6.3 New Home Contracts, Infill & Short Sale Addenda

6.3 New Home Contracts, Infill & Short Sale Addenda

Exam Focus: On the broker examination, questions on specialized promulgated forms frequently test the operational nuances between completed versus incomplete new home construction contracts, the dispute procedures under the Texas Residential Construction Liability Act (RCLA), the unique "Amended Effective Date" timeline rules in the Short Sale Addendum (TREC 45-2), mineral estate dominance and surface waivers (TREC 44-3), and the strict 90-day limitation on promulgated temporary leases.

1. New Home Contracts: Completed vs. Incomplete Construction

TREC promulgates two distinct contracts for newly constructed residential homes:

1. New Home Contract (Completed Construction) (TREC Form 24-20): Used when the new home is 100% finished and ready for occupancy, and no prior occupancy has occurred. It closely mirrors the 1-4 Family Resale contract in Paragraph 7 (Property Condition) but excludes standard resale seller disclosure notices.
2. New Home Contract (Incomplete Construction) (TREC Form 23-20): Used when construction is underway or the home is being built from the ground up according to architectural plans and specifications.

┌─────────────────────────────────────────────────────────────────────────────┐
│                     NEW HOME CONTRACT COMPARISON                            │
├──────────────────────────────────────┬──────────────────────────────────────┤
│    COMPLETED CONSTRUCTION (24-20)    │   INCOMPLETE CONSTRUCTION (23-20)    │
├──────────────────────────────────────┼──────────────────────────────────────┤
│ • Home is 100% finished              │ • Construction in progress or custom │
│ • Certificate of Occupancy issued    │ • Architectural plans & finish specs │
│ • Standard closing schedule          │ • Substantial completion benchmarks  │
│ • Express builder warranties         │ • Change order & cost overrun rules  │
│ • FTC insulation disclosure included │ • Builder delay / weather extensions │
└──────────────────────────────────────┴──────────────────────────────────────┘

Critical Incomplete Construction Provisions (Form 23-20)

• Plans, Specifications & Allowances: Construction must strictly conform to written architectural plans, finish schedules, and material allowances attached as exhibits to the contract.
• Written Change Orders: Any alteration, upgrade, or deletion of materials or floor plans must be documented in a written change order signed by both buyer and seller before the work begins, stating the exact price adjustment and impact on completion schedules.
• Cost Overruns: Paragraph 7 details who pays when actual material or labor expenses exceed contractual budget allowances.
• Substantial Completion & Certificate of Occupancy: Closing occurs within a specified number of days after substantial completion—defined as when construction is sufficiently complete in accordance with plans so that the home can be occupied for its intended use and a permanent Certificate of Occupancy (CO) has been issued by the local municipality.

Statutory Builder Warranties & The RCLA Framework

• Texas Residential Construction Liability Act (RCLA, Texas Property Code Chapter 27): RCLA governs all construction defect disputes between homeowners and builders in Texas. Before a homeowner can file a lawsuit or arbitration against a builder for defects, the owner must provide written notice by certified mail at least 60 days prior to filing suit, allowing the builder a statutory right to inspect the property and submit a reasonable written settlement/repair offer within 45 days.
• Statutory Warranty Baselines: Under Texas law and standard third-party warranty programs (e.g., RWC, 2-10 Home Buyers Warranty):
  • 1 Year: Workmanship and materials (drywall, paint, trim, siding, hardware).
  • 2 Years: Mechanical, electrical, and plumbing distribution systems.
  • 10 Years: Major structural components (foundation, load-bearing walls, roof trusses).
• FTC Insulation Disclosures (16 CFR Part 460): Federal Trade Commission regulations require new home contracts to disclose the type, thickness, and R-value of insulation installed in the walls, ceilings, and floors.

2. Short Sale Addendum (TREC Form 45-2)

A short sale occurs when the contract sales price and net proceeds from the sale are insufficient to pay off all existing mortgage liens, tax liens, and closing costs in full, and the seller does not have sufficient personal cash assets to make up the financial deficiency.

The Short Sale Addendum (TREC Form 45-2) Mechanics

Under TREC Form 45-2, the contract is made strictly contingent upon the seller obtaining written approval from all existing lienholders (lenders) to accept a discounted payoff and release their liens against the property.

