When it comes to buying and selling a home, the Purchase Contract is a major player in the process. As a legally binding contract, it’s essential that you understand exactly what you’re agreeing to when you sign on the dotted line. In this guide, we’re taking an in-depth look at a Texas Purchase Contract, what each section means, and what you should look out for.
This guide answers the following questions:
- What is a real estate purchase contract?
- What are the elements included in a purchase contract?
- What are the different types of purchase contracts and when are they used?
- What key terms related to the purchase contract are important to know?
- What is included in a Texas Purchase Contract and what does each section mean?
- What addenda are commonly included with the purchase contract?
- What happens after the purchase contract is signed?
What is a Purchase Contract?
A Purchase Contract, also sometimes referred to as a Purchase Agreement or Purchase and Sale Agreement, is a contract between two parties detailing the agreed upon terms and conditions for the sale of a home.
The purchase contract is usually prepared by the buyer’s agent in a transaction. When a buyer wants to make an offer on a home, their agent will draw up a purchase contract, which they’ll then deliver to the seller’s listing agent.
What does a Purchase Contract include?
In general, the Purchase Contract or Agreement includes:
- The parties involved in the transaction
- A description of the property and its condition
- Sales price
- Earnest money deposit amount
- Who will provide and pay for the owner’s title policy and property survey
- How property taxes will be prorated
- How any conflicts will be resolved
- Closing date
- Any addenda
- Option fee amount
- Signatures of the two parties
Don’t worry, we’ll go over these in more detail in a bit!
The Different Types of Texas Purchase Contracts
- One to Four Family Residential Contract (Resale): This contract is used for the resale of residential properties, including single family homes, duplexes, triplexes, and four-plexes. However, it is not used for the resale of condominiums, new build homes, or farm or ranch homes. The One to Four Family Residential Contract is the most frequently used contract form.
- New Home Contract (Incomplete Construction): This contract is used for new build homes when the construction of the home has not yet been completed by the builder.
- New Home Contract (Completed Construction): This contract is used for new build homes where construction has been completed by the builder and no one has lived in the home previously.
- Residential Condominium Contract (Resale): This contract is used for the resale of a condominium unit. It contains unique provisions related to condominium transactions. However, if a seller owns fee simple title to the land beneath the unit (in other words, the seller owns the land beneath the property), this contract is not used.
- New Residential Condominium Contract (Incomplete Construction): This contract is used for new build condominiums when the unit is still under construction by the builder.
- New Residential Condominium Contract (Completed Construction): This contract is used when construction for a new build condominium has been completed and no one has lived in the unit previously.
- Farm and Ranch Contract: This contract is typically used for rural properties and includes provisions that relate to farms and ranches that are not specifically outlined in other contract types.
The Purchase Contract: Terms You Need to Know
Now, before we do a deep-dive into the components of a Purchase Contract, here are a few terms you should know:
- Earnest Money: a deposit made by the buyer in good faith that they’re going to purchase a home. This is money that the buyer won’t get back if they decide to back out of the deal for a reason not specified in the contract.
- Owner’s Title Policy: this is an insurance policy that protects the buyer if someone comes forward to claim ownership of the home after closing. This lasts for as long as the buyer owns the property.
- Property Survey: a document that verifies property lines and makes note of any shared structures like fences.
- Title Commitment: a document that discloses any liens, defects, or obligations that affect the property and outlines the terms and conditions that must be met before the title policy is issued.
- Seller’s Disclosure: a document that must be completed by the seller disclosing everything they know about the condition of their home. This includes any improvements or changes that may have been made during the time they owned the home.
- Home Warranty: a policy that covers the cost of replacing or repairing many home appliances and systems if they break after the buyer has purchased a home. Referred to as a Residential Service Contract in the Purchase Contract, home warranties are not required, but are often purchased by a buyer when they close on a home. The seller is usually responsible for paying the cost of the buyer’s home warranty.
- Escrow: in real estate, escrow refers to an account in which funds related to the transaction are held by a third party.
- Escrow Agent: the third party that is responsible for holding any funds during the real estate transaction, typically an escrow or title company.
- Option Period: a specific timeframe in which the buyer is able to terminate the contract for any reason without risking their earnest money deposit.
- Option Fee: a non-refundable fee paid by the buyer to the seller at the beginning of the option period. In the case that the buyer terminates the contract during the option period, the seller has the right to keep this money.
Understanding the Texas Purchase Contract: What Are You Really Signing?
