Lesson 7: Contingencies, Addenda and Amendments

Transcription

1 Lesson 7: Contingencies, Addenda and Amendments Lesson Topics This lesson focuses on the following topics: Contingencies Addenda Amendments Lesson Learning Objectives By the end of this lesson, you should be able to: Have a better concept of what some of the contingencies are that affect real estate sales contracts. Recognize the various ways a contract that has been negotiated and accepted can be changed with the use of the TREC amendment. Become familiar with the use of TREC addenda. Contingencies Contingencies are conditions that must be met if a contract is to continue on its way to closing. Some examples included in the TREC contract forms include: Paragraph 7B of the TREC sales contract has three choices in regard to the receipt of the Seller s Disclosure Notice. Number 1 and 3 do not provide a contingency. Choice number 2 creates a couple of contingencies that do not benefit the seller. 7B. SELLER'S DISCLOSURE NOTICE PURSUANT TO 5.008, TEXAS PROPERTY CODE (Notice): (Check one box only) (1) Buyer has received the Notice. (2) Buyer has not received the Notice. Within days after the effective date of this contract, Seller shall deliver the Notice to Buyer. If Buyer does not receive the Notice, Buyer may terminate this contract at any time prior to the closing and the earnest money will be refunded to Page 1 of 46

2 Buyer. If Seller delivers the Notice, Buyer may terminate this contract for any reason within 7 days after Buyer receives the Notice or prior to the closing, whichever first occurs, and the earnest money will be refunded to Buyer. (3) The Seller is not required to furnish the notice under the Texas Property Code. Paragraph 23 of the contract creates a contingency when the buyer purchases an option to terminate within a certain time frame. 23. TERMINATION OPTION: For nominal consideration, the receipt of which is hereby acknowledged by Seller, and Buyer's agreement to pay Seller $ (Option Fee) within 3 days after the effective date of this contract, Seller grants Buyer the unrestricted right to terminate this contract by giving notice of termination to Seller within days after the effective date of this contract (Option Period). Notices under this paragraph must be given by 5:00 p.m. (local time where the Property is located) by the date specified. If no dollar amount is stated as the Option Fee or if Buyer fails to pay the Option Fee to Seller within the time prescribed, this paragraph will not be a part of this contract and Buyer shall not have the unrestricted right to terminate this contract. If Buyer gives notice of termination within the time prescribed, the Option Fee will not be refunded; however, any earnest money will be refunded to Buyer. The Option Fee will will not be credited to the Sales Price at closing. Time is of the essence for this paragraph and strict compliance with the time for performance is required. The Third Party Financing Addendum says that the contract is subject to the buyer being able to obtain buyer approval within a certain time period. This addendum also creates a contingency if the property does not satisfy property approval in accordance with the addendum. B. APPROVAL OF FINANCING: Approval for the financing described above will be deemed to have been obtained when Buyer Approval and Property Approval are obtained. 1. Buyer Approval: This contract is subject to Buyer obtaining Buyer Approval. If Buyer cannot obtain Buyer Approval, Buyer may give written notice to Seller within days after the effective date of this contract and this contract will terminate and the earnest money will be refunded to Buyer. If Buyer does not terminate the contract under this provision, the contract shall no longer be subject to the Buyer obtaining Buyer Approval. Buyer Approval will be deemed to have been obtained when (i) the terms of the loan(s) described above are available and (ii) Page 2 of 46

3 lender determines that Buyer has satisfied all of lender's requirements related to Buyer s assets, income and credit history. This contract is not subject to Buyer obtaining Buyer Approval. 2. Property Approval: Property Approval will be deemed to have been obtained when the Property has satisfied lender s underwriting requirements for the loan, including but not limited to appraisal, insurability, and lender required repairs. If Property Approval is not obtained, Buyer may terminate this contract by giving notice to Seller before closing and the earnest money will be refunded to Buyer. 3. Time is of the essence for this paragraph and strict compliance with the time for performance is required. C. SECURITY: Each note for the financing described above must be secured by vendor s and deed The Addendum for Sale of Other Property says that the contract is contingent upon the Buyer s receipt of the proceeds for the sale of the Buyer s property at. A. The contract is contingent upon Buyer's receipt of the proceeds from the sale of Buyer's property at (Address) on or before, 20 (the Contingency). If the Contingency is not satisfied or waived by Buyer by the above date, the contract will terminate automatically and the earnest money will be refunded to Buyer. NOTICE: The date inserted in this Paragraph should be no later than the Closing Date specified in Paragraph 9 of the contract. The Addendum for Oil, Gas and Other Minerals say that the mineral estate owned by the seller, if any, will be conveyed unless reserved by the seller. B. Subject to Section C below, the Mineral Estate owned by Seller, if any, will be conveyed unless reserved as follows (check one box only): (1) Seller reserves all of the Mineral Estate owned by Seller. (2) Seller reserves an undivided interest in the Mineral Estate owned by Seller. NOTE: If Seller does not own all of the Mineral Estate, Seller reserves only this percentage or fraction of Seller s interest. Page 3 of 46

