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Transaction Guide

contract200We have included this section to help answer many of the commonly asked questions, and to help demystify the transaction process. Whether or not a buyer or seller has an agent to provide guidance through the transaction, it is still helpful to understand the process. We have broken it down into 2 sections:

    1) The steps and parties involved from when an offer is made through to the closing
    2) A brief guide to the most commonly used forms, including standard terms of most contracts

The steps and parties involved from offer to closing

Once an offer is negotiated and accepted, the executed contract and the earnest money are taken to the title company and the title company writes a receipt. (See below for the brief guide to contract terms.)

Title Co.
The title company's job is to act as escrow agent and receive all the documentation from all parties, provide title searches and title insurance, disburse funds according to instructions, get the deed recorded, and various other details to facilitate the closing of the transaction.

The title company immediately orders the title work, which shows what all the liens are against the property. Depending on how busy they are, it can take anywhere from 2 to 14 days, but a week is about average. The buyer is given a copy of the title report to give the opportunity to object to anything. Usually there are no surprises here, but the buyer can get out of the contract if there's a problem and the seller can't fix it.

If the seller has not already done so, he must provide the buyer with a "Seller's Disclosure Notice", which discloses whatever the seller is aware of concerning the property. If the home was built prior to 1978, a "Lead Paint Disclosure" must also be provided. If there is a mandatory membership in a homeowner's association, seller must provide an Addendum for Property Subject to Mandatory Membership in an Owner's Association. The buyer signs the notices evidencing receipt, and returns a copy to the seller.

Some other items the seller needs to give the title company are the loan payoff information (a mortgage payment invoice will do), an existing survey if there is one, and the Homeowner Association information if there is one. There's a pile of HOA papers that buyers get when they buy a house, which they never read and promptly file away and forget about. As the seller, it helps if you find these papers and give them to the title company. It also helps if you provide the title company with the HOA management phone number. Timeline: The first week after the title company received the contract. (Efficient title companies will pester you and your listing agent until they get these things.)

Resale Certificate (if mandatory HOA only)
If the property has a mandatory homeowners association, a Resale Certificate must be issued by the HOA before the property can be transferred. The title company normally orders the Resale Certificate. In recent years, it has become popular for title companies to ask for the seller to order it, because more and more HOAs are requiring payment in advance before providing anything, and the title companies don't want to pay for it and not get reimbursed if the deal doesn't close. If you have a Mandatory HOA, provide the title company the HOA contact information. Timeline: After option period to avoid getting stuck paying for it when the deal doesn't close. Contact HOA to find out how long it will take to make sure you have enough time before closing.

Buyer orders home inspection
The buyer should not waste any time ordering a home inspection. A home inspection typically costs about $350 for an average size home, plus $75 if it includes a termite inspection. To see what a home inspection report looks like, click Sample Home Inspection. (Note that home inspections are often just about 10 sheets of paper with various boxes checked, and not always in the professional format in the sample.) The Home inspection will tell the buyer just about anything wrong with the property that is not readily apparent. Timeline: ASAP after contract, and preferably completed 3-4 days before the end of the option period to allow time to negotiate any needed repairs.

Repairs
Once the inspection report has been reviewed by the buyer, it's often back to the negotiation table to figure out which repairs the seller is willing to do, and what the buyer is willing to accept. Generally, the buyer can cancel the contract at this stage, and it's normally during the option period anyway.

Loan Application and Appraisal
The buyer applies for the loan if he/she has not already been approved, and the mortgage company will order the appraisal. The buyer has to pay for the appraisal, so the smart buyer has the mortgage company wait until after the home inspection to order the appraisal. This is to make sure the buyer doesn't waste money on an appraisal for a house he/she may not want to buy after getting the inspection report. Timeline: An appraisal should be ordered right after the option period, and in no event later than 10 days before closing. The appraisal report should be in the lender's hands at least a week before closing. Delayed appraisals lead to delayed closings!

Survey
Title company will require a survey before insuring title. A survey from when the seller first bought the home is usually acceptable. Adding on to the home, adding a pool, or adding a fence are examples of situations when the title company would require a new survey.

When the seller's existing survey is used, the seller must sign and have notarized a T-47, also known as a Residential Real Property Affidavit. This form can be signed at closing, but it would be wise to discuss it with the title company at least a week in advance, just in case the T-47 will not suffice and a new survey needs to be ordered.

The buyer normally pays for a new survey if required, which costs an average of $350. The title company will order the survey. Timeline: At least a week before closing. Although a survey can be done a few days after being ordered, it's best to get it ordered as soon as you know it's needed to avoid possible delays.

Insurance
Buyer must contact an insurance company and order a homeowner's insurance policy. The information is given to the title company and the mortgage company. Timeline: Insurance can be obtained in a few days, but it's best for the buyer to get this lined up a week or two before closing in case there are any problems.

Home Warranty
Almost all contracts call for the buyer to receive a home warranty, which covers repair costs for heating and air conditioning units, major appliances, etc., usually for a period of a year after the closing. Typical cost is $350, and the title company can suggest some companies. The buyer selects the home warranty company, and the seller pays for it up to the amount specified in the contract. Timeline: Not critical. Buyer should let the title company know who he wants to use at least a day before closing, preferably sooner.

Final Walk-Through
Usually the day before the closing the buyer may want to do a "walk-through" to make sure everything is where it's supposed to be, and that there are no problems with the property. This is advisable, but not everybody does it.

Settlement Statement
The title company is required to supply you with a Settlement Statement (also known as the "HUD 1" or simply "the HUD") at least 24 hours before the closing. (Lenders are often late in getting the loan documents to the title company, so the title company can't supply the HUD on time.) It has all the numbers of who pays and gets what. Be sure to review the statement as soon as you get it, and call the title company if something doesn't look right or if there is anything you don't understand. (Call us if the title company enters a commission for us when we aren't supposed to get one, and we will get it corrected. This is their most common mistake.)

The Closing
On the closing day, the buyer and seller go to the title company. The Buyer brings a cashier's check (if there is money due) made out to the title company, and the seller brings the keys. Each signs a pile of papers, the buyers are given the keys, and the seller gets a check. The seller gets his money when the buyer's loan funds, which is later in the day or the next business day. We suggest the seller give the title company wiring instructions to wire the proceeds, otherwise the seller will need to go back to the title company to pick up a check or have it mailed.

Contrary to what some agents will tell you, there is absolutely no need for an agent to go to the closing. If the Settlement Statement numbers have been reviewed and are correct, the closing is routine. (Many 6% agents go to closings to appear like they are doing something important to earn their big commissions.)

A brief description of the most commonly used forms

The Offer & Counteroffer
When writing an offer or responding to an offer, real estate agents, and most buyers and sellers use the standard "One to Four Family Residential Contract" form promulgated by the Texas Real Estate Commission (TREC). (TREC makes it a point to inform people that they only authorize the use of their forms for licensed real estate professionals, so if a nonprofessional uses them, it's at their own risk.) This same form is used for offers, counter-offers, and contracts.

When making a counter-offer, it is customary to simply make changes to the offer presented, initial those changes, and fax it back. The proper way to make a change is to draw a single line through whatever you are changing such that what was crossed out is still visible, write in the new term or condition, and initial it. After the other side approves the changes by adding their initials, you have a valid contract. Once both parties have initialed all the changes and signed the contract on page 7, it is considered an "executed"" contract.

Standard Contract Terms
Here's a quick guide to what is typical in a contract in the state of Texas. This does not constitute legal advice, and we must advise you to seek the help of a lawyer or real estate professional. If any of the following is confusing to you, don't try to do it yourself. If you are frugal and don't want to spend money for an attorney, we can tell you that title companies routinely help clients fill out contracts in order to attract business, and don't charge for the service. But they won't give you legal advice.

First, Click Here and a PDF blank version of the standard Texas contract will open. (It may be easier to follow along if you print it a copy.)

We will begin at the top of page one, and go through each clause by number. We will skip clauses that are self-explanatory or don't have blanks to fill in. We urge you to read the entire contract thoroughly, and ask a professional for advice if there is anything you don't understand. The numbers on the left refer to paragraph numbers in the contract.

1. Make sure the seller is really the owner if you're the buyer, or that the buyer is really the one who will be obtaining the loan and will be on title if you are the seller.

2. Don't worry about the legal description; the street address is good enough. The title company will enter the legal description on the official copy you will sign at the closing.

3. Note that "A" is the down payment; and "C" is the sales price. Many people get this reversed the first time.

4. Most of the time the buyer wants the contract to be contingent upon obtaining a loan. In that case, check "A" and fill in the amount of the loan, and check "(1)". You will also need to complete a "Third Party Financing Condition Addendum", which is reviewed below.

5. The earnest money amount is typically approximately 1% of the sales amount. For example, $2000 is typical for a $215,000 home. Enter the name and address of the title company you will be using. You may want to look into title companies when you first put your house on the market so you don't have to figure it out when you are writing a contract. If you don't have any particular preference, it's ok to go with the title company the buyer's agent recommends. They may try harder if they know the agent and want to continue getting his/her business.

6. A. Who pays for the title policy is totally negotiable, but 99% of the time the seller pays.

6. C. Most of the time, the seller has a copy of an old survey lying around somewhere. If not, the buyer typically pays for a new survey, but this is totally negotiable. The title company decides if an existing survey is acceptable. Any time you are using an existing survey, the title company will ask the seller to sign and notarize a "Residential Real Property Affidavit". In this affidavit the seller is representing that there have been no changes made while he owned the property that would cause a need for a new survey. The most common items that would cause a new survey to be required are a new fence, addition of a pool, or a room addition.

6. D. As a buyer, you would want to state anything you may want to use the property for that may not be allowed. For example, if you plan to breed dogs, state "Dog breeding with a maximum of 8 dogs allowed."  (ii) 3-5 days is normal.

6. E. (2) Check the box regarding owner's association membership (homeowners association). Note that if membership in a homeowner's association is mandatory, you should also complete an Addendum for Property Subject to Manditory Membership in an Owner's Association.

7. B. If the Seller's Disclosure Notice is provided at the time of signing the contract, check "(1)". Otherwise check "(2)". 2-3 days is a normal period of time to produce the the Notice (see notes regarding this form below) Note: We attach the Seller's Disclosure to the listing in MLS any time a seller provides us with one. If there is a buyer's agent involved, he/she should have gotten it from there even before they wrote the offer.

7. D. (1) Check this box if there is nothing that the buyer expects to get repaired. It does NOT mean the buyer is accepting the property "As Is". The buyer can still back out during the option period. For example, if some needed repairs are discovered during the inspection, and the seller refuses to do the repairs, the buyer can use his right to cancel under the option period.

7. D. (2) Enter the repairs the seller has agreed to make as part of the contract. An occasional annoyance is the buyer who waits until after the inspection to ask for modifications/repairs they already knew they wanted when they made the offer. This is most common with inexperienced agents. If the buyer wants an allowance for new carpet, or wants the back door with the doggie flap replaced, it should be entered here at the time of the offer.

7. H. A Residential Service Contract (generally referred to as a Home Warranty) is like an insurance policy that covers the buyer in case something goes wrong with a built-in appliance or Heating/AC system. Policies are generally for 1 year and extra coverage can be added to include things like pool equipment, washers and dryers. It is customary for the seller to pay for a home warranty plan for the buyer, but this is totally negotiable. Cost for a basic policy is about $350, so that's a typical amount buyers ask for in offers. Your title company can suggest several companies. As the buyer, you may want to make your selection at least a few days before closing so you have time to compare.

9. A. Enter your anticipated closing date.

10. Check the box indicating when possession will take place.

11. If there are any other special provisions not covered elsewhere in the contract, enter them here.

12. A. (1) (b). Here's where you put what the seller will contribute to the buyer's closing costs and expenses. It is common for buyers to ask the seller to pay for some of the buyers' closing costs. A $3000 seller contribution to buyer's expenses or a price reduction of $3000 have the same effect, so it should make no difference to the seller. When negotiating a contract, it is wiser for the seller to counter-offer with a higher purchase price and leave the contribution to buyer's expenses as is, even if it means the purchase price needs to be increased beyond what the listing price is.

Warning: There are closing fees charged to the seller for FHA and VA loans that the buyer is not allowed to pay. These can range from $700 to $1000. If this space is blank, and the seller has consented to an FHA or VA loan by signing the Third Party Financing Addendum, the seller could get stuck with unanticipated closing costs. If this blank is filled in with an amount over $1000, those fees would be included in that amount, so there wouldn't be any surprises.

16. Most people would rather have a dispute mediated than go to court, so they check "will".

21. Enter the buyer and seller contact information.

22. Check off all the addendums and disclosures that the buyer is getting at the time the contract is executed. Not giving the buyer the "Seller's Disclosure Notice" or "Addendum for Property Subject to Mandatory Membership in an Owner's Association" at the time of signing the contract is like giving the buyer 7 days to get out of the contract from the date the buyer finally receives it. Having those items checked off and part of the contract does not give the buyer that 7 day latitude. Smart sellers have these forms filled out and copies made before the first prospective buyer comes to look at the house.

23. It is customary for the buyer to have a period of time to back out of the contract for any reason, for which the buyer pays an option fee. $100 for an option period of 7-10 days is typical for an average price home. Legally, the buyer has 48 hours to get the option fee to the seller, or risk losing the option to cancel. It's amazing how sloppy many buyer's agents are about making sure the seller gets the option fee and signs the receipt. Many will simply drop the option check in the mail to the listing agent and forget about it. As a buyer, you want to make sure you get the signed receipt from the seller within 48 hours as proof that the seller received the option fee timely.

24. Enter attorney information if either party is using one.

The "EXECUTED" date (right above the signatures) is the date that all the terms of the contract are agreed upon, all changes are initialed, both parties have signed, and both parties have received a fully executed copy. Once all this is done, enter the date. Some people get confused by the words "BROKER TO FILL IN THE DATE OF FINAL ACCEPTANCE", and don't fill it in. Disregard this and fill in the date! If the date is left blank, technically a buyer's option period never expires, and all the deadlines in the contract are meaningless.

Before everything is agreed upon, signed, and delivered, you are still in the "offer" stage, and the EXECUTED date is left blank.

The last page, page 8, is where the broker and agent information is entered. Buyer's Broker information is always on the left; Listing Broker information is always on the right. If we listed your property on MLS, Creekview Realty's information MUST be entered on the right side, even if we are not receiving any commission. NO EXCEPTIONS! (This requirement is spelled out on page 2 of our listing agreement.) All our information is at the top of you listing agreement and also on the Contact Us page of this website.

Page 8 also serves as the receipt page for the option money received by the seller, and earnest money received by the title company.

Third Party Financing Condition Addendum
Click for Sample The purpose of a Third Party Financing Condition Addendum is: To give the buyer the option to cancel the contract if the buyer cannot obtain financing under the terms and conditions stated, within the number of days stated in the first paragraph. This form is only required if the buyer is obtaining FHA or VA financing; otherwise it is optional. .

Check the appropriate boxes according the type of financing the buyer will be applying for. Note that the greater the loan amount and the lower the interest rate that is entered, the more likely it will be that the buyer will not get the loan, and be able to use this as a way to get out of the contract.

One thing that has always been mind-boggling to us is that almost half of all agents we deal with don't really understand the purpose of this addendum. When we ask why it's needed if their buyer is so eminently qualified, we get answers such as: "It's part of the contract"; "Our office requires it"; "I was taught to always have it"; "I've always included it for 20 years"; etc. We sometimes even see this addendum attached to an all cash offer!

It's common to see the number of days on this addendum surpass the closing date. Does the buyer need to be able to cancel the contract after the closing date? It's also common for an offer to have more days for an option period than days to cancel according to the Financing Addendum. During the option period the buyer can cancel for ANY reason, so what's the logic of needing the ability to cancel before the end of the option period for an additional reason? When we negotiate offers, it's next to impossible to get the buyer's agent to eliminate this addendum, but it's extremely easy to get the same agent to enter the same number of days in paragraph one of the addendum as the number of days for the option period. That makes the addendum moot, so why have it at all? Asking these kinds of questions is a great way for you to test the incompetence of an agent.

