Tom Polk, ABR, CRS
Austin area real estate,
 over 30 years done properly


Contract Procedures
Common practice in the Austin Area

Following is not legal advice. See disclaimer below:

What's a contract?
Do I have to sign a contract?
Why should I want a contract?
How long am I obligated?
How strongly am I obligated?
How comprehensive is a contract?
What are contract procedures in Austin?
How are contracts negotiated?
What all is negotiable?
Who pays closing costs?
Tell me about counter offers Okay.
Tell me about contingencies
Contingency examples, please?
Inspection & Repair Contingencies
Financing Contingencies
Property Title Contingencies

What's a contract?  A contract is an agreement, a meeting of the minds.  It binds each party, and each party must perform what the contract requires to avoid being in default.

Do I have to sign a contract?  Both parties must sign a contract to have an enforceable agreement.

Why should I want a contract? A seller wants to have the buyer under contract to ensure that the seller’s time and money are not wasted on a buyer who does not show up at closing.  A buyer wants to have the seller under contract because the buyer is going to spend time and money on inspections and financing; he doesn’t want the seller to sell the house out from under him.  This is why contracts are signed before inspections and repairs are made.

How long am I obligated? Most contracts contain provisions for the contract’s termination.  Some contracts may have contingencies.   If the contingencies are not met by a specified date, then the contract terminates.  Just because contingencies might not be met does not mean that there is no contract.

How strongly am I obligated? It depends on how much leeway the contract gives you and what you are willing to risk if you default.  If you back out you could lose your earnest money or get sued for specific performance.  Or you could take advantage of the flexibility available in many contracts.  For example, a seller and buyer may enter into a contract where the buyer must sell his own property before he can close on the seller’s property.  If the buyer doesn’t sell his own property, it does not necessarily mean that he backed out of the contract.  Is the seller damaged in this case?   The seller may feel like it, but he would not be damaged because he agreed to accept that risk when he signed the contract.  In this case, the buyer has more leeway than the seller.

How comprehensive is a contract? Typically, both parties accept a certain amount of risk when signing a contract.  Contracts seldom address all the risks one might incur, only the most common ones.

Contracts often contain financing and inspection contingencies.  Accepting a contingency is accepting a risk.

What are contract procedures in Austin? Local real estate practice requires contracts to be in writing, and signed by all parties. Changes are initialed by all parties.  The property is considered to be under contract when all parties have signed the contract and initialed all changes, and all parties know this or have copies.  The effective date of the contract does not depend on who signs first or last or when the contract is receipted by the title company, but is filled in on the contract by a broker the date the last party signs.

How are contracts negotiated?  Negotiations begin when the buyer makes an offer to purchase.  The offer is not just a price.  It consists of several terms: price, inclusions, closing date, possession date, inspections, repairs, etc.  The complexity of the offer requires it to be presented to the seller as a written document.

After reviewing the offer, the seller exercises one of four options:

        Accept the offer
        Reject it
        Change it to yield acceptable terms, by making a counteroffer
        Ignore it

What all is negotiable? The commonly heard phrase, “everything is negotiable” applies when the offer is presented to the seller and when the seller’s counteroffer is presented to the buyer.  Although not encouraged to, both parties have the right to change even the preprinted language on the contract form. “Negotiable” implies willingness to compromise; either party can pay for something, such as an inspection or repair, but they both have to agree.  If one party does not agree, the parties do not have a contract.

Who pays closing costs? Both buyers and sellers have closing costs.  There is nothing intrinsic to the contract that requires one party to pay certain costs; however, some entities, such as lenders, prohibit a buyer from paying certain closing costs.  Still those costs can be negotiable; for example, a seller might pay the buyer’s closing costs if the buyer adjusts the price to make up for it.

Tell me about counter offers.  Okay.  Because “everything is negotiable,” a seller has the right to change anything that they do not like on the buyer’s offer.  Having the right does not necessarily mean that it is in the seller’s interest make certain changes.  Sellers do well to try to understand the buyer’s needs and motivations in order to construct a counteroffer that would be acceptable to the buyer.

