Texas 1-4 Contract - Part 2: Paragraphs 3 & 4

Here we are for part 2 on our series about the most common Texas real estate contract. A quick recap of part 1: We started by explaining the name of the contract and why it is the most commonly used contract. Then we touched on paragraph 1, the parties and then dove head first into a meatier part, paragraph 2 which defines the property and what is included and what is not included. Make sure you check that out here

The Most Important Paragraph

Is paragraph 3 the most important one? Well, I am sure many people think so. It makes sense. This is the one with the price! Really all the paragraphs have significant importance, but I’m sure most buyer’s number one concern is the price they are paying and most seller’s number one concern is the price they are receiving. 

Overall, this paragraph is pretty simple but is broken into 3 parts. Part A is the cash portion of the price, ie. the down payment. This paragraph was changed a year or two ago. A definition for “cash” was added. It states that cash “does not include proceeds from borrowing of any kind or selling other real property except as disclosed in this contract". That may seem like common sense, but before that definition was added, often someone obtaining private financing or a hard money loan would call it a “cash deal” even though it really wasn’t. 

Money House

But, one piece of this definition that many people overlook is the part about proceeds. What this means is that you don’t really have cash unless the money is already in your bank account. Often times buyers are also sellers. And so they put their home on the market and accept a contract and then go find their next house with the plan to use the money they receive selling their current home as the down payment of their new home. Well, with this new definition they cannot state those proceeds as cash unless it is “disclosed in this contract”. In a buyers market, the buyer will often make the purchase of their new home contingent on the sale of their old home. Doing so meets this disclosure requirement. However, in a sellers market, sellers are reluctant to accept this contingency. This is an extra risk and if they have multiple offers, they will want to go with a less risky offer. So buyers will forgo this contingency and skip disclosing that their downpayment comes from the proceeds of the sale of their current home. In that case, they should structure their offer showing only the funds in the bank as their down payment. 

Paragraph 3A

So, what if you don’t want to do a contingency for the sale of your existing home but still want to use that money as your down payment? Well, unfortunately the state hasn’t given us agents any way to disclose this in the contract. And we have to stay within the states guidelines and since we are not attorneys, we cannot go about writing additional provisions into the contract. So in that case, my recommendation would be to seek the guidance of an attorney. They would be able to write a specific provision to meet the legal requirements. 

The next part of paragraph 3 is the portion of the contract that is being paid through financing. Whether that financing comes from a typical bank, a loan assumption or even seller financing. In fact, there are checkboxes for each to those options. 

Paragraph 3B

And the last part of paragraph 3 is the big one. The actual purchase price as the sum of parts A and B. 

Paragraph 3C

Moving On

On to Paragraph 4. Succinctly titled “Leases” this paragraph is one of the newer parts of the contract. In my mind, this section is more of a disclosure than terms of the deal. If there are any leases associated with the property, they seller has to disclose it here. On top of that, it also states that the seller may not enter into any new leases without the buyer’s consent, nor can the seller amend any existing leases. 

Paragraph 4

It is broken into 3 sub paragraphs. The first one, 4A, is about Residential Leases. If there is a tenant living in the property, it would need to be disclosed with this check box and then the Addendum Regarding Residential Leases will need to be included with the contract.

The next paragraph 4B is about Fixture Leases. As we discussed in our previous article, fixtures are attachments to the property. So then, you are probably asking yourself what is meant by a fixture lease. Well, this is actually one of the most common leases that may be included with a house. Security systems are often sold on a lease. The company will give a free system but then the homeowner will have a 3 or 5 year lease for service. If they cancel service before the end of the term then they will have to pay off the remaining contract. In rural areas it is not uncommon for homes to have large propane tanks that are often leased.

Alarm System

One fixture lease that is becoming more and more common is solar panels. Most solar panels are sold on a 20 or 30 year lease. So the buyer of the home will have to take over that lease or it will need to be paid off. Unfortunately, most homeowners don’t really understand how these leases work and we are seeing more and more issues arise from these. There are a hundred different companies and each lease agreement is different. Some don’t allow the lease to be paid off early which means the buyer will have to assume that lease. The problem is that the buyer is in the process of getting approved for a mortgage and now they need to take on an additional loan for the solar panels and this can affect their mortgage approval. Personally, I love the idea of solar panels, but I have seen numerous issues caused by them when the home is being sold. Unless you know you will be in the home for decades come, I don’t recommend getting them. 

Home with Solar Panels

As with residential leases, there is an addendum of fixture leases that needs to be included when there are fixture leases attached to the property. 

The last part of paragraph 4, 4C is about Natural Resource Leases. In addition to oil and gas leases, there might be water, wind or other leases. And again, there is an addendum to be included with the contract.

With each of these types of leases, the seller will be expected to share a copy of the lease with the buyer. It is best to have this available for any perspective buyers so they can know what they are getting into up front rather than wasting a week or two and then the buyer terminating the contract and you have to start all over at square one. 

To Be Continued

Well we have officially made it through the very first page. Only took 2 articles but we did it. Next we will be moving on to earnest money and option periods and title policies. So stay tuned. As always, if you have any questions feel free to reach out. You can find us online at www.blackjackrealty.net or call 469-914-7707 or email [email protected]

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