4 C. Seller does does not reserve and retain implied rights of ingress and egress and of reasonable use of the Property (including surface materials) for mining, drilling, exploring, operating, developing, or removing the oil, gas, and other minerals. NOTE: Surface rights that may be held by other owners of the Mineral Estate who are not parties to this transaction (including existing mineral lessees) will NOT be affected by Seller s election. Seller s failure to complete Section C will be deemed an election to convey all surface rights described herein. Paragraph D of the Short Sale Addendum reads that if seller does not notify buyer by a certain date that they have received approval of the short sale by the seller s lender then the contract will terminate. D. If Seller does not notify Buyer that Seller has obtained Lienholder s Consent and Agreement on or before, this contract terminates and the earnest money will be refunded to Buyer. Seller must notify Buyer immediately if Lienholder s Consent and Agreement is obtained. For purposes of performance, the effective date of the contract changes to the date Seller provides Buyer notice of the Lienholder s Consent and Agreement (Amended Effective Date). Paragraph B of the Addendum for Back-Up Addendum says that if the first contract does not terminate by a certain date this contract will terminate. B. If the First Contract does not terminate on or before, 20, the Back-Up Contract terminates and the earnest money will be refunded to Buyer. Seller must notify Buyer immediately of the termination of the First Contract. For purposes of performance, the effective date of the Back-Up Contract changes to the date Buyer receives notice of termination of the First Contract (Amended Effective Date). The Environmental Assessment Addendum, Threatened or Endangered Species, and Wetlands Addendum say that with a certain number of days the buyer may terminate the contract by furnishing the seller with a copy of the report that adversely affects the use of the property and a notice of termination of the contract. Page 4 of 46

5 Within days after the effective date of the contract, Buyer may terminate the contract by furnishing Seller a copy of any report noted above that adversely affects the use of the Property and a notice of termination of the contract. Upon termination, the earnest money will be refunded to Buyer. Paragraph A 1&2 of the Addendum for Property Subject to Mandatory Membership in a Property Owners Association create contingencies if the buyer does not receive the Subdivision Information within a certain number of days. A. SUBDIVISION INFORMATION: Subdivision Information means: (i) a current copy of the restrictions applying to the subdivision and bylaws and rules of the Association, and (ii) a resale certificate, all of which are described by Section of the Texas Property Code. (Check only one box): 1. Within days after the effective date of the contract, Seller shall obtain, pay for, and deliver the Subdivision Information to the Buyer. If Seller delivers the Subdivision Information, Buyer may terminate the contract within 3 days after Buyer receives the Subdivision Information or prior to closing, whichever occurs first, and the earnest money will be refunded to Buyer. If Buyer does not receive the Subdivision Information, Buyer, as Buyer s sole remedy, may terminate the contract at any time prior to closing and the earnest money will be refunded to Buyer. 2. Within days after the effective date of the contract, Buyer shall obtain, pay for, and deliver a copy of the Subdivision Information to the Seller. If Buyer obtains the Subdivision Information within the time required, Buyer may terminate the contract within 3 days after Buyer receives the Subdivision Information or prior to closing, whichever occurs first, and the earnest money will be refunded to Buyer. If Buyer, due to factors beyond Buyer s control, is not able to obtain the Subdivision Page 5 of 46

6 Information within the time required, Buyer may, as Buyer s sole remedy, terminate the contract within 3 days after the time required or prior to closing, whichever occurs first, and the earnest money will be refunded to Buyer. 3. Buyer has received and approved the Subdivision Information before signing the contract. Buyer does does not require an updated resale certificate. If Buyer requires an updated resale certificate, Seller, at Buyer s expense, shall deliver it to Buyer within 10 days after receiving payment for the updated resale certificate from Buyer. Buyer may terminate this contract and the earnest money will be refunded to Buyer if Seller fails to deliver the updated resale certificate within the time required. 4. Buyer does not require delivery of the Subdivision Information. The title company or its agent is authorized to act on behalf of the parties to obtain the Subdivision Information ONLY upon receipt of the required fee for the Subdivision Information from the party obligated to pay. An interesting choice of a contingency or no contingency is presented in paragraphs A & B of the Addendum for Release of Liability on an Assumed Loan and/or Restoration of Seller s Entitlement for a VA loan. A. RELEASE OF SELLER'S LIABILITY ON LOAN TO BE ASSUMED: Within days after the effective date of this contract Seller and Buyer shall apply for release of Seller's liability from (a) any conventional lender, (b) VA and any lender whose loan has been guaranteed by VA, or (c) FHA and any lender whose loan has been insured by FHA. Seller and Buyer shall furnish all required information and documents. If any release of liability has not been approved by the Closing Date: (check one box only) (1) This contract will terminate and the earnest money will be refunded to Buyer. (2) Failure to obtain release approval will not delay closing. Page 6 of 46

7 B. RESTORATION OF SELLER'S ENTITLEMENT FOR VA LOAN: Within days after the effective date of this contract Seller and Buyer shall apply for restoration of Seller's VA entitlement and shall furnish all information and documents required by VA. If restoration has not been approved by the Closing Date: (check one box only) (1) This contract will terminate and the earnest money will be refunded to Buyer. (2) Failure to obtain restoration approval will not delay closing. Reasonable Time vs. Time is of the Essence The promulgated contracts are designed to be reasonable time contracts. Only the Termination Option paragraph, paragraph 23, is designated as time is of the essence, and it is for that paragraph only. Time is of the Essence Time is of the Essence. The Free Dictionary. Time is of the essence is a phrase in a contract that means that: Time is of the essence is a phrase in a contract that means that performance by one party at or within the period specified in the contract is necessary to enable that party to require performance by the other party. Failure to act within the time required constitutes a breach of the contract. The general rule is that time is not of the essence unless the contract expressly so provides. As a result, with respect to real estate transactions, the modern view is that time is not of the essence unless the parties have manifested such an intent. The same is generally true in construction contracts and in contracts relating to the manufacture of goods. When time is not of the essence, courts generally permit parties to perform their obligations within a reasonable time. (Source: West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.) Page 7 of 46

