The new contract

TREC made a handful of changes to the One to Four Family Residential contract. Here’s the rundown on what’s new.

by Ron Walker   On Oct. 29, 2001, the Texas Real Estate Commission adopted revisions to the standard residential resale contract forms. (For a list of the forms revised, adopted, and repealed see page 8.) Here are some highlights of the more significant changes in the One to Four Family Residential contract.

Paragraph 2 was reorganized to more clearly distinguish improvements (real property such as fixtures) from accessories (personal property). All items listed in paragraph 2 are part of the "property" unless specifically excluded. All items listed under paragraph 2B are permanently installed or built-in. Entry gate controls, mailbox keys, and above ground pool were added to paragraph 2C. The mandatory owners’ association notice was moved to paragraph 6E.

Paragraph 4 was overhauled. Most of the financing provisions in the prior contract form were moved to new addenda: the Third Party Financing Condition Addendum and the Loan Assumption Addendum. These changes allowed TREC to repeal the FHA/VA contract form, because the cash, conventional, FHA, and VA transactions are now merged into one form.

Paragraph 4A now permits the parties to choose whether the contract will or will not be contingent upon the buyer qualifying and obtaining approval for the loan.

For example, a buyer who believes or knows that he is creditworthy and otherwise qualified for approval of a loan to purchase the property, and who will assume the risk, may choose to check paragraph 4A(2). A buyer who does not know if he will be approved for the loan or does not want to assume the risk will check paragraph 4A(1) and attach the Third Party Financing Condition Addendum. By checking paragraph 4A(1) and attaching the addendum, the financing contingency will be nearly the same as in the prior contract forms. Paragraph 4A(2) is most likely to be more common for "strong," well-qualified buyers or buyers who have already obtained a commitment or approval (like a buyer who was approved for a loan to purchase a property in a transaction that fell through for other reasons). Paragraph 4A(2) is not to be checked in FHA or VA transactions. Regardless of whether paragraph 4A(1) or 4A(2) applies, the contract remains contingent upon the property satisfying the lender’s requirements (e.g., appraisal, condition, type). This is specifically noted in the lead-in phrase to paragraph 4A(1) and 4A(2).

Paragraph 4B, which concerns assumption transactions, refers to the new Loan Assumption Addendum. The assumption provisions in the prior forms were moved to the new addendum. Otherwise, the assumption provisions remain essentially the same.

Paragraph 6 was organized to make it easier to read. The checkboxes before the title policy and survey provisions were deleted. A notice was added in paragraph 6A(8) advising the buyer that he may have the standard printed exception as to "areas and boundaries" amended (aka "deleting the standard exception").

Paragraph 6C, concerning the survey, significantly changed. The time by which to obtain the survey and to object are measured solely from the effective date of the contract. Old paragraph 6B(1), which measured the time for objections from the date the buyer received the survey furnished to a lender, is deleted. New paragraph 6C(3) permits the seller to deliver a copy of an existing survey to the buyer. The existing survey must be acceptable to the title company. If the survey is not acceptable, a new survey must be obtained.

Paragraph 6E, concerning notices, was modified by: 1) adding the mandatory owners’ association notice (moved from paragraph 2); 2) moving the environmental notice to new paragraph 7G; 3) moving the notice concerning "back-up" offers to new paragraph 9C; and 4) deleting the notice concerning residential service contracts and incorporating it into a new provision under paragraph 7H.

Paragraph 7D no longer contains the option provision (moved to new paragraph 23).

Paragraph 7H is new. It permits the seller to contribute an amount toward the buyer’s purchase of a residential service contract. The provision was drafted as a reimbursement to comply with the letter and intent of Section 11(e) of the Residential Service Company Act, which prohibits a seller or an agent from making the purchase of a residential service contract as a condition of purchasing a property. The provision permits the buyer to choose the company and type of coverage that best suits his needs.

Paragraph 9 is reformatted. The "up to 15-day" extension under old paragraph 9 that was allowed if the buyer had obtained "financing approval" is deleted. Paragraph 9B defines the parties’ obligations at closing. Paragraph 9C was moved from the notices under old paragraph 6.

Paragraph 10 now contains checkboxes as opposed to a line. Possession will occur either "upon closing or funding" or "according to a temporary residential lease."

Paragraph 12 contains a number of changes, most of which were necessary in order to merge cash, conventional, FHA, and VA transactions into one form. Appraisal fees are now listed under "buyer’s expenses." Paragraph 12A(2)(a) defines "Loan Fees" as "loan origination, discount, buy-down, and commitment fees." This definition is important as the new Third Party Financing Condition Addendum specifically refers to "Loan Fees" when describing the type of loan the buyer will seek to obtain. Paragraph 12A(3) is a new provision that allows the seller to contribute a certain amount to the buyer’s costs. Paragraph 12A(3) was added in the hope of curbing abuses related to "surprise" or "junk" that a mortgage lender may add at closing and claim that FHA or VA does not permit the buyer to pay. The amount inserted in paragraph 12A(3), if any, will place a cap on the seller’s exposure for such items. If the seller does not wish to contribute any amounts to the buyer’s costs, the seller will insert $0.

Paragraph 16 is new and eliminates the need for the Mediation Addendum.

Paragraph 22 lists the TREC addenda that may be attached.

Paragraph 23 is the option provision (moved from old paragraph 7D(1)). The first sentence was added and placed in bold type to clarify and admonish the parties and agents that both blanks must be filled in and the option fee must be tendered in order for the option to apply. If the blanks are not completed and the option fee is not paid, the buyer will take the property in its present condition in accordance with paragraph 7D. The last sentence was added to advise the parties that time is of the essence with respect to the option period. Because the option provision was removed from paragraph 7, the form now permits a little more flexibility concerning acceptance of the property’s condition. There are basically four different scenarios concerning condition:

1. The buyer buying the property in its present condition with no repairs, who does not want the option to terminate, will insert nothing in paragraph 7D and will not complete paragraph 23.
2. The buyer buying the property in its present condition with some specific repairs that are identified at the time the contract is signed but who does not want the option to terminate, will insert the specific repair items in paragraph 7D and will not complete paragraph 23.
3. The buyer who does not know what repairs, if any, he will want completed and wants the right to terminate the contract after inspections are made, will insert nothing in paragraph 7D, complete paragraph 23, and pay the option fee. This is probably the most common of the scenarios and corresponds to the buyer choosing old paragraph 7D(1) in the prior form.
4. The buyer who wants the seller to complete a specific repair(s) (e.g., replace the dishwasher) and also wants the right to terminate the contract after inspections are made, will insert the specific repair(s) in paragraph 7D, complete paragraph 23, and pay the option fee.

A seller’s receipt for the option fee was added to the last page of the form.

Additional lines for the listing associate’s and selling associate’s addresses (for in-house transactions) were added in the broker information box.

Ron Walker is director of legal affairs for TAR.

Photo © Comstock Images.

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