You’ve found a great real estate deal. The seller is happy with your offer and is in full agreement with your terms and timeframe. Now what? Congratulations, you’ve done the hard part – finding the deal! Now you need to secure the property with a contract. Here are our contract basics for new real estate investors operating in Texas.
If you don’t understand the form at all, you might want to engage a real estate agent, broker or attorney to help you get clear. Your confidence with the contract form is a key element to getting a seller to sign on the dotted line.
New investors often worry about contracts. Believe it or not, this is NOT the hard part! Here are our contract basics for new real estate investors on the Texas Real Estate Commission (TREC) one-to-four-family residential contract form. Download it and open it; it’s a template. We’ll explain the blanks you’ll need to fill in below.
If the property is in Travis County, you can look up the property’s legal description (and tax record) at Travis County’s website TravisCAD.org. You’ll find other metro areas in Texas have the same type of search features on their county websites. If you have trouble finding a legal description, your title company can probably help.
Earnest money is money you (the buyer) deposit at a title company to secure the contract. The title company holds this money until closing or contract termination. It can be as little as $1, but we usually offer $100 or $500 so the seller feels confident in our ability to close.
Transactions with a real estate agent will usually require 1% of the sales price in earnest money. Except in the case of default, earnest money is either refunded to the buyer or credited to the sale price.
Title policies (6A) are customarily paid for by the seller, but if you’re working with a motivated seller it’s often easier to make your offer with you, the buyer, paying all or most of the closing costs. It makes the job of telling the seller exactly what they can expect to net much easier. The price on the contract minus what they owe on their mortgage and taxes through the closing date is easier to explain than the details of a typical HUD closing statement.
Survey (6C) is typically a buyer expense, but it’s negotiable. You can also request the seller’s most current survey here and determine if it works for you and/or your lender.
On objections (6D), you would normally write in “residential,” meaning if it’s not zoned/permitted for residential use you’re not obligated to buy the property. If there are other uses you need to verify (commercial, multi-family, etc.) also write those in here.
This section is pretty self-explanatory, but you may or may not want the seller to provide you with a seller’s disclosure form (7B), where they disclose all material knowledge of the property.
Residential service contracts (7H), also known as home warranties, are not typically offered in an investment purchase, but the option is there for you to negotiate.
Section 12A provides a space for the seller to contribute to the buyer’s closing costs. This effectively changes the purchase price, so in most cases it’s more straightforward to adjust the sales price instead of making the seller pay some of it back to you here.
The termination option gives you a window of time to determine if the property is a good investment for you. As a buyer, you want as much time as possible, but it’s in the seller’s best interest for the option period to be as short as possible. A motivated seller might not have much time to spare, so be considerate of their timeline.
If real estate agents are involved, the typical option fee is $100 to $250 and the typical term is 7 to 10 days. You can back out for any reason (or no reason) and get your earnest money returned during this option period. The option fee is typically credited to the purchase price at closing, but this fee is not refundable.
Although most scrupulous investors don’t plan to re-negotiate price during the option period, you might run across issues during your inspection period that indicate you can’t pay as much as you initially offered. During your option period, you may choose to revise your offer (instead of terminating the contract) based on the information that comes to your attention, although the seller may or may not agree to your new price.
Reading the TREC contract carefully (maybe a few times) and reviewing these contract basics for new real estate investors should be enough for you to confidently and fearlessly ink the deal you’ve worked so hard to find.
Note that unless you have a real estate license, you can only prepare contracts to which you are a party. Only a licensed real estate agent, broker or attorney can prepare a real estate contract on someone else’s behalf.