5.2 One to Four Family Residential Contract (Resale) Analysis

5.2 One to Four Family Residential Contract (Resale) Analysis

Exam Focus: The TREC One to Four Family Residential Contract (Resale) (Form No. 20-19) is the single most tested contract on the Texas Broker Licensing Examination. Broker candidates must know the precise clause mechanics for all 24 paragraphs, with special emphasis on Paragraph 1 (Parties & Homestead), Paragraph 2 (Property & Exclusions), Paragraph 3 (Pricing), Paragraph 4 (Lease Disclosures), Paragraph 5 (Earnest Money & Option Delivery Deadlines), Paragraph 6 (Title Commitment & T-47 Surveys), Paragraph 7 (Seller's Disclosure & 7D As-Is Provisions), Paragraph 11 (Special Provisions Limitations), Paragraph 15 (Default Remedies), and Paragraph 18 (Escrow & Treble Damages).

1. Parties, Property, Sales Price & Leases (Paragraphs 1–4)

Paragraph 1: Parties

• Legal Capacity & Full Legal Names: Identifies the full legal identities of Buyer and Seller (including corporate entity designations such as LLC, LP, or Corporation).
• Texas Homestead & Marital Joinder Rule: Texas is a community property and homestead state. Under the Texas Family Code and Texas Constitution (Art. XVI, § 50), if a property is the homestead of a married couple, both spouses must sign the sales contract and conveyance deed, even if the property is the separate property of only one spouse. A broker must ensure all spouses join in the contract to prevent voidable conveyance issues.

Paragraph 2: Property (Legal Descriptions, Improvements & Exclusions)

• 2A. Land: Complete legal description including Lot, Block, Addition/Subdivision, City, County, and postal address. (Metes and bounds legal descriptions must be verified if lot/block is unavailable).
• 2B. Improvements: Permanently attached fixtures, built-in appliances, wall-to-wall carpeting, plumbing/lighting fixtures, heating/cooling systems, window screens, shutters, and landscaping.
• 2C. Accessories: Non-permanently attached items that convey automatically with the property unless explicitly excluded (e.g., window air conditioning units, stove, fireplace screens, curtains and rods, blinds, garage door openers and remotes, security systems, swimming pool equipment, and mailbox keys).
• 2D. Exclusions: Specific items that would otherwise convey as improvements or accessories but which the Seller retains (e.g., "dining room chandelier," "mounted living room television"). Excluded items must be removed prior to delivery of possession without damaging the property.
• 2E. Reservations: Mineral reservations cannot be written in Paragraph 2; the parties must attach the promulgated Addendum for Reservation of Oil, Gas, and Other Minerals (TREC Form 44-3).

Paragraph 3: Sales Price Structure

• 3A. Cash portion of Sales Price payable at closing: The cash down payment paid by Buyer at closing.
• 3B. Sum of all financing: Total loan principal described in attached financing addenda (Third Party Financing, Loan Assumption, or Seller Financing).
• 3C. Total Sales Price: The exact sum of 3A and 3B ($3A + 3B = 3C$).

┌─────────────────────────────────────────────────────────────────────────────┐
│                     PARAGRAPH 3: SALES PRICE BREAKDOWN                      │
├─────────────────────────────────────┬───────────────────────────────────────┤
│ 3A. Cash Down Payment (at closing)  │ $  80,000                             │
│ 3B. Financing Principal (Addenda)   │ $ 320,000                             │
├─────────────────────────────────────┼───────────────────────────────────────┤
│ 3C. Total Sales Price (3A + 3B)     │ $ 400,000                             │
└─────────────────────────────────────┴───────────────────────────────────────┘

Paragraph 4: Leases & Encumbrances

Paragraph 4 requires mandatory statutory disclosure regarding whether the property is subject to outstanding leases:

1. Residential Leases: If the property is occupied by tenants, the Seller must disclose existing leases and attach the promulgated Addendum Regarding Residential Leases (TREC Form 28-2). Seller must deliver copies of all leases within 7 days after the effective date.
2. Fixture Leases: Discloses leased equipment attached to the property (e.g., solar panel systems, propane tanks, water softeners, security monitoring systems). Seller must attach the promulgated Addendum Regarding Fixture Leases (TREC Form 52-1).
3. Natural Resource Leases: Discloses active oil, gas, mineral, water, or timber leases affecting the property.

