Texas Real Estate Contracts: The Basics
We tackle a few common questions about Texas real estate contracts for investors here.
Effective date vs. receipted date
A contract effective date is the day the contract is agreed to and signed by all parties. Everyone must also initial any changes from the original offer. The effective date is the day all signatures and initials were completed, not the offer date.
The receipted date is the date the title company receives the earnest money and contract. Timelines in the contract are typically associated with the effective date, not the receipted date. In a typical Texas real estate contract (established by the Texas Real Estate Commission), the option period begins on the effective date, not the receipted date.
In TREC’s Texas real estate contract, deadlines are associated with days, not business days but actual days. A 5-day option period begins on the effective date and ends at the end of the 5th day following it. For example, if your effective date is Monday July 1st, then the end of a 5-day option period would be Saturday July 6th.
Technically it may be midnight on the 5th day, but it is courteous and common to consider it 5 pm on that 5th day, even if it’s not explicit. No one responds well to receiving a revised offer or termination by email at 11 pm on the last day of the option period.
It’s good practice to decide as quickly as possible and give the seller a commitment to close well before the end of the option period. It’s best not to ask for more time on the option unless there is a specific issue you are planning to tackle with the extra time.
Special provision language for investors
Many investors include a special provision (Section 11 on the TREC 1-to-4 family contract form) on their Texas real estate contracts disclosing their investor status and intent to profit from the purchase. This may help keep remorseful sellers from coming back to you.
You can tailor it to your comfort level, but the provision goes something like this:
Seller is aware that Buyer is a real estate investor purchasing this property with the intent to profit from rental or resale. Buyer may or may not make improvements before offering the house for rent or resale. Seller is aware that Buyer is purchasing the property for less than current market value.
It might sound crazy to include this kind of disclosure in a normal Texas real estate contract, but if you’re dealing with a truly motivated seller that you have prepared well, they will already be aware of all these things and more than willing to sign. Remember that time and certainty is often more important than money for motivated sellers.
Buyer’s financing contingency addendum
You may choose to use a third-party financing addendum for an additional “out” when you get an investment property under contract. A financing contingency states that if you’re not able to obtain financing under the terms described, you’re not obligated to buy the property.
Be aware that a smart motivated seller may turn down an offer with a third party financing addendum for credit approval because it’s a much weaker commitment than a cash offer without one.
Termination of contract
You have a property under contract, but during your option period you’ve determined it’s not a fit for your investment goals. You’ve tried to renegotiate with the seller for a better price, but they’re not having it. You need to send them a notice of buyer’s termination of contract and release of earnest money before the end of the option period.
The buyer’s termination of contract form is pretty simple. If you’re terminating during the option period you’ll fill out the seller’s name, the property address, and check #1, referencing your unrestricted right to terminate the contract during the option period. Sign and send to your title company. The title company may require a separate release of earnest money, which they can provide you.
Remember the option period in TREC Texas real estate contracts allows you, the buyer, to terminate the contract for any reason or no reason at all. If the seller trusts you, they will often agree to a reduced contract price, especially if you have specific justifications for the reduced price (like a major repair need).
Even if you do terminate the contract, don’t be surprised if the seller comes back to you and says they want to move forward at the revised price after a few days, weeks or months.
Texas real estate contracts can accommodate amendments. Most anything that can be done in an amendment could be an initialed change on the original contract, but an amendment can help keep things clear and legible. You can use the amendment to communicate contract change requests during the option period or to ask for an extension of your option period.
The standard amendment for the TREC contract is a simple form to change the following terms:
- Sales price and financing terms
- Repairs to be performed by the seller
- Closing date
- Seller concession toward buyer costs ($)
- Lender-required repairs paid for by buyer, seller or both
- Extended option period and additional option fee
- Ending option period early (usually this goes along with a contract change)
- Date for financing contingency
Be sure to send any and all addendum forms to your title company once they are signed by all parties. Once signed, an addendum becomes part of Texas real estate contracts.
Not sure if you’re ready for this? You can always engage a local real estate agent to help out – many will do contract assistance for a small fee. Here’s another great article how to get over the hump: Am I ready to flip a house?