8 Reasonable Time Investor Words: Reasonable time is a fair length of time that may be allowed or required for an act to be completed considering the nature of the act and the surrounding circumstances. Contracts that do not include reasonable time frames for the completion of acts are often challengeable in court. (Source: If a contract was unable to close until two days after the agreed upon date because the lender was not ready, a court would probably say that was within a reasonable time. When time is of the essence as in the termination option paragraph, when it says the option period ends in five days, it ends at 5 PM on the fifth day. Five minutes after 5 PM is too late. Licensees should never write time is of the essence in their contracts. If a party wants to add the language they need to be told they should consult an attorney first. Those words change legal rights under the contract. Four addenda include the words time is of the essence: 1. Addendum for Sale of Other Property by Buyer The Sale of Other Property Addendum is used when the Buyer making the offer has a property they are trying to sell and want the offer they are making to be contingent upon their current property selling. 2. Addendum for Back-Up Contract This Addendum is used when the Seller s property is already under a valid contract but the seller wants to negotiate a back-up contract with another buyer in case the first contract does not close. The Back-Up Addendum creates an agreement to allow a purchaser to put up their earnest money and option money and then wait to see if the first contract is going to fall through within a limited period of time, prior to proceeding with further performance. The effective date of the contract is Page 8 of 46

9 amended to the date the buyer receives notice from the seller that the first contract has fallen through and this contract is now primary. 3. Third Party Financing Addendum The Third Party Financing Addendum creates a financing contingency for the purchaser on the contract for a limited period of time. 4. Short Sale Addendum The Short Sale Addendum creates an agreement to allow a purchaser to put up their earnest money and option money and then wait for the sellers lender to approve the short sale prior to proceeding with further performance. The effective date of the contract is amended to the date the buyer receives notice from the seller that the lender has approved the short sale. Amendments An Amendment changes or makes modifications to an agreed upon contract. All parties must sign amendments. After a contract has been fully accepted and agreed upon, the original document should never be changed. That is the original agreement and the effective date tells us when the agreement happened. If the parties agree to change anything it must be done by using the TREC amendment form. Each amendment also has an effective date so the history of the agreement and all of the changes are easy to keep track of.review the items that can be changed by the Amendment. It is a promulgated (must use) form. ROMULGATED BY THE TEXAS REAL ESTATE COMMISSION (TREC) AMENDMENT TO CONTRACT CONCERNING THE PROPERTY AT (Street Address and City) Seller and Buyer amend the contract as follows: (check each applicable box) (1) The Sales Price in Paragraph 3 of the contract is: A. Cash portion of Sales Price payable by Buyer at closing... $ B. Sum of financing described in the contract... $ Page 9 of 46

10 C. Sales Price (Sum of A and B)... $ (2) In addition to any repairs and treatments otherwise required by the contract, Seller, at Seller s expense, shall complete the following repairs and treatments: (3) The date in Paragraph 9 of the contract is changed to,20 (4) The amount in Paragraph 12A(1)(b) of the contract is changed to $. (5) The cost of lender required repairs and treatment, as itemized on the attached list, will be paid as follows: $ by Seller; $ by Buyer. (6) Buyer has paid Seller an additional Option Fee of $ for an extension of the unrestricted right to terminate the contract on or before 5:00 p.m. on, 20. This additional Option Fee will will not be credited to the Sales Price. (7) Buyer waives the unrestricted right to terminate the contract for which the Option Fee was paid. (8) The date for Buyer to give written notice to Seller that Buyer cannot obtain Buyer Approval as set forth in the Third Party Financing Addendum is changed to, 20 (9) Other Modifications: (Insert only factual statements and business details applicable to this sale.) EXECUTED the day of, 20. (BROKER: FILL IN THE DATE OF FINAL ACCEPTANCE.) Buyer Seller Buyer Seller This form has been approved by the Texas Real Estate Commission for use with similarly approved or promulgated contract forms. Such approval relates to this form only. TREC forms are intended for use only by trained real estate licensees. No representation is made as to the legal validity or adequacy of any provision in any specific transactions. It is not suitable for complex transactions. Texas Real Estate Commission, P.O. Box 12188, Austin, TX , ( TREC No This form replaces TREC No Page 10 of 46