Now that we know what a purchase contract is and when it’s used, let’s walk through each section in detail so you know exactly what to expect when it comes time for you to use this document. Since the One to Four Family Residential Contract (Resale) is the most frequently used, we’ll use this form as our example. Alright, let’s jump into it!
1. Parties: This is the first section included in the purchase contract and identifies the two parties involved in the transaction–the seller and the buyer.
- A. Land: The property’s legal description which designates the specific lot and block of land the property resides on. It also lists the city, county, and address of the property.
- B. Improvements: States that any permanently-installed or built-in items that are attached to the property will be included in the sale. These items include things like the garage, window screens, awnings, ceiling fans, and built-in outdoor cooking equipment.
Pro Tip: The list of improvements included in the purchase contract is only a base definition of what may be included. Not sure whether an item comes with the house? Consider how permanently an item is installed. A general rule of thumb: if you were to remove the item from the house and it leaves a hole, then it would be included in the sale. For instance, a countertop microwave wouldn’t come with the house but a microwave installed above the stove would. Want to keep your TV wall mount? Remove it before you put your home on the market. If not, it would be included with the house unless specified in the listing.
- C. Accessories: Notes any accessories or less obvious items that stay with the home when it’s sold. Some of these items–like curtains, drapes, and rods–may come as a surprise.
- D. Exclusions: Includes any items that do not convey (or come) with the property. If you’re a seller and you’d like to take any of the above items with you when you leave, these will need to be clearly communicated. Typically, the listing agent will note these items (if any) in the listing and the buyer’s agent should make a note of these in this section. Both buyers and sellers should pay close attention to this paragraph to avoid any issues come closing.
- E. Reservations: States that in the case where the seller wishes to reserve or retain all or part of an interest in the mineral estate of the property, an Addendum for Reservation of Oil, Gas and Other Minerals will be included with the contract. A mineral estate refers to all oil, gas, and other minerals in, under, or that may be produced by the property.
3. Sales Price: Shows the total sales price, how much of the sales price is being paid by the buyer in cash, and how much of the sales price is being financed either by a third-party, the seller, or a loan assumption. A loan assumption is when the buyer takes on the existing loan of the seller.
4. License Holder Disclosure: Discloses whether the buyer holds a real estate license in Texas.
5. Earnest Money: Indicates the amount of earnest money the buyer will provide and who will act as the escrow agent. If any additional earnest money is to be provided after the contract is signed, this will be noted as well.
6. Title Policy and Survey
A. Title Policy: Indicates who will pay for the owner’s title insurance policy and the company that will be issuing the policy. A list of exceptions to the title policy is also included. The owner’s title policy is customarily paid for by the seller and the lender’s policy is customarily paid for by the buyer in the state of Texas.
B. Commitment: States that the title company must deliver the title commitment to the buyer on behalf of the seller within 20 days of the contract being executed. After that time period, there will be an automatic extension of 15 days or 3 days prior to closing (whichever comes first). If the seller does not provide the commitment by that time, the buyer can terminate the contract and be refunded their earnest money.
C. Survey: There are three options that can be checked here. The first box indicates that the seller must provide an existing property survey to the buyer within a specified number of days, as well as a Residential Real Property Affidavit (more commonly referred to as a T-47 Affidavit). A T-47 Affidavit is a form that the seller completes identifying any modifications to the property since the survey was issued. In the case that the seller is unable to provide an existing survey along with a notarized T-47 Affidavit within the noted timeframe, the buyer will obtain a new survey at the seller’s expense. If the survey has been delivered to the buyer but has been deemed unacceptable by the title company or the buyer’s lender, a checkbox will indicate whether the seller or buyer will pay for a new survey. If there is no survey and a new survey has to be drawn, the second box indicates that the buyer will pay and the third box indicates that the seller will pay.
D. Objections: After receiving the title commitment, exception documents, and survey, the buyer has a certain amount of time to object to items that might affect the title policy. If the buyer presents any objections, then the seller must resolve these objections within a specified time or the buyer can terminate the contract and get their earnest money back.
E. Title Notices: Elaborates on items related to the title policy.
- (1) Abstract or Title Policy: Although a title policy is not required, it is recommended that buyer’s obtain one. This states that if a buyer chooses not to get a title policy, it is advised that they have an attorney review the property’s title history. In the case that they do get a title policy, it is advised that they have an attorney review the title commitment when it’s received.
- (2) Membership in Property Owners Association(s): Indicates whether or not the property is a part of a homeowners association. If the property is a part of an association, this states that the buyer must pay membership dues to the association or they risk a lien or foreclosure on their property.