When the seller makes a counteroffer, normal procedure is for the seller to make changes on the offer, initial the changes, and then sign it.  Thus, the only thing lacking to create a contract is a set of buyer’s initials.  If the seller does not sign the counteroffer before returning it to the buyer, it would not be a counteroffer.  Such an action might be considered not to be negotiating in good faith.  The buyer signed their offer and expects the seller to sign the counteroffer.  Because the buyer may initial the seller’s changes, creating a contract, the seller must be willing to honor the counteroffer that is presented to the buyer.

If the buyer finds that the seller’s counteroffer is not acceptable, he has the same options as discussed above.  The same procedures are followed for any counteroffer proposed by the buyer:  Accept the counteroffer, reject it, counter it, or ignore it.

Once the changes have been agreed to by both sides, then the parties and the property are “under contract” and have an agreement to transfer ownership of the property under the terms described in the contract.  The property is labeled as “contract pending” by the listing broker’s office.

The parties remain under contract until the property ownership is transferred at closing, or until the contract is terminated for other reasons (e.g. loan not approved, unsatisfactory inspection results, title problems, etc.)  Until then the parties are trying to perform all the terms of the contract (apply for the loan, get inspections, survey, etc.)

Tell me about contingencies.  A contingency is a condition that must be met or waived in order to close the sale. Most contracts have contingencies.  Most often, contingencies are met, and the sale closes as scheduled.  If contingencies are not met, the contract terminates or may be renegotiated.

Contingency examples, please? The most common contingencies that cause renegotiations are inspection results that are unsatisfactory to the buyer.  Other problems such as title problems or the buyer’s inability to obtain financing can cause the contract to terminate or be renegotiated.

Inspection & Repair Contingencies:  In the case of inspections revealing problems that are unacceptable to the buyer, it is up to the buyer and seller to work things out.  Normally, neither party is obligated to proceed to closing if a buyer wants the seller to be responsible for repairs over what had been agreed to at the contract signing.

Financing Contingencies: If the buyer is having trouble obtaining financing, the buyer must make every reasonable effort to obtain financing to avoid being in default.  For example, if the buyer has credit approval from the lender, but the property does not appraise, the buyer will not obtain financing; then the buyer will be entitled to receive the earnest money when the contract terminates.

Often, buyers apply for a loan, and the lender makes a preliminary determination that the buyer will be approved for a loan.  During loan processing, sometimes buyers cannot document the income needed to qualify for a loan.  If the buyer notifies the seller that he cannot get the loan within the time specified in the contract, the contract terminates.  The buyer is entitled to the earnest money, having made a good faith effort to obtain financing and having fulfilled the notification requirement.  The seller does well to require in the contract that the buyer obtain financing quickly.

Property Title Contingencies: If the seller believes he has good title to the property, but it is discovered that the property is encumbered by a claim against it that will not be resolved at closing, then the contract usually says the buyer does not have to buy the house.  Generally speaking, this type of problem results when a previous lien was paid off, but not recorded.  It is advisable to open title with a title company when the property goes on the market to discover any problems early.

None of these problems has to prevent a sale if the seller and buyer are willing to work things out.  It is part of the real estate agent’s job to help find ways to solve problems.

When all contingencies are met and problems are solved, the sale moves toward closing and the property is transferred at closing.

DISCLAIMER:  I am not a lawyer and am not qualified to give legal advice.  The previous is compiled from over twenty years of observations I’ve made about how residential real estate contracts are negotiated, created, and closed in the Austin area.  If you want legal advice, you should contact a lawyer.

Call Tom: 512-327-9310 x 234

Stanberry & Associates has operated as a real estate brokerage firm licensed in the State of Texas since 1985.

Tom Polk is a real estate broker licensed in the State of Texas.

 
 

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