The "Amended Effective Date" Concept

The most heavily tested concept regarding short sales is the distinction between the original Effective Date and the Amended Effective Date:

• Original Effective Date: The date the buyer and seller execute the contract and communicate acceptance. This date governs the execution of the contract and the initial delivery of the Short Sale Addendum.
• Amended Effective Date: Defined in Paragraph D as the date the seller delivers written notice to the buyer that the seller's lienholder(s) have approved the short sale.
• Resetting Contract Clocks: The Amended Effective Date resets all performance timelines in the main contract, including:
  • The Paragraph 5 Option Period (if specified to begin on the Amended Effective Date);
  • The Closing Date;
  • Earnest money deposit delivery (if negotiated to be delivered upon lienholder approval).

Buyer's Unilateral Right to Terminate

Under Paragraph D of Form 45-2, because lender short sale approval can take weeks or months with no guarantee of success, the buyer retains the unrestricted right to terminate the contract at any time prior to receiving the seller's notice of lienholder approval. Upon delivering notice of termination, the buyer is entitled to an immediate full refund of all earnest money deposited.

3. Mineral Rights & The Mineral Reservation Addendum (TREC Form 44-3)

In Texas, land ownership is legally severable into two distinct real property estates: the Surface Estate and the Mineral Estate.

Common Law Dominance of the Mineral Estate

• Under Texas common law, the Mineral Estate is the dominant estate, and the Surface Estate is the servient estate.
• This means the owner of the mineral estate (or their oil and gas lessee) possesses the inherent legal right to use as much of the surface estate as is reasonably necessary to explore, drill, produce, extract, store, and transport oil, gas, and other minerals, without asking permission from or paying damages to the surface owner (unless restricted by statute or private agreement).

Addendum for Reservation of Oil, Gas, and Other Minerals (TREC Form 44-3)

When a seller intends to sell the surface estate but retain all or a fraction of the subsurface mineral rights, the parties must execute TREC Form 44-3.

• Components of the Mineral Estate: The mineral estate includes oil, gas, uranium, coal, lignite, sulfur, and all other liquid or solid hydrocarbons. It explicitly includes executive rights (the power to execute oil and gas leases), bonuses, delay rentals, and production royalties.
• Surface Rights Waiver Clause: Paragraph C of Form 44-3 contains a critical protective provision for residential buyers: the seller can agree to waive all rights of ingress and egress across the surface of the property for mineral exploration. This prevents the mineral owner or future drillers from placing pumpjacks, drilling rigs, or pipelines directly on the buyer's residential yard or improvements, requiring extraction to occur via directional or horizontal drilling from adjacent tracts.

4. Promulgated Temporary Residential Leases (TREC 15-6 & 16-6)

TREC promulgates two temporary residential lease forms to accommodate situations where occupancy occurs before or after closing:

1. Seller's Temporary Residential Lease (TREC Form 15-6): Used when the seller remains in occupancy of the property for a short period after closing.
2. Buyer's Temporary Residential Lease (TREC Form 16-6): Used when the buyer occupies the property prior to closing.

The Strict 90-Day Limitation & TRELA Compliance

• Maximum 90-Day Term: Both temporary leases are promulgated strictly for occupancy of not more than 90 days.
• Prohibition Against Long-Term Leases: A real estate license holder is prohibited under TRELA and TREC Rule § 537.11 from using these promulgated temporary lease forms for permanent or long-term tenancies. If a lease term exceeds 90 days, standard lease agreements prepared by an attorney or Texas REALTORS® non-promulgated lease forms must be utilized.

Critical Terms and Operational Rules

• Landlord-Tenant Relationship: Executing a temporary lease legally establishes a formal landlord-tenant relationship governed by the Texas Property Code Chapter 92.
• Daily Rental Rate: Rent is expressed as a daily rental rate paid in advance at closing.
• Security Deposit: The tenant must pay a separate security deposit held by the landlord to cover any property damage occurring during the temporary lease term.
• Casualty and Renters Insurance: The tenant is legally responsible for maintaining personal property and liability insurance (renters insurance). In a Seller's Temporary Lease, the buyer becomes the homeowner and carries hazard insurance, but the seller (now tenant) must insure personal belongings.
• Prohibition of Alterations: The tenant may not make any alterations, paint, or install fixtures without the landlord's prior written consent.

5. Temporary Lease Compliance Matrix

The following matrix details the distinct operational rules governing temporary leases in Texas transactions: