The One to Four Family Residential Contract (Resale) and Buying a Home
When buying a home in Texas, most buyers will use the One to Four Family Residential Contract (Resale) to write their offer and negotiate their purchase. This form is used for resale homes (not new construction) and is the majority of what we see in contracts, so we’re going to dig deep and cover this contract so that you may better understand what all goes into the purchase of your home. Much like our other posts on contracts, we’ll be splitting this one up over several posts, so come back later to read the rest.
Paragraph 1. Parties As always, we’re going to need to define who the buyer is and who the seller is. This paragraph also sets forth that the seller is agreeing to sell the property to the buyer and that the buyer is agreeing to buy the property from the seller.
Paragraph 2. Property This paragraph defines the property to be purchased in several ways. Section A gives the legal description of the property. Section B gives the list of improvements that are considered part of the property. These are basically permanently installed items and include window screens, carpeting, mirrors, ceiling fans, water softeners, and landscaping (please see the contract for a complete list). It is interesting to note that this list includes “mounts and brackets for televisions and speakers” – often sellers think they can take these off the wall and move them to their new place, but as they are considered part of the improvements of the property, they cannot be taken from the property. Section C is for accessories to the property. A list similar to Section B with the main difference being that these items are not necessarily permanently installed. A few items from this list? Window AC units, curtains, blinds, keys, and garage door openers. While these items are not permanently attached, they are considered as part of the property as they are an essential part of the home. Section D is for any exclusions – if a seller doesn’t want to transfer ownership of anything in the home, this is the place to do it. A seller needs only put in the items that would normally transfer to the buyer in a sale. A good example is if they have an antique chandelier that they want to take with them. Since the chandelier is considered permanently attached, it is an improvement and therefore would be the buyers property at the conclusion of the sale. A refrigerator however, is not considered an improvement (as it is not permanently affixed to the home), so there is no need to exclude it from the sale. Buyers often ask, “does that come with the house?,” and you can always check with your agent for clarification.
Paragraph 3. Sales Price Here we lay out the sales price of the home; Section A is the cash portion of the sales price the buyer is paying, Section B is the sum of any financing the buyer will be using to buy the home, and Section C is the actual sales price (sum of Sections A and B).
Paragraph 4. Financing If buying a home with all cash, this section would not apply as this covers financing only. This portion of the contract covers some of the basics of financing and is typically backed up with a Third Party Financing Addendum for Credit Approval.
- Section A. Third Party Financing: If you’re applying for a loan, you’ll be using this paragraph. Here you’ll define the amount of the loan you’re seeking and whether or not you must be approved for financing in order to buy the property (sometimes people will apply for a loan, but could possibly still buy the property with cash if needed). It is also important to note that this section lays out rules for “property approval” and what happens when the property does not satisfy the lender’s requirements; in such a case, the buyer may terminate the contract and they will receive their earnest money back.
- Section B. Assumption: We don’t see this box checked much these days. Assumption allows a buyer to assume the seller’s current loan – taking oven payments for them. However, most loans now come with an acceleration clause. This clause allows to lender to make the entire balance due and payable in full if the seller tries to transfer the loan balance to another person. That person would then have to qualify for the loan just like anyone else. Assumptions were used a lot in the 80s when interest rates where skyrocketing…they allowed a buyer to get into a home and assume the lower interest rate loan that the seller had bought the home with.
- Section C. Seller Financing: If the seller is willing, they can finance the loan for the home. It’s a complicated process, but seller financing can help both seller and buyer achieve their goals.
Paragraph 5. Earnest Money Simply put, earnest money is a deposit given in good faith to show your interest in the property. This paragraph sets how much earnest money will be given and who will act as escrow agent for that money. It also outlines any additional earnest money to be given at a later date.
Paragraph 6. Title Policy and Survey This is a pretty hefty section of the contract covering nearly two pages (out of nine). The title policy is insurance against any claims on the land or home by anyone else after the sale. For example, if a husband and wife owned the property jointly and one of them sold the property to someone without the other spouse’s knowledge, a title policy would protect the buyer against the claim when that person found out and claimed their interest in the property.
- Section A covers who will pay for the title policy and who will issue the title policy (which title company). It goes on to list several exceptions to what the title policy will cover.
- Section B covers title commitment – when a title company agrees to issue a title policy, they issue a title commitment…agreeing to issue the policy, which often comes after the sale of the home. This section gives the title company twenty days from the execution of the contract to get these documents to the buyer (and includes an automatic extension of this time for an additional fifteen days or three days prior to closing, whichever is earlier). If the seller (via the title company) fails to furnish these documents, the buyer may terminate the contract and receive their earnest money back.
- Section C is all about the survey. There are three choices in this section. C.(1) is for when there is an existing survey. If there is one and both parties check this off, then within the specified amount of days, the seller must provide the survey (along with a T-47 Affidavit) to the buyer. There are also checkboxes for whether the seller or buyer will pay for a new survey if the title company or buyer’s lender deem the survey not acceptable. It is important to note, that regardless of which box is checked (buyer pays or seller pays), if the seller does not provide the survey to the buyer in the agreed upon time in this section, the buyer may order a brand new survey at the seller’s expense. C.(2) and C.(3) are used when there is no survey and you are opting to order a new survey at the buyer’s – C.(2) – or the seller’s – C.(3) – expense.
- Section D allows the buyer to object to items that would affect the title policy. The buyer can name any objections and this section gives a time frame for the buyer to make objections after receiving the title commitment, exception documents, and the survey. The section gives the seller a timeframe in which they must clear these objections or the contract is terminated.
- Section E covers various title notices. Basically, this section clears up and defines several items related to the title policy. It is recommended that you read this section carefully and if you have questions, consult with your agent and/or a real estate attorney.
Tomorrow, we will pick up where we left off, beginning with Paragraph 7. Property Condition, so stop back then to read “Residential Contract: A Closer Look at Buying a Home Part II” and learn more about the contract most often used when buying a home.