2. Earnest Money, Termination Option & Title / Survey (Paragraphs 5–6)

Paragraph 5: Earnest Money & Termination Option Delivery Rules

Paragraph 5 combines the delivery of Earnest Money and Option Fee into a single, unified escrow delivery framework:

• Escrow Agent & Dual Deposit: Buyer must deliver the Earnest Money and the Option Fee to the designated Escrow Agent (Title Company) within 3 calendar days after the Effective Date of the contract.
• The 11:59 PM Rule: Delivery must occur by 11:59 PM on the 3rd calendar day after the effective date.
• Weekend / Holiday Extension: If the 3rd day falls on a Saturday, Sunday, or legal holiday, the delivery deadline is automatically extended to 11:59 PM of the next business day.
• Application of Funds: The Option Fee is credited to the Sales Price at closing. The Earnest Money is credited to the Sales Price at closing.
• Termination Option Window (Time is of the Essence): For nominal consideration (the Option Fee), Seller grants Buyer the unrestricted right to terminate the contract by giving written notice of termination to Seller within the negotiated number of days (e.g., 7 days) after the effective date. Notice of termination under Paragraph 5 must be delivered by 5:00 PM on the final day of the option period at Seller's address specified in Paragraph 21.
• Failure to Deliver Funds (Default Notice): If Buyer fails to deliver the Earnest Money or Option Fee within the required 3 days, Seller may provide written notice of default and terminate the contract at any time before full payment is deposited.

┌─────────────────────────────────────────────────────────────────────────────┐
│                     PARAGRAPH 5: CRITICAL DELIVERY TIMELINE                 │
├──────────────────────────┬──────────────────────────────────────────────────┤
│ Effective Date (Day 0)   │ Final contract executed & date stamped.          │
│ Day 3 (by 11:59 PM)      │ Deliver Earnest Money & Option Fee to Escrow.    │
│ End of Option Period     │ Notice of Termination must be delivered by       │
│ (Negotiated # of Days)   │ exactly 5:00 PM on expiration date.              │
└──────────────────────────┴──────────────────────────────────────────────────┘

Paragraph 6: Title Policy and Survey Procedures

• 6A. Title Policy: Standard Texas Department of Insurance Owner's Policy of Title Insurance issued by the designated title company, paid for by either Seller or Buyer as negotiated.
• 6B. Title Commitment: Title company has 20 days after receipt of the contract to issue the title commitment and true copies of recorded restrictive covenants. If not delivered within 20 days, the delivery window is automatically extended up to 15 days or 3 days prior to closing.
• 6C. Survey Options (The Three Checkbox Pathways):
  • 6C(1) Existing Survey + T-47 Affidavit: Seller must furnish Buyer and Title Company with the existing survey and a notarized Texas Department of Insurance Form T-47 (Residential Real Property Affidavit) within a negotiated number of days. The T-47 certifies whether any structural changes, fences, pools, or easements have been added since the date of the existing survey. If the existing survey or T-47 is rejected by the Title Company or Lender, the negotiated checkbox determines whether Buyer or Seller pays for a new survey.
  • 6C(2) New Survey at Buyer's Expense: Buyer orders and pays for a new survey.
  • 6C(3) New Survey at Seller's Expense: Seller orders and pays for a new survey.
• 6D. Objections: Buyer has a negotiated number of days after receiving the Commitment, exception documents, and survey to object to title defects or encumbrances that prevent the Buyer's intended use. Seller must cure objections within 15 days; if Seller fails to cure, Buyer may terminate and receive earnest money back.
• 6E. Statutory Title Notices:
  • Abstract or Title Policy Notice: Mandatory statutory warning under TRELA § 1101.655 advising Buyer to obtain an abstract of title or an owner's policy of title insurance.
  • MUD District Notice (Texas Water Code § 49.452): Mandatory statutory disclosure if property is in a Municipal Utility District; Buyer may terminate if not provided prior to contract execution.
  • Public Improvement District (PID) Notice (Tex. Local Gov't Code § 372.013): Mandatory written notice disclosing annual assessment obligations.
  • Tide Waters / Coastal Hazards Notice: Mandatory disclosures for coastal properties under the Texas Natural Resources Code (Open Beaches Act).

3. Property Condition, Repairs, Closing & Special Provisions (Paragraphs 7–11)

Paragraph 7: Property Condition & Disclosures

• 7A. Access, Inspections, and Utilities: Seller must permit Buyer and TREC-licensed inspectors access to the property at reasonable times. Seller must keep all utilities on throughout the contract period at Seller's expense.
• 7B. Seller's Disclosure Notice (Texas Property Code § 5.008):
  • 7B(1): Buyer has received the written notice prior to signing.
  • 7B(2): Buyer has not received the notice. Seller must deliver the notice within a negotiated number of days. If Seller fails to deliver the notice within the specified timeframe, Buyer may terminate the contract for any reason prior to closing, or within 7 calendar days after receiving the late notice, and receive a full refund of earnest money.
  • 7B(3): Seller is statutorily exempt from providing the notice under Texas Property Code § 5.008(e) (e.g., foreclosure sales, bankruptcy trustee conveyances, estate executor/administrator transfers, transfers between co-owners or divorcing spouses, or new construction single-family residences).
• 7C. Lead-Based Paint Disclosure: Mandatory federal disclosure for residential properties constructed prior to 1978; parties must attach promulgated TREC Form OP-L granting a 10-day inspection opportunity.
• 7D. Acceptance of Property Condition ("As-Is"):
  • 7D(1): Buyer accepts the property in its present condition ("As-Is").
  • 7D(2): Buyer accepts the property "As-Is" provided Seller completes specific, identified repairs at Seller's expense (e.g., "Seller shall repair roof flashing around chimney by a licensed roofing contractor prior to closing").
  • Critical Exam Rule: Agreeing to accept the property "As-Is" under 7D(1) does not preclude or waive the Buyer's right to inspect under 7A or terminate under the Paragraph 5 Option Period!
• 7E. Lender Required Repairs: Neither party is obligated to pay for lender-mandated repairs unless agreed in writing. If lender-required repairs exceed 5% of the Sales Price, Buyer may terminate the contract and receive a full refund of earnest money.
• 7F. Completion of Repairs: All repairs must be performed by persons who are licensed or commercially qualified, with transferable warranties and paid receipts delivered to Buyer prior to closing.