11 Addenda The Promulgated Addenda are created to add to the contract forms to make them work for many different situations. Any of the contracts can be used as a back-up contract, a short sale contract, etc. by adding an addendum. In addition to attaching the addendum, Paragraph 22 of the contract makes the addendum part of the offer and acceptance. TREC provides 15 promulgated addenda including two temporary leases. Typically, contracts will contain addendums, which are added to the original contract to identify supplementary information. This supplementary information can be items that were excluded from the original contract or additional agreements, disclosures or contingencies between the buyer and seller. TREC has specific promulgated forms for addendums, including the following. TREC provides 15 Promulgated Addenda including two temporary leases. The Third Party Financing Addendum for Credit Approval Addendum for Release of Liability on an Assumed Loan and/or Restoration of the Seller s VA Entitlement Addendum for Sale of Other Property by Buyer Seller Financing Addendum, Environmental Assessment, Threatened or Endangered Species and Wetlands Addendum Addendum for Coastal Area Property Addendum for Property Located Seaward of the Gulf Intracoastal Waterway Addendum for Property Subject to Mandatory Membership in an Owners' Association Loan Assumption Addendum Addendum for Unimproved Property Located in a Certificated Service Area of a Utility Service Provider Addendum for Back-Up Contract Addendum for Reservation of Oil, Gas and Other Minerals Short Sale Addendum Page 11 of 46

12 Addendum for Property in a Propane Gas System Service Area Buyer s Temporary Lease Seller s Temporary Lease TREC also provides approved but not required forms. Sometimes the notice is mandatory but the form the agent may use to give the notice is optional. For example the seller s disclosure is mandatory but TREC has an approved (not promulgated) form, TAR has a form, many Associations of REALTORS have forms and agents are able to use any of them legally. Notice to Prospective Buyer Seller s Disclosure of Property Condition Texas Real Estate Consumer Notice concerning Hazards or Deficiencies Information About Brokerage Services Lead Based Paint Addendum Non-Realty Items Addendum Disclosure of a Relationship with a Residential Service Company Following are some of the TREC Addenda. All of the current addenda can be reviewed or obtained from the TREC website at These forms and the TAR forms are also available through the zip forms programs available for TAR members at Page 12 of 46

13 ROMULGATED BY THE TEXAS REAL ESTATE COMMISSION (TREC) THIRD PARTY FINANCING ADDENDUM TO CONTRACT CONCERNING THE PROPERTY AT (Street Address and City) A. TYPE OF FINANCING AND DUTY TO APPLY AND OBTAIN APPROVAL: Buyer shall apply promptly for all financing described below and make every reasonable effort to obtain approval for the financing, including but not limited to furnishing all information and documents required by Buyer s lender. (Check applicable boxes): 1. Conventional Financing: (a) A first mortgage loan in the principal amount of $ (excluding any financed PMI premium), due in f u l l in year(s), with interest not to exceed % per annum for the first year(s) of the loan with Origination Charges as shown on Buyer s Loan Estimate for the loan not to exceed % of the loan. (b) A second mortgage loan in the principal amount of $ (excluding any financed PMI premium), due in full in year(s), with interest not to exceed % per annum for the first year(s) of the loan with Origination Charges as shown on Buyer s Loan Estimate for the loan not to exceed % of the loan. 2. Texas Veterans Loan: A loan(s) from the Texas Veterans Land Board of $ for a period in the total a m o u n t of years at the interest rate established by the Texas Veterans Land Board. 3. FHA Insured Financing: A Section FHA insured loan of not less than $ (excluding any financed MIP), amortizable monthly for not less than years, with interest not to exceed % per annum for the first year(s) of the loan with Origination Charges as shown on Buyer s Loan Estimate for the loan not to exceed % of the loan. 4. VA Guaranteed Financing: A VA guaranteed loan of not less than $ (excluding any financed Funding Fee), amortizable monthly for not less than years, with interest not to exceed % per annum for the first year(s) of the loan with Origination Charges as shown on Buyer s Loan Estimate for Page 13 of 46

14 the loan not to exceed % of the loan. 5. USDA Guaranteed Financing: A USDA-guaranteed loan of not less than $ (excluding any financed Funding Fee), amortizable monthly for not less that years, with interest not to exceed % per annum for the first year(s) of the loan with Origination Charges as shown on Buyer s Loan Estimate for the loan not to exceed % of the loan. 6.Reverse Mortgage Financing: A reverse mortgage loan (also known as a Home Equity Conversion Mortgage loan) in the original principal amount of $ ( excluding any financed PMI premium or other costs), with interest not to exceed % per annum for the first year(s) of the loan with Origination Charges as shown on B u y e r s Loan Estimate for the loan not to exceed % of the loan. The reverse mortgage loan will will not be an FHA insured loan. Third Party Financing Addendum The Paragraph A on the first page of the Third Party Financing Addendum clarifies that the buyer is going to apply for the financing promptly and will provide the lender with the documentation needed to make a loan decision. Paragraphs A1 through A6 describe the third party financing. Notice that in A1b, (conventional financing) of the Third Party Financing Addendum following, it provides for a 2 nd lien if being used. The terms described here must be available. Interest is a not to exceed figure so with the buyer s permission you can allow a little room for change here. If this is a fixed rate mortgage, interest will be the same for the entire term of the loan. Therefore, the interest not to exceed % per annum for the first 30 years of the loan if the loan has a 30 year term. If it is an adjustable rate mortgage that will adjust in one year, it will be per annum for the first one year of the loan. Any adjustment caps or lifetime caps for an adjustable rate mortgage will need to be described in Special Provisions, paragraph 11 of the contact. Page 14 of 46