- (3) Statutory Tax Districts: States that if the property is located within a special tax district, the seller is required to notify the buyer and the buyer is required to sign off on it prior to the contract being executed.
- (4) Tide Waters: States that if the property is located along the coast, an additional notice must be provided to the buyer.
- (5) Annexation: Requires the seller to notify the buyer that the home may be annexed (or added) to a municipality now or in the future.
- (6) Property Located in a Certified Service Area of a Utility Service Provider: Notifies the buyer that the property may be located in a certified water or sewer service area. If this is the case, then there may be additional costs that must be paid by the buyer and lines or facilities built in order to provide the property with water and sewer service. This is more typical for properties that are located in more rural areas away from a city.
- (7) Public Improvement Districts: Requires the seller to notify the buyer if the property is located in a public improvement district where additional costs may be due if an improvement project in their district is undertaken by the city.
- (8) Transfer Fees: States that the seller must notify the buyer if the property is subject to a private transfer fee.
- (9) Propane Gas System Service Area: Requires the seller to notify the buyer if the property is located in a propane gas system service area.
- (10) Notice of Water Level Fluctuations: States that the seller must notify the buyer if the property is located beside a reservoir or lake and that water levels may fluctuate for various reasons including drought or flooding.
7. Property Condition
- A. Access, Inspections and Utilities: Grants the buyer and buyer’s agent the right to access the property for inspections and states that the seller must keep the utilities on, at their expense, during the contract period until the day of closing. This includes water, electric, and gas but would exclude cable, internet, and any security monitoring service.
- B. Seller’s Disclosure Notice: This section includes a few options related to the Seller’s Disclosure. If the buyer has received the Seller’s Disclosure Notice, the first box will be checked. If the buyer has not received the notice, the second box will be checked. It also provides the timeframe in which the seller must provide the notice to the buyer. If the buyer doesn’t receive the Seller’s Disclosure Notice by that time, they can terminate the contract and their earnest money will be returned. Even if the buyer does receive the notice on time, they still have seven days to terminate the contract for any reason and their earnest money will be refunded (as long as the property hasn’t already closed). In the case that the seller is not required to provide a disclosure, the third box will be checked.
- C. Seller’s Disclosure of Lead-Based Paint: States that federal law requires all properties built prior to 1978 require a disclosure for lead-based paint and lead-based paint hazards.
- D. Acceptance of Property Condition: Defines “as is” condition and that the buyer will accept the property “as is.” The buyer can also stipulate that they will accept the property “as is” if the seller agrees to make certain repairs at their expense. Buyers should be careful though–these stipulations may cause the seller to reject the buyer’s offer.
Pro Tip: This does not mean the buyer forfeits their right to have the property inspected, that they are unable to negotiate, or that they waive their right to terminate the contract during the option period. After the closing date, when all negotiations are complete, the buyer accepts the property as-is.
- E. Lender Required Repairs and Treatments: States that if the lender requires repairs, neither party is responsible for paying for these repairs but the buyer and seller must come to an agreement as to who will pay. If the parties cannot come to an agreement or the lender requires repairs that exceed 5% of the sales price, the buyer can terminate the contract and their earnest money will be refunded.
- F. Completion of Repairs and Treatments: States that the seller must complete all repairs prior to the closing date, that required permits must be obtained, and the work must be done by a licensed professional or someone who does that trade commercially. It also states that warranties will be transferred to the buyer at the buyer’s expense. If the seller does not complete the repairs on time, the buyer can extend closing up to 5 days or exercise their rights as stated in paragraph 15 of the contract.
- G. Environmental Matters: Advises the buyer of potential environmental matters that may affect their use of the property in the future.
- H. Residential Service Contracts: Indicates if the buyer is requesting the seller to reimburse them for a portion of the cost of a Residential Service Contract, more commonly referred to as a Home Warranty.
Pro Tip: Typically, the seller pays for the buyer’s Home Warranty, but this is negotiable. The Home Warranty shields the seller in the event that something breaks in the home after the buyer has moved in. For example, if the A/C quits the day after closing, the Home Warranty would cover the cost of repairing or replacing the A/C unit. This brings both peace of mind to both the buyer and the seller in case something goes wrong with the home during that first year after it's sold.
