID, or PID notices to the buyer before the contract is executed. This closes a loophole buyers can use to get out of an agreement even after the option period and contingencies have passed.

“It is important to get that notice out up front, and this contract is now going to make that a little bit more clear. I really like this one because in the past, this was not clearly stated in the contract, but yet it was still a loophole that buyers could use.”

[00:10:13] Understanding the Section 7D “Property Accepted As Is” Clause in Real Estate Contracts

When drafting a contract, it is important to consider Section 7D which deals with the buyer accepting the property as-is. In reality, no contracts are truly as-is, and if a seller insists on an as-is sale, they should make sure that it is clearly stated so that the buyer understands their rights during the option period. A buyer cannot be expected to know what defects are present in the house without performing due diligence and inspections, so expecting them to accept the property as-is without having done any of this is unreasonable.

“So just know it’s not as-is. It’s never as-is. It’s not going to be as is. An as-is sale is rare. It’s really meant for a junker of a house. So just keep that in mind.”

[00:15:17] Texas Real Estate Commission Provides Clarity on Seller’s Responsibility Regarding Repairs

Section 7 of the Texas Real Estate Commission’s contract provides clarity on what is required of sellers when it comes to providing proof of repairs. Sellers are required to provide buyers with copies of documentation from repair people that show the scope of work and payment for the work completed, and also arrange for the transfer of any transferable warranties at their own expense. If a seller wants to do repairs themselves, they must make the buyer aware in writing. All of these contracts can be found on the TREC website.

[00:20:35] Understanding HOA Language in the Texas Real Estate Contract

HOA transfer fees are typically the seller’s responsibility, but they can be negotiated depending on the situation. It is important to call the HOA beforehand so that the seller knows what will be expected of them in terms of payment minus what the buyer will pay.

[00:24:38] Special Provisions in Real Estate Contracts

Special provisions should only be used to fill in blanks or clarify any gray areas, and should not be used to add penalties or deadlines. Agents should not put anything in the special provisions line, and buyers/sellers can do so if they wish.

“We are brokers or agents brokering a sale on a transaction. We’re not parties to the contract. The buyer and seller are. So if a seller wants me to put something in special provisions I’m going to tell them you can write it in, you can have your attorney write it in. I’m not gonna write it in. I’m usually gonna drop an extra little initial there to make sure it’s very clear that that language came from you and not me because I’m not gonna be held responsible for any conflicting language that’s gonna be put in there.”

[00:27:49] What is the Third Party Financing Addendum?

The third party financing addendum has been updated with a new section for “other financing.” This could mean private loans, non-conforming loans, and hard money. TREC provides a draft of the addendum with red line changes to show what the new language is.

“So they added a whole section for other financing. Okay, what is other financing? I don’t know. They actually don’t give a definition for what it is. What I’m going to take a guess at would be private financing, non-conforming financing, probably hard money I think could get lumped into that category. It’s just not one of those other categories.”

[00:30:48] Understanding the Buyer Approval and Property Approval Clauses

The two sections in the third party Financing Addendum that can cause confusion and problems are Buyer Approval and Property Approval. Buyer Approval is the buyer’s ability to obtain financing, while Property Approval is the property meeting lender requirements such as appraisal, insurability and repairs. For FHA or VA loans, the lender must send out an amendatory clause document for the loan to be funded. It is important to understand the contents of this document, as it reaffirms the terms already agreed to in the contract.

“The more you know, the less you freak out when you see these documents at the last minute.”

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