Don’t Be Mr. Johnson… Understanding Real Estate Contracts

by John Andrews

Real estate transactions don’t have a required format even though the perception often is that they do. This perception is due to the extensive use of the standard Texas Association of Realtors (TAR) and Texas Real Estate Commission (TREC) approved contracts for sale and purchase of real estate. These standardized contracts allow all parties involved in residential sales to rely on a set of uniform standards, which define different terms within the contracts. These terms are generally accepted and understood by real estate attorneys and realtors. More complex transactions may require additional terminology, which is usually added by formal amendments to the contracts.

However, there are many other contract formats used in the marketplace. So, both the buyer and seller are well advised to seek competent legal advice to be sure that they understand their respective rights and obligations prior to signing any contractual obligation.

TAR/TREC contracts include provisions that stipulate whether the seller or buyer is to provide and pay for a title insurance commitment and an owner’s title insurance policy. The commitment, together with a copy of all the exceptions to title, must be submitted to the buyer for review. In Texas, the seller typically pays these charges and provides the title work. However, contract terms are always negotiable. In some parts of Texas, custom and practice may call for the buyer to pay these costs.

The contracts also stipulate the number of days prior to closing that the commitment must be provided. More importantly, contracts also establish a precisely defined time period for examining the title and notifying the seller in writing of any deficiencies or objections to title. This review period typically begins on the day the buyer receives the title commitment. The number of days specified in the contract is legally binding, and the buyer is bound by these time limits.

To give you a sense of how serious the time limits on this review can be, consider the tragic tale of Mr. Johnson. Mr. Johnson placed a $50,000 deposit on a $500,000 home purchase. Imagine Mr. Johnson’s surprise when he learned that the seller demanded forfeiture of the $50,000 deposit solely because neither he nor his attorney raised a legitimate objection to title in a timely manner. He missed the deadline, so Mr. Johnson cannot subsequently raise the title objection as a basis for terminating the contract and obtaining a refund of his deposit. Mr. Johnson may not be real, but the financial consequences of missing a contract deadline can result in very real monetary losses.

If the buyer does make a timely objection to title, the seller must cure the defects within the time period stated. Should the seller fail to resolve the issues within the time specified, the buyer may terminate the contract and reclaim his or her deposit or earnest money.

Most buyers don’t have sufficient cash reserves to purchase property outright. They usually need financial assistance in the form of a mortgage loan. Real estate contracts typically include a financing provision. This provision stipulates acceptable financing terms and a time period within which the buyer will apply for a loan commitment from an institutional lender or private party. As with other contract provisions, timing is critical. The buyer has placed an earnest money deposit at risk. He or she must apply for the loan approval within the time period defined under this provision and notify the seller if that loan approval cannot be obtained within the specified time period.

The buyer must use reasonable diligence to obtain the loan approval and must make a good-faith effort to obtain that financing.  Alternatively, if the buyer legitimately does not qualify for the loan under the parameters set forth in the contract, he or she may be entitled to terminate the contract and obtain a refund of the deposit.

Contracts also establish the closing date, at which the parties are to complete the transaction. By establishing a closing date, and other specific dates within the contract, the parties, including any lender, are provided with deadlines for satisfying all preconditions of the contract. These dates provide certain time periods that enable the buyer and seller to hold the other party accountable for failure to comply with the obligations set forth in the contract. Let’s assume, for example, that Mr. Johnson has decided it would be more convenient to close the sale two weeks later than the date specified in the contract, but the seller refuses to extend the closing date. If Mr. Johnson then fails to appear at the closing, his $50,000 deposit may be forfeited to the seller. If the language in the contract permits, the seller may also alternatively bring an action in equity to enforce seller’s rights under the contract (i.e., make the buyer purchase the property under all of its terms and conditions).

A real estate purchase contract is the primary tool used to acquire real property, and defines all relevant terms by which the seller agrees to transfer the property and by which the buyer agrees to be governed. The attorneys at Bailey & Galyen are ready to assist you with the drafting, reviewing or negotiating of your real estate purchase or sale, and to make sure you understand each term within the contract and your responsibilities, deadlines and rights. Don’t be Mr. Johnson.

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