8. Brokers’ Fees: States that whoever is responsible for paying the broker fees is outlined in a separate agreement.
9. Closing: Sets forth the closing date. If the property does not close on the specified date, closing can be extended by 7 days if objections were made in paragraph 6. If either party fails to close on the date, they will be in default of the contract and paragraph 15 will apply. This section also outlines the responsibilities of both the buyer and seller at closing:
- (1) The seller must present the buyer with a general warranty deed to the property and show tax statements that prove they are not delinquent on their taxes.
- (2) The buyer must provide the funds in the amount of the sales price to the escrow agent.
- (3) Both parties agree to provide any documents required for the sale to close and the title policy to be issued.
- (4) There will not be any liens or assessments against the property that haven’t been paid at or before closing.
- (5) If the property is currently being leased, the seller agrees to transfer any security deposits to the buyer. The buyer must also deliver a signed statement to the tenant acknowledging that they have acquired the property and are responsible for returning the security deposit in the designated amount.
- A. Buyer’s Possession: Designates when the seller gives the buyer possession of the property (the date they hand over the key). A checkbox will indicate if the buyer will get possession the date of closing and funding or at a later date, in the case that the buyer and seller have agreed to a leaseback or other type of lease. If the latter, then each party should consult with their insurance agent as a temporary lease could affect their coverage.
- B. Leases: If the property is currently being leased, this states that (1) the seller cannot enter into any other lease agreement after the contract has been executed and (2) they must provide the buyer with a copy of the existing lease and the tenant’s move-in condition form within 7 days of the contract execution.
11. Special Provisions: This section is for factual statements and business details that are applicable to the sale. A common inclusion is if the buyer or seller is a licensed agent or if they are related to their agent. However, if provisions are included in this section, an attorney should be consulted. Any items listed in this section should not be included in the contract or addenda.
12. Settlement and Other Expenses
(A) Describes the expenses that must be paid by the seller and the buyer at or prior to closing.
(1) Lists the expenses that must be paid by the seller.
- (a) The seller must pay any releases for existing liens, which includes prepayment penalties and recording fees, the release of the seller’s loan liability, tax statements, the preparation of the deed, half of the escrow fee, and any other expenses that the seller must pay as outlined in the contract.
- (b) Sets forth the amount of seller-paid buyer closing costs. For instance, if the seller offers a concession in lieu of making repairs or if a buyer puts little money down and requests assistance with closing costs, the amount that the seller pays will be listed here.
(2) Lists the expenses that must be paid by the buyer.
(B) If any expense exceeds the amounts set forth in the contract, then the contract can be terminated. It also states that the buyer cannot pay for fees that are prohibited by the FHA, VA, Texas Veterans Land Board, or other government loan program regulations.
13. Prorations: Lists the expenses that may be prorated including taxes for the current year, interest, maintenance fees, assessments, dues, and rents. For these expenses, the seller will pay a prorated amount up to the date of closing and the buyer will pay a prorated amount after the date of closing. For taxes, the seller will credit and transfer their portion to the buyer at closing and the buyer will be responsible for paying the taxes. Sometimes the estimated taxes paid at closing differ from the actual amount due. If this is the case, the parties agree to work together for any adjustment to the amount due by each party.
14. Casualty Loss: If the property is damaged or destroyed by a fire or other type of casualty after the contract has been executed, the seller must restore the property to its original condition by the closing date. If the seller is unable to do so due to factors beyond their control, the buyer can (a) terminate the contract and receive their earnest money back, (b) extend the closing date up to 15 days to allow the seller more time to restore the property, or (c) accept the property in its damaged condition and receive proceeds from the seller’s insurance and a credit from the seller at closing in the amount of their deductible.
15. Default: If either party fails to meet the requirements set forth by the contract, they will be in default which means they’ve violated the terms of the contract. If the buyer is in default, the seller may (a) enforce specific performance in which case the buyer must purchase the home regardless of why they defaulted or (b) terminate the contract and keep the earnest money as damages. If the seller defaults, the same options apply to the buyer.
16. Meditation: If the buyer and seller are in dispute and unable to resolve the issue through informal discussion, then the dispute will be brought to a mediator. The cost of the mediator will be split equally between both parties.
17. Attorney’s Fees: In the event that a dispute is brought to court, the losing party may be required to pay for the attorney and court fees of the winning party.
- A. Escrow: States that the escrow agent is not liable for (i) the default of either party, (ii) the interest on earnest money, or (iii) the loss of earnest money due to the failure of the financial institution in which the earnest money is being held (unless the financial institution is the escrow agent).
- B. Expenses: Describes how the earnest money will be applied at closing. Funds will first be applied to the cash down payment, then to any expenses paid by the buyer with any remaining funds being returned to the buyer. If there is no closing, the escrow agent may require a written release relieving them of any liability and any unpaid expenses will be paid and deducted from the earnest money.
