How To Read a Real Estate Purchase Contract in Texas

Buying a home is a significant milestone and can often feel overwhelming, especially when it comes to understanding the details of the purchase contract. In Texas, the TREC One to Four Contract is the standard agreement used for the sale of single-family homes or up to four units. This contract is designed to clarify the terms and conditions involved in a home purchase, ensuring fairness for both buyers and sellers. In this post, we’ll break down the key components of the TREC One to Four Contract to help you navigate your home purchase with confidence.

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What is the TREC One to Four Contract?

The TREC One to Four Contract was created by the Texas Real Estate Commission (TREC) to standardize the home purchasing process. This contract has evolved over decades to address various disputes and litigations that have arisen in the real estate market. By using this contract, buyers and sellers can ensure that the terms are clear and legally binding, protecting both parties in the transaction.

Key Sections of the TREC One to Four Contract

While the contract is comprehensive, there are several crucial sections that buyers and sellers should pay particular attention to:

Section 1: Parties Involved

This section identifies the parties involved in the transaction, including the buyer and seller. It's essential to ensure that all names are spelled correctly and that contact information is accurate.

Section 2: Property Description

Here, the property being sold is described in detail. This includes the address and any specific details that pertain to the property. Additionally, any exclusions—such as fixtures that the seller wishes to take with them—should be listed in this section.

Section 3: Sales Price and Financing

This section outlines the total sales price, including the cash and financed amounts. If financing is involved, an addendum for financing must accompany the contract to detail the terms of the loan.

Section 4: Leases and Natural Resources

In cases where the property has existing leases, such as rental agreements for tenants, this section explains how those leases will transfer with the sale. It also addresses any natural resources associated with the property, like mineral rights.

Section 5: Earnest Money and Option Fees

Earnest money demonstrates that the buyer is serious about the purchase. Typically, this amount is around 1% of the purchase price, while option fees range from $150 to $300. The option fee allows buyers to back out of the contract during a specified period without losing their earnest money.

This section also specifies the duration of the option period, usually between 7 to 10 days, during which the buyer can terminate the contract for any reason. This is a critical time for buyers to conduct inspections and assess the property’s condition.

Section 6: Title Policy and Survey

Buyers want to ensure they receive a clear title, free of any liens or claims. This section discusses title insurance, which protects against future claims, and any encroachments found on the survey of the property boundaries. It also outlines the time frame a buyer can object to any encumberances on the title.

If the property is part of an HOA, this section will provide details on the association and any fees associated with it. It’s crucial for buyers to understand the rules and regulations of the HOA.

Lastly if the property is part of a MUD District it would need to be disclosed in this section as this can impact taxes and other costs of home ownership.

Section 7: Property Condition

In this section the contract outlines how the seller will disclose the condition of the property and what changes are required prior to closing.

Section 8: Brokers and Sales Agents

If your realtor is a family member or part of the buying party in a transaction then this needs to be disclosed.

Section 9 & 10: Closing and Possession

This section outlines the closing date and when the buyer will take possession of the property. Buyers can negotiate for possession upon closing or through a temporary residential lease if the seller needs extra time to move. This could position your offer above others in a bidding situation.

Section 11: Special Provisions

This area allows for any additional terms or modifications to be added to the contract. It’s advisable to consult a real estate attorney for any complex changes or additions.

Section 12: Settlement and Other Expenses

This section includes a provision for sellers to give money at closing to help buyers with closing costs. This will significantly reduce what the buyer needs to bring in cash to transact. The buyer might even be open to a higher sales price if they can reduce their cash to close or reduce their monthly payment by buying points for their mortgage.

Understanding Your Responsibilities

As a buyer or seller, it's essential to understand your obligations under the contract. Buyers should be proactive in obtaining financing, conducting inspections, and ensuring all necessary documents are submitted on time. Sellers must disclose any known issues with the property and prepare for the closing process.

Buyer's Responsibilities

Secure financing and provide proof of funds.

Conduct a thorough inspection during the option period.

Review and understand all disclosures provided by the seller.

Communicate with the escrow agent and title company.

Seller's Responsibilities

Provide accurate disclosures and property condition information.

Ensure the property is ready for inspection.

Coordinate with the title company for a smooth closing process.

Understand any obligations related to the HOA.

Common Contingencies in the Contract

Contingencies are conditions that must be met for the contract to remain valid. Common contingencies include:

• Home inspection contingency: Allows buyers to back out if significant issues are found during the inspection.

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  Financing contingency: Protects buyers if they are unable to secure a loan.
  
  
• Appraisal contingency: Ensures the home appraises for at least the agreed-upon purchase price.

Closing Costs and Final Steps

Closing costs can add up, so it’s crucial for buyers to understand what they will be responsible for at closing. Typical closing costs include:

Loan origination fees

Title insurance

Property taxes

Homeowner’s insurance

Escrow fees

Conclusion

Understanding the TREC One to Four Contract is vital for a successful real estate transaction in Texas. By familiarizing yourself with the key components and your responsibilities as a buyer or seller, you can navigate the home purchasing process with greater confidence. Always consult with a qualified real estate agent or attorney if you have any questions or concerns about the contract or the purchasing process.

Whether you’re buying your first home or selling an investment property, being informed is your best strategy. Don’t hesitate to reach out for help as you embark on this exciting journey! Give us a call or fill out a form on our website