Law of Contracts

TREC One to Four Family Residential Contract (Resale)

Commission-promulgated sales contract required for most Texas one-to-four family residential resale transactions.

Promulgated Form

Standardized contract or addendum issued by TREC that licensees are required to use unless an exception applies.

Addendum

A written document that adds terms or conditions to an existing contract.

Amendment

A written change that modifies the terms of an existing contract after execution.

1031 Exchange

IRS-approved transaction allowing investors to defer capital-gains tax by reinvesting proceeds in like-kind property.

Real Property

Land and permanent improvements affixed to it; transfers with the sale unless otherwise negotiated.

Personal Property

Movable items belonging to the seller that may be removed at closing unless included in the sale.

Effective Date (Texas contracts)

The calendar day after final signature when all deadlines in the contract begin.

ESIGN Act

2000 federal law granting electronic signatures the same legal status as handwritten signatures.

Uniform Electronic Transactions Act (UETA)

Model law adopted by Texas giving electronic records and signatures legal equivalence to paper versions.

Contingency

A contract condition that must be satisfied for the agreement to proceed to closing.

Loan Contingency

Condition requiring the buyer to obtain financing approval by a specified date.

Inspection Contingency

Condition allowing a buyer to evaluate property condition and negotiate or cancel based on findings.

Appraisal Contingency

Protects a buyer if the property does not appraise at or above the contract price.

Sale-of-Other-Property Contingency

Requires the buyer’s current property to sell before the new purchase can close.

Addendum for "Back-Up" Contract

TREC form used when a contract will become primary only if the first contract terminates.

Third-Party Financing Addendum

TREC form specifying loan type, amount, and buyer’s financing approval deadlines.

Temporary Residential Lease (Buyer/Seller)

Addendum that allows one party to lease the property for a short period before or after closing.

Amendment to Contract (TREC)

Promulgated form used to change terms such as price, closing date, or repairs after execution.

TRELA

Texas Real Estate License Act, governing licensing and conduct of real estate professionals.

TREC

Texas Real Estate Commission; enforces TRELA, promulgates forms, and regulates licensees.

Broker-Lawyer Committee

13-member group that drafts and revises contract forms for TREC approval.

Unauthorized Practice of Law

Providing legal advice or drafting legal documents outside a licensee’s authority.

Fiduciary Duty

Legal obligation of loyalty, confidentiality, disclosure, obedience, accounting, and reasonable care owed to clients.

Deceptive Trade Practices Act (DTPA)

Texas consumer protection law allowing treble damages for knowingly deceptive acts.

Exclusive Right-to-Sell Listing

Listing agreement granting one broker the right to earn commission regardless of procuring buyer.

Exclusive Agency Listing

Listing where seller pays commission unless seller procures the buyer without any broker’s help.

Open Listing

Non-exclusive listing allowing multiple brokers; only the procuring broker earns commission.

Net Listing

Listing in which broker’s commission is any amount above a price set by the seller.

Listing Agreement Required Elements

Parties, property description, price, term, broker compensation, services, access, disclosures, signatures, etc.

Buyer Agency Agreement

Contract defining the relationship and compensation terms between broker and buyer.

Contract for Deed

Seller-financed installment sale in which seller retains legal title until buyer pays in full.

Equitable Title

Buyer’s financial interest in property under a contract; gives right to obtain legal title.

Legal Title

Ownership recognized by law, including right to convey property.

Breach Notice (Contract for Deed)

Required written notice giving defaulting buyer at least 30 days to cure after 9/1/2003.

Tax-Deferred Exchange Agreement

Contract facilitating a 1031 like-kind exchange while deferring capital gains taxes.

Specific Performance

Court remedy forcing a party to perform contractual obligations rather than pay damages.

Partial Performance

When only part of contractual duties are completed; may or may not satisfy the other party.

Substantial Performance

Completion of most, but not all, contract terms; may require damages for unperformed part.

Impossibility of Performance

Contract termination because obligations cannot legally or practically be completed.

Operation of Law

Contract termination or modification resulting from legal principles, such as death or bankruptcy.

Assignment (Contracts)

Transfer of contractual rights to a new party while original party remains liable.

Novation

Substitutes a new party and releases the original party from liability.

Liquidated Damages

Pre-agreed sum payable if a party breaches, often the buyer’s forfeited earnest money.

Statute of Frauds (Texas)

Requires real estate sale and >1-year lease contracts to be in writing and signed.

Statute of Limitations (Texas)

Legal actions on contracts must be filed within four years.

Estate for Years

Leasehold estate with a fixed beginning and ending date.