- C. Demand: In the event that the contract has been terminated, the buyer or the seller may make a written demand for the earnest money in which case the escrow agent will notify the other party that a demand was made. If no objection to the demand is made by the other party within 15 days, the escrow agent will disburse the money to the party who made the written demand.
- D. Damages: If the contract is terminated and a release is made, any party that fails or refuses to sign the release within 7 days of receiving it, will be liable to the other party for damages, the earnest money, attorney’s fees, and the cost of a lawsuit.
- E: Notices: States that notices from the escrow agent are effective when sent in accordance with paragraph 21. Objection notices to demands are considered to be effective when they are received by the escrow agent.
19. Representations: States that all covenants, representations, and warranties in the contract will continue past closing. In other words, any claims made in the contract must still be true after closing. If claims are found to be untrue after closing, then the seller is in default. This section also states that the seller may continue to show the property and receive, negotiate, or accept backup offers, unless explicitly prohibited in a written agreement.
20. Federal Tax Requirements: If a seller is considered to be a “foreign person” as defined by the IRS, then additional tax laws apply.
21. Notices: Defines how notices must be received to be deemed effective and includes the contact information for both the buyer and seller. This information will be used by the escrow agent to deliver documents to either party.
22. Agreement of Parties: States that the contract can not be changed unless a written agreement is made. This section also lists common addenda and provides a place for less common addenda to be included.
23. Termination Option: Sets forth the amount of the option fee that the buyer agrees to pay the seller (due to the seller 3 days after the contract has been executed) and specifies the time frame in which the buyer is allowed to terminate the contract for any reason. If the buyer terminates the contract during that time, the option fee will not be refunded but the earnest money will. This section also states whether the option fee will or will not be credited to the sales price at closing.
24. Consult an Attorney before Signing: Real estate agents are prohibited from giving real estate advice and the Texas Real Estate Commission (TREC) encourages both parties to consult with their attorney before signing as the contract is a legally binding document. This section includes a place for attorney contact information, the signatures of both the buyer and seller, and the broker to write in the date of execution.
Additional Pages: Included on the following page is each broker’s information and the agreed upon commission to be paid to the buyer’s agent. The last page includes acknowledgements for the receipt of the option fee, earnest money, contract, and any additional earnest money. The option fee receipt is signed by the listing agent or seller and the contract and earnest money receipts are signed by the escrow agent.
Common Purchase Contract Addendum
- Third Party Financing Addendum: This addendum is used when any type of third party financing is being used for all or some of the purchase price. In other words, the purchase is being financed by someone other than the buyer or the seller.
- Addendum for Seller's Disclosure of Information on Lead-Based Paint and Lead-Based Paint Hazards as Required by Federal Law: This addendum is used if the home being purchased was built before 1978. Federal regulations require that properties built prior to this time provide a lead paint disclosure that discloses any knowledge of lead-based paint and lead-based paint hazards before the property is sold.
- Addendum for Property Subject to Mandatory Membership in a Property Owners Association: When the property owner is required to be a member of a property owners association, this addendum will be used. With this form, the buyer may elect to receive or not receive information regarding the association. This addendum is not used for condominiums.
- Addendum for Sale of Other Property by Buyer: In the case that the buyer is unable to purchase the property until their existing property has been sold, this addendum will be used. This addendum lists the contingent property address, a date by which the property must be sold, and the number of days a buyer has to waive their contingency in the event the seller receives another offer.
- Non-Realty Items Addendum: Sometimes, the seller will agree to include additional items like a washer and dryer or patio furniture with the sale of the home. If this is the case, this addendum will be used to disclose these items if they haven’t already been mentioned in the property section of the purchase contract.
- Seller's Temporary Residential Lease: If the buyer agrees to lease back the property to the seller after the purchase has been completed, this form will be used as the lease. The form states the rental rate and security deposit amount.
There you have it! Everything you need to know about the Texas Purchase Contract. What happens next? Once the seller has officially accepted an offer, both parties will sign the purchase contract and the closing process will begin.
Still have unanswered questions about the Texas Purchase Contract? Don’t hesitate to reach out to our Jovio Real Estate Specialists who are available around the clock to answer any questions you might have.
*The information provided in this article is meant for informational purposes only and is not intended to constitute legal, financial, tax, or insurance advice. Jovio encourages readers to contact their attorney or other advisors for advice regarding these matters.