15 Having the various loan programs listed on the first page of the Third Party Financing Addendum is a good reminder for the programs that are available. A good agent will learn about each program and ascertain they have a lender on their team that can help the buyer with any of them. Buyer s circumstances dictate which program is best for them. Loan Programs Listed on the Third Party Financing Addendum 1. Conventional Loan Mortgages can be government insured or guaranteed or they are said to be conventional loans. The Federal Housing Agency (FHA) provides insurance that protects the lender called a mortgage insurance premium (MIP). It is paid for by the borrower. VA loans are guaranteed by the Veterans Administration. The U.S. Department of Agriculture (USDA) makes loans to low income buyers that are guaranteed through government-backed programs. Borrowers pay for the guarantees that protect the lender on both UDSA and VA loans. FHA, VA and USDA do not provide the money for the loans. The money comes from private lenders. The money for conventional loans also comes from private lenders. On conventional loans the lender usually requires a 20% down payment since they are not protected by the government. If the borrower needs a smaller down payment on a conventional mortgage, the borrower can purchase private mortgage insurance called PMI. 2. Texas Veterans Loans Any veteran that resides in Texas is eligible for a program provided by the Texas Veterans Association. Funds are available to buy a home at interest rate lower than the market rate. There are many benefits for veterans using this program including: Lower fixed rates Lower closing costs Easier approval process Lower payments No Mortgage Insurance 3. FHA Loans FHA loans are popular with mortgage borrowers because they require lower down payments and have less rigid lending standards. Page 15 of 46

16 FHA loans are insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development. To protect the lender from a loss if the borrower defaults on the loan, borrowers with FHA loans pay for mortgage insurance. The money for FHA loans comes from private lenders. 4. VA Loans Are loans that provide a guarantee that protects the lender. The guarantee is provided by the U.S. Department of Veteran Affairs (VA). The veteran pays for the VA guarantee. One of the great advantages of a VA loan is that there is - 0- down payment required. If the seller is willing to pay all of the veterans closing cost it is permitted by VA. The money for VA loans comes from private lenders. 5. USDA Loans USDA loans are home mortgages for borrowers living in rural and suburban communities in Texas. They are guaranteed by the government. There are many advantages to Texas USDA loans, including: No down payment No mortgage insurance 6. Reverse Mortgage Financing A reverse mortgage is special financing for people over the age of 62. Some facts about reverse mortgage purchases are: They have a very low loan to value ratio based on age of the borrower. They require a large down payment. Up-front fees can be large. The property must remain owner occupied. Taxes and insurance must be paid. There are no monthly payments. Interest is being added to the loan balance monthly so the balance increases rather than decreases each month. The buyer does not have to qualify. The owner still owns the property and it passes to the heirs at the time of death. The heirs can pay off the mortgage and keep the property or let the lender take it back. It is a non-recourse loan so all the lender gets is the property. It may enable your buyer with $100,000 cash to buy a much more expensive home and still have no monthly payments. Page 16 of 46

17 PROMULGATED BY THE TEXAS REAL ESTATE COMMISSION (TREC) THIRD PARTY FINANCING ADDENDUM Page 2 B. APPROVAL OF FINANCING: Approval for the financing described above will be deemed to have been obtained when Buyer Approval and Property Approval are obtained. 1. Buyer Approval: This contract is subject to Buyer obtaining Buyer Approval. If Buyer cannot obtain Buyer Approval, Buyer may give written notice to Seller within days after the effective date of this contract and this contract will terminate and the earnest money will be refunded to Buyer. If Buyer does not terminate the contract under this provision, the contract shall no longer be subject to the Buyer obtaining Buyer Approval. Buyer Approval will be deemed to have been obtained when (i) the terms of the loan(s) described above are available and (ii) lender determines that Buyer has satisfied all of lender's requirements related to Buyer s assets, income and credit history. This contract is not subject to Buyer obtaining Buyer Approval. 2. Property Approval: Property Approval will be deemed to have been obtained when the Property has satisfied lender s underwriting requirements for the loan, including but not limited to appraisal, insurability, and lender required repairs. If Property Approval is not obtained, Buyer may terminate this contract by giving notice to Seller before closing and the earnest money will be refunded to Buyer. 3. Time is of the essence for this paragraph and strict compliance with the time for performance is required. 4. C. SECURITY: Each note for the financing described above must be secured by vendor s and deed of trust liens. D. FHA/VA REQUIRED PROVISION: If the financing described above involves FHA insured or VA financing, it is expressly agreed that, notwithstanding any other provision of this contract, the purchaser (Buyer) shall not be obligated to complete the purchase of the Property described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise: (i) unless the Buyer has been given in accordance with HUD/FHA or VA requirements a written statement issued by the Federal Housing Commissioner, Department of Veterans Affairs, or a Direct Endorsement Lender setting forth the Page 17 of 46