Paragraphs 9 & 10: Closing Date & Possession

• Paragraph 9 (Closing Date): Date mutually agreed for execution of deeds, payment of funds, and legal closing (can be extended under 6B title cure periods).
• Paragraph 10 (Possession): Possession is delivered upon closing and funding unless otherwise agreed by attaching promulgated temporary lease forms:
  • Buyer's Temporary Residential Lease (TREC Form 15-6): Used when Buyer occupies property prior to closing (maximum occupancy: 90 days).
  • Seller's Temporary Residential Lease (TREC Form 16-6): Used when Seller remains in property after closing (maximum occupancy: 90 days).
  • Exam Trap: Occupancy for more than 90 days creates a standard tenancy requiring an attorney-drafted residential lease agreement; promulgated temporary leases cannot exceed 90 days.

Paragraph 11: Special Provisions (Strict Legal Guardrails)

• Permissible Content: Strictly limited to factual statements and business details requested by the parties for which no promulgated addendum exists.
• Prohibited Content: Licensees cannot draft legal rights, contingency clauses, default remedies, or lease-purchase options into Paragraph 11. Inserting non-promulgated legal provisions violates TRELA § 1101.654 (Unauthorized Practice of Law).

4. Default, Escrow & Statutory Treble Damages (Paragraphs 15, 18, 23)

Paragraph 15: Default Remedies

When either party fails to comply with the terms of the contract, the non-defaulting party has distinct statutory remedies:

┌─────────────────────────────────────────────────────────────────────────────┐
│                     PARAGRAPH 15: DEFAULT REMEDY OPTIONS                    │
├───────────────────────────────────┬─────────────────────────────────────────┤
│       NON-DEFAULTING BUYER        │          NON-DEFAULTING SELLER          │
├───────────────────────────────────┼─────────────────────────────────────────┤
│ 1. Enforce Specific Performance   │ 1. Enforce Specific Performance         │
│    (compel Seller to convey deed) │    (compel Buyer to purchase)           │
│ 2. Terminate Contract & Receive   │ 2. Terminate Contract & Receive         │
│    Full Refund of Earnest Money   │    Earnest Money as Liquidated Damages  │
│ 3. Seek Other Relief Provided     │ 3. Seek Other Relief Provided           │
│    by Law (Monetary Damages)      │    by Law (Monetary Damages)            │
└───────────────────────────────────┴─────────────────────────────────────────┘

• Specific Performance: A court order compelling the defaulting party to perform their contractual obligation (i.e., compelling the seller to sign and deliver the deed or the buyer to pay the purchase price).
• Liquidated Damages: If the seller terminates upon buyer default, receipt of the earnest money serves as liquidated damages, releasing both parties from further contractual obligations.

Paragraph 18: Escrow Administration & Treble Damages Penalty

• 18A. Escrow Agent Status: The Escrow Agent is not a party to the contract and holds funds in trust without liability for interest or non-negligent bank failure.
• 18C. Demand for Earnest Money: If the contract terminates, either party may submit a written demand for the earnest money to the escrow agent. The escrow agent promptly forwards a copy of the demand to the other party. If the escrow agent does not receive a written objection from the other party within 15 calendar days, the escrow agent is authorized to disburse the earnest money to the demanding party.
• 18D. Damages for Wrongful Refusal to Release (Statutory Treble Damages): If a party fails or refuses to sign a release of earnest money within 7 calendar days after receiving a written request from the other party when no legal dispute exists, that party is liable to the other party for:
  1. The earnest money;
  2. Three times (treble) the amount of earnest money as statutory damages;
  3. Reasonable attorney's fees; and
  4. All court costs.

Paragraph 23: Consult an Attorney Warning

• License holders are statutorily prohibited from giving legal advice.
• Paragraph 23 explicitly warns both parties: "READ IT CAREFULLY. If you do not understand the effect of this contract, consult an attorney BEFORE signing."
• Contains blank contact fields for Buyer's and Seller's legal counsel.

5. Summary Table: Critical Promulgated Contract Deadlines