Seller's Disclosure Notice
The seller needs to fill out this form and give it to the buyer in the time specified in the contract. If you are the seller, it's wise to have it completed in advance, and give it to the buyer at the time you are signing the contract. If you give this Seller's Disclosure Notice to the buyer any time after signing the contract, the buyer has 7 days to get out of the contract for any reason from the date of receiving the Notice. If you're the buyer, and you're are dealing direct with a seller who doesn't know this, you can use it to your advantage - you technically have a 7 day option period that you don't have to pay for.

Addendum for Property Subject to Mandatory Membership in an Owner's Association
Click for Sample It's wise to have this completed in advance, and give it to the buyer at the time you are signing the contract. If you give this addendum to the buyer any time after the signing of the contract, the buyer has 7 days to get out of the contract for any reason from the date of receiving the addendum.

Request for Information from an Owners' Association (if mandatory HOA only)
The Request for Information from an Owners' Association is the form that needs to be submitted to the HOA to notify the HOA of the intended sale and to request the subdivision information which needs to be provided to the buyer. The title company typically requests the information along with the Resale Certificate, so discuss this with the title company.

Lead Paint and other forms
If the home was built prior to 1978, the Seller's Disclosure Notice needs the additional "Lead Paint Disclosure"

Other Forms
Any other forms you may need, such as a Buyer's or Seller's Temporary Lease, amendment and addendum forms, cancellation forms, etc., are all available on our "Forms" page. We suggest you familiarize yourself with all of the forms you may be using, and ask a professional for advice if anything is not clear to you. Note: Once upon a time the Texas Association of Realtors® complained about us providing their forms on our website for the public, so we had to remove a few forms. If there is a form you need that you don't see on our forms page, call us and we'll get it to you.

Loan Pre-Approval Letter
As a seller, you want to be very wary of entering into a contract with a buyer who has not gotten pre-approval for a loan. When you enter into a contract, you are effectively taking your house off the market. If you find out a month later that your buyer can't get a loan, you've wasted a month and missed other potential buyers. It's not wise to enter into a contract without obtaining a strong pre-approval letter from a reputable lender.

WARNING: There are unscrupulous lenders who routinely give pre-approval or pre-qualification letters to borrowers who they know will never get the loan. Why? Because they charge the borrower all kinds of nonrefundable fees, often thousands of dollars. They play the game, tell the unsuspecting borrower they'll get them the loan, string everybody along, and charge their outrageous fees. The day before the closing, the crooked loan officer tells the borrower how sorry he is that the underwriter didn't approve the loan, and how he (the crooked loan officer) did everything he could to fight to get an approval.

This happens most often with homes in the lower price ranges with first-time home buyers (under $130,000) and is rampant in lower income areas and homes under $80,000. Low income borrowers, unsophisticated buyers, minorities, and people who have difficulty obtaining financing are the most common targets. The likelihood of it happening reduces as the price of the home and the income and education level of the buyer increases.

As the seller, you want to get a Pre-Approval letter from a mortgage company name you recognize. If your home is in the lower price ranges and the buyer has a loan officer working for a rinky-dink mortgage company, you may want to ask some more questions. If you find out the buyer is also paying high nonrefundable fees to the mortgage company, you and the buyer may be in trouble.

Loan Pre-qualification vs. Pre-Approval
Generally, a Pre-qualification Letter means the mortgage company has talked to a borrower on the phone, and based on what the borrower said, he/she should be able to get a loan. They may or may not have run the borrower's credit to make this determination. Basically, a pre-qualification letter means little or nothing.

A Pre-Approval Letter carries more weight, and generally means the mortgage company has taken a complete application, considered the credit report, and received complete documentation from the borrower such as W-2, paycheck stubs, bank statements, and/or tax returns. The borrower has been approved, and the only conditions remaining are approval of the property, and that the mortgage company can refuse the loan if the borrower's situation substantially changes before the closing date, such as if the borrower loses his/her job.

This terminology will vary depending on the lender, but the most important issue is that a complete application with credit report and all of the buyer's documentation has been done and was approved.

If you are the buyer, you are wise to get a loan pre-approval letter before you start looking at houses. That letter can easily make the difference between an acceptance or rejection of your offer. Include a copy of the letter with any offer you make.


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