18 appraised value of the Property of not less than $ ; or (ii) if the contract purchase price or cost exceeds the reasonable value of the Property established by the Department of Veterans Affairs. (1) The Buyer shall have the privilege and option of proceeding with consummation of the contract without regard to the amount of the appraised valuation or the reasonable value established by the Department of Veterans Affairs. (2) If FHA financing is involved, the appraised valuation is arrived at to determine the maximum mortgage the Department of Housing and Urban Development will insure. HUD does not warrant the value or the condition of the Property. The Buyer should satisfy himself/herself that the price and the condition of the Property are acceptable. (3) If VA financing is involved and if Buyer elects to complete the purchase at an amount in excess of the reasonable value established by the VA, Buyer shall pay such excess amount in cash from a source which Buyer agrees to disclose to the VA and which Buyer represents will not be from borrowed funds except as approved by VA. If VA reasonable value of the Property is less than the Sales Prices, Seller may reduce the Sales Price to an amount equal to the VA reasonable value and the sale will be closed at the lower Sales Price with proportionate adjustments to the down payment and the loan amount. E. AUTHORIZATION TO RELEASE INFORMATION: (1) Buyer authorizes Buyer s lender to furnish to Seller or Buyer or their representatives information relating to the status of the approval for the financing. (2) Seller and Buyer authorize Buyer s lender, title company, and escrow agent to disclose and furnish a copy of the closing disclosure provided in relation to the closing of this sale to the parties respective brokers and sales agents identified on the last (3) page of the contract. Buyer Seller On the second page of the Third Party Financing Addendum below paragraph B describes both Buyer Approval and Property Approval. Both approvals are needed to have full loan approval. Page 18 of 46

19 Paragraph B1 gives the buyer the right to terminate and receive a refund of earnest money if the lender says they do not meet the buyer requirements and it is within the number of days agreed to by the parties. The buyer must act to terminate within that certain number of days or they lose their right to terminate under this addendum and there is no longer any financing contingency on this contract. If the loan fails after this date because of the buyer, the buyer will be in default. Paragraph B2 describes the property approval. Notice that property approval can take up to the closing date. It is not limited to the time for buyer approval. If the property does not meet the lenders requirements the Buyer may terminate. Paragraph B3 time is of the essence for this paragraph. This is one of only six places these words are used in the promulgated forms. Paragraph C describes the vendor s (seller s) lien that will be on the property. The seller has a lien until he/she is paid in full. Paragraph D is language required by FHA and VA. They want to ascertain that their buyers are not penalized if the property does not appraise. The buyer is not obligated to purchase the property if the appraisal is not enough for the lender to make the loan described here. If the property is not approved by the lender (appraisal, insurability and lender required repairs) the buyer has the option to terminate and receive their earnest money back. If the buyer elects to go forward with a smaller loan amount, the buyer will be paying the difference in the cash down payment. Another option is that the seller may be willing to reduce the sales price to the appraised value. PROMULGATED BY THE TEXAS REAL ESTATE COMMISSION (TREC) THIRD PARTY FINANCING ADDENDUM ADDENDUM FOR RELEASE OF LIABILITY ON ASSUMED LOAN AND/OR RESTORATION Page 19 of 46

20 OF SELLER'S VA ENTITLEMENT TO CONTRACT CONCERNING THE PROPERTY AT (Address of Property) A. RELEASE OF SELLER'S LIABILITY ON LOAN TO BE ASSUMED: Within days after the effective date of this contract Seller and Buyer shall apply for release of Seller's liability from (a) any conventional lender, (b) VA and any lender whose loan has been guaranteed by VA, or (c) FHA and any lender whose loan has been insured by FHA. Seller and Buyer shall furnish all required information and documents. If any release of liability has not been approved by the Closing Date: (check one box only) (1) This contract will terminate and the earnest money will be refunded to Buyer. (2) Failure to obtain release approval will not delay closing. B. RESTORATION OF SELLER'S ENTITLEMENT FOR VA LOAN: Within days after the effective date of this contract Seller and Buyer shall apply for restoration of Seller's VA entitlement and shall furnish all information and documents required by VA. If restoration has not been approved by the Closing Date: (check one box only) (1) This contract will terminate and the earnest money will be refunded to Buyer. (2) Failure to obtain restoration approval will not delay closing. NOTICE: VA will not restore Seller's VA entitlement unless Buyer: (a) is a veteran, (b) has sufficient unused VA entitlement and (c) is otherwise qualified. If Seller desires restoration of VA entitlement, paragraphs A and B should be used. Seller shall pay the cost of securing the release and restoration. Seller's deed will contain any loan assumption clause required by FHA, VA or any lender. Buyer Seller Buyer Seller Page 20 of 46

21 Addendum for Release of Liability on an Assumed Loan and/or Restoration of the Seller s VA Entitlement If a seller allows a purchaser to assume his current loan, he will want to be for liability for that loan. This addendum can be used to request that release. The contract can be made contingent upon the lender giving the seller that release, or it can be just a request and not hold up closing. Veterans who want to reuse their VA loan benefit in full may need to seek a restoration of entitlement. Restoration of Entitlement: How to Reuse Your VA Loan Benefit in Full. Chris Birk. Veteran United Network. A VA entitlement is a financial guaranty from the government, which pledges to repay a portion of your home mortgage in the event of default. Your entitlement is a specific dollar amount. Because first-time home buyers have yet to utilize their benefit, 100 percent of their entitlement remains on their Certificate of Eligibility, which stands to reason, seeing they have yet to utilize their benefit. But borrowers who have utilized a VA home loan before may have some or none of their entitlement remaining when the time comes for them to seek another VA purchase. And this means a borrower may have to apply for a restoration of entitlement prior to getting a new loan. Page 21 of 46

22 Restoring Entitlement Prospective homeowners are able to apply for restored VA loan eligibility for a new home loan only after they have paid the first loan in full and sold the property. But there is a one-time exception to the must-sell mandate, giving the borrower an opportunity to keep the first home and seek a new VA loan for another home. Borrowers who choose to utilize the one-time restoration allowance will have to dispose of all property in the future if they again seek restoration of entitlement. There are no rules concerning the disposition of the first property once the loan has been paid in full, leaving it to be served as a rental property or vacation home without penalties or restrictions from the VA. However, the new property purchased with the VA loan is still under department regulations involving occupancy, business use of the space and marketability, among other issues. Updating the VA Some borrowers who have previously purchased a home with a VA loan will have no entitlement remaining or their Certificate Of Eligibility (COE) will say, Paid in full, no restoration. This means their previous loan was paid off, but the VA lacks information as to how or if the property was disposed. In order to update the COE to reflect current information, borrowers should fill out VA form , focusing on Section 8. A VA-approved lender can also help veterans take care of this. Often the VA will want to see a copy of the final HUD from the sale of the home, so it is important keep all paperwork received from the title company at closing. Restoration of entitlement is not an automatic process. It requires an application from the borrower. Once an application has been processed and entitlement restored, borrowers can then move forward with the process of applying for a new VA home loan, generally Page 22 of 46

23 PROMULGATED BY THE TEXAS REAL ESTATE COMMISSION (TREC) ADDENDUM FOR SALE OF OTHER PROPERTY BY BUYER TO CONTRACT CONCERNING THE PROPERTY AT Address of Property A. The contract is contingent upon Buyer's receipt of the proceeds from the sale of Buyer's property at ( Address) on or before, 20 (the Contingency). If the Contingency is not satisfied or waived by Buyer by the above date, the contract will terminate automatically and the earnest money will be refunded to Buyer. NOTICE: The date inserted in this Paragraph should be no later than the Closing Date specified in Paragraph 9 of the contract. B. If Seller accepts a written offer to sell the Property, Seller shall notify Buyer (1) of such acceptance AND (2) that Seller requires Buyer to waive the Contingency. Buyer must waive the Contingency on or before the day after Seller's notice to Buyer; otherwise the contract will terminate automatically and the earnest money will be refunded to Buyer. C. Buyer may waive the Contingency only by notifying Seller of the waiver and depositing $ with escrow agent as additional earnest money. All notices and waivers must be in writing and are effective when delivered in accordance with the contract. D. If Buyer waives the Contingency and fails to close and fund solely due to Buyer's non-receipt of proceeds from Buyer's property described in Paragraph A above, Buyer will be in default. If such default occurs, Seller may exercise the remedies specified in Paragraph 15 of the contract. E. For purposes of this Addendum time is of the essence; strict compliance with the times for performance stated herein is required. Buyer Seller Buyer Seller This form has been approved by the Texas Real Estate Commission for use with similarly approved or promulgated contract forms. Such approval relates to this form only. TREC forms are intended for use only by trained real estate licensees. Page 23 of 46

24 No representation is made as to the legal validity or adequacy of any provision in any specific transactions. It is not suitable for complex transactions. Texas Real Estate Commission, P.O. Box 12188, Austin, TX , ( TREC No This form replaces TREC No The Sale of Other Property Addendum is the form to use if the buyer is unable to buy a new property unless his or her existing property is sold and closed. It is usually used when the buyer needs the money from the first sale to complete the second sale. Or it could be necessary because the new lender would not approve a loan on the new property until the debt is paid in full on the existing loan. Paragraph A gives a date by which the funds from the sale of an existing property must be received. Notice that Paragraph E says that, for this addendum, time is of the essence. This addendum works best when the buyers present home is already under contract (pending), and they are just concerned about closing and funding. Paragraph 19 of the contract says that the seller can continue to market the property for back up offers and receive, negotiate, and accept a back-up offer. Paragraph B in the Sale of Other Property Addendum discusses what will happen if the seller accepts a backup offer. If seller accepts a back up offer, seller will notify this buyer (buyer 1) and buyer 1 may waive the contingency on or before a date they have agreed upon; otherwise, this first contract will terminate. Paragraph D cautions buyers not to waive the contingency unless they are certain they can close even if the first property does not close. Otherwise, the buyer will be in default. In Paragraph C, the parties can agree upon the amount of additional earnest money that must be paid if buyer #1 waives the contingency. Page 24 of 46

25 Before you go? 1. When is the best time to use a Sale of Other Property Addendum? Anytime the prospective buyer wants a way to terminate the contract When the prospective buyer has a home that is under contract and waiting to close* When the prospective buyer wants this home and is putting his home on the market Anytime 2. What must happen before the seller can tell the buyer they must waive the contingency? The date in paragraph A has passed The Seller has received a Back-Up offer The Buyer refused to put up the additional earnest money The Seller has negotiated a fully accepted Back-Up Offer* 3. What happens if a buyer waives the contingency and then the buyer s lender turns their loan down because having two house payments put them over the debt limit on the loan. The Buyer is in default and the seller can pursue damages under the default paragraph* Nothing, the buyer cannot buy if they have no money If the seller can salvage the sale with the Back-Up buyer they have to release this first buyer The buyer is in default. The seller can keep the earnest money and release the buyer Page 25 of 46

26 4. In paragraph A of the Sale of Other Property Addendum the purchaser listed January 12, If it has now passed that date and the sale has not closed on their present home, how does the buyer terminate the contract on the home they are trying to buy? They use the Buyer s Termination of Contract They send a letter to the seller They do not have to do anything it is automatic* The contract will automatically extend the date PROMULGATED BY THE TEXAS REAL ESTATE COMMISSION (TREC) SELLER FINANCING ADDENDUM TO CONTRACT CONCERNING THE PROPERTY AT Address of Property A. CREDIT DOCUMENTATION. To establish Buyer's creditworthiness, Buyer shall deliver to Seller within days after the effective date of this contract, credit report verification of employment, including salary verification of funds on deposit in financial institutions current financial statement and. Buyer hereby authorizes any credit reporting agency to furnish copies of Buyer's credit reports to Seller at Buyer's sole expense. B. BUYER S CREDIT APPROVAL. If the credit documentation described in Paragraph A is not delivered within the specified time, Seller may terminate this contract by notice to Buyer within 7 days after expiration of the time for delivery, and the earnest money will be paid to Seller. If the credit documentation is timely delivered, and Seller determines in Seller's sole discretion that Buyer's credit is unacceptable, Seller may terminate this contract by notice to Buyer within 7 days after expiration of the time for delivery and the earnest money will be refunded to Buyer. If Seller does not terminate this contract, Seller will be deemed to have approved Buyer's creditworthiness. C. PROMISSORY NOTE. The promissory note in the amount of $ (Note), included in Paragraph 3B of the contract payable by Buyer to the order of Seller will bear interest at the rate of % per annum and be payable at the place designated by Seller. Buyer may prepay the Note in whole or in part at any time without penalty. Any prepayments are to be applied Page 26 of 46

27 to the payment of the installments of principal last maturing and interest will immediately cease on the prepaid principal. The Note will contain a provision for payment of a late fee of 5% of any installment not paid within 10 days of the due date. Matured unpaid amounts will bear interest at the rate of 1½% per month or at the highest lawful rate, whichever is less. The Note will be payable as follows: (1) In one payment due after the date of the Note with interest payable at maturity monthly quarterly. (check one box only) (2) In monthly installments of $ including interest plus interest (check one box only) beginning after the date of the Note and continuing monthly thereafter for months when the balance of the Note will be due and payable. (3) Interest only in monthly installments for the first month(s) and thereafter in installments of $ including interest plus interest (check one box only) beginning after the date of the Note and continuing monthly thereafter for months when the balance of the Note will be due and payable. D. DEED OF TRUST. The deed of trust securing the Note will provide for the following: (1) PROPERTY TRANSFERS: (check one box only) (a) Consent Not Required: The Property may be sold, conveyed or leased without the consent of Seller, provided any subsequent buyer assumes the Note. (b) Consent Required: If all or any part of the Property is sold, conveyed, leased for a period longer than 3 years, leased with an option to purchase, or otherwise sold (including any contract for deed), without Seller's prior written consent, which consent may be withheld in Seller's sole discretion, Seller may declare the balance of the Note to be immediately due and payable. The creation of a subordinate lien, any conveyance under threat or order of condemnation, any deed solely between buyers, or the passage of title by reason of the death of a buyer or by operation of law will not entitle Seller to exercise the remedies provided in this paragraph. NOTE: Under (a) or (b), Buyer's liability to pay the Note will continue unless Buyer obtains a release of liability from Seller. (2) TAX AND INSURANCE ESCROW: (check one box only) (a) Escrow Not Required: Buyer shall furnish Seller, before each year's ad valorem taxes Page 27 of 46

28 become delinquent, evidence that all ad valorem taxes on the Property have been paid. Buyer shall annually furnish Seller evidence of paid-up casualty insurance naming Seller as a mortgagee loss payee. (b) Escrow Required: With each installment Buyer shall deposit in escrow with Seller a pro rata part of the estimated annual ad valorem taxes and casualty insurance premiums for the Property. Buyer shall pay any deficiency within 30 days after notice from Seller. Buyer's failure to pay the deficiency will be a default under the deed of trust. Buyer is not required to deposit any escrow payments for taxes and insurance that are deposited with a superior lienholder. The casualty insurance must name Seller as a mortgagee loss payee. (3) PRIOR LIENS: Any default under any lien superior to the lien securing the Note will be a default under the deed of trust securing the Note. Buyer Seller Buyer Seller This form has been approved by the Texas Real Estate Commission for use with similarly approved or promulgated contract forms. Such approval relates to this form only. TREC forms are intended for use only by trained real estate licensees. No representation is made as to the legal validity or adequacy of any provision in any specific transactions. It is not suitable for complex transactions. Texas Real Estate Commission, P.O. Box 12188, Austin, TX , ( TREC No This form replaces TREC No First let s talk about what Seller Financing is NOT. It is NOT a contract for Deed and it is NOT a wrap-around mortgage. Both of those would require an attorney to be preparing the documents. They are outside the scope of what a real estate licensee can do. Seller Financing is when the seller s property has no debt. Any loans have been paid in full or are being paid in full before closing. The seller is agreeing to take a note in lieu of Page 28 of 46