Periodic Estate

Leasehold that automatically renews for successive periods until notice is given.

Tenancy at Sufferance

Holdover tenancy where tenant remains after lease expiration without consent.

Tenancy at Will

Leasehold with no fixed term, terminable by either party with notice.

General Warranty Deed

Deed offering the strongest guarantees, including all six covenants of title.

Bargain and Sale Deed

Deed that conveys title and may include limited warranties.

Quitclaim Deed

Deed that conveys any interest without warranties; often used to clear title clouds.

Executor’s Deed

Deed used by an estate’s executor to convey property to a buyer.

Referee’s Deed

Deed issued in bankruptcy or foreclosure conveying ownership to a high bidder.

Deed in Trust

Instrument conveying real estate to a trustee for the benefit of a beneficiary.

Covenant of Seisin

Grantor’s promise of ownership and right to convey specified in a warranty deed.

Habendum Clause

"To have and to hold" clause defining the grantee’s ownership interest.

Chain of Title

Complete record of property ownership transfers from original source to present owner.

Abstract of Title

Condensed history of title including all recorded liens and encumbrances.

Title Insurance

Policy protecting against past defects in title; separate policies for owner and lender.

Title Theory State

State such as Texas where legal title is held by a trustee until the loan is repaid.

Lien Theory State

State where borrower holds title and lender has a lien; foreclosure requires judicial action.

Deed of Trust

Three-party security instrument giving trustee legal title and power of non-judicial foreclosure.

Promissory Note

Borrower’s written promise to repay loan, detailing terms, interest, and default provisions.

Loan Origination Fee

Charge (often 1-3% of loan) covering lender’s cost of processing the mortgage.

Prepayment Penalty

Fee charged for paying a loan off early; must be disclosed by lender.

Collateral (Security)

Property pledged to secure repayment of a loan, usually the house itself.

Primary Mortgage Market

Local lenders that originate loans directly to borrowers.

Secondary Mortgage Market

Investors that buy packaged loans from primary lenders, providing liquidity.

Loan-to-Value Ratio (LTV)

Loan amount divided by property value; indicates borrower’s equity.

Conventional Loan

Mortgage not insured or guaranteed by a government agency.

FHA-Insured Loan

Government-backed mortgage with low down payment and mortgage insurance premium.

VA-Guaranteed Loan

Mortgage for eligible veterans requiring no down payment and no MIP.

Private Mortgage Insurance (PMI)

Insurance protecting a conventional lender when borrower’s down payment is <20%.

Conforming Loan

Meets Fannie Mae / Freddie Mac guidelines for size, LTV, and borrower ratios.

Non-Conforming Loan

Fails to meet conforming guidelines; often jumbo or unique underwriting situations.

Truth in Lending Act (TILA)

1968 law requiring full disclosure of credit terms; implemented by Regulation Z.

Equal Credit Opportunity Act (ECOA)

Prohibits discrimination in lending based on protected characteristics; Regulation B.

Real Estate Settlement Procedures Act (RESPA)

Prohibits kickbacks and mandates closing cost disclosures; implemented by Regulation X.

Community Reinvestment Act

Requires lenders to serve low- and moderate-income communities with affordable credit.

Qualified Mortgage (QM)

Loan meeting ability-to-repay rules, no toxic features, and ≤43% debt-to-income ratio.

CLO (Computerized Loan Origination)

System allowing borrowers to compare and apply for loans electronically.

Adjustable-Rate Mortgage (ARM)

Loan with interest rate that changes periodically based on an index.

Balloon Mortgage

Loan with periodic payments and large lump-sum balance due at maturity.

Buydown

Up-front payment to reduce the borrower’s interest rate temporarily or permanently.

Reverse Mortgage

Loan allowing homeowners 62+ to convert home equity into cash without monthly payments.

Wrap-Around Mortgage

Seller financing in which new loan encompasses existing loan plus additional funds.

Bridge Loan

Short-term financing used to bridge the gap between home purchases.

Reinstatement (Foreclosure)

Borrower’s right to cure default by paying past-due amounts plus fees before foreclosure.

Redemption (Foreclosure)

Borrower’s right to pay off entire loan and costs to regain property after default.

Non-Judicial Foreclosure

Foreclosure outside court using trustee’s power of sale under a deed of trust.

Short Sale

Sale in which lender agrees to accept less than the loan balance to avoid foreclosure.

Police Power

Government authority to regulate property for health, safety, and welfare without compensation.

Eminent Domain

Government power to take private property for public use with just compensation.

Escheat

State takes property of a deceased person with no heirs or will.

Lien

Creditor’s legal claim against property to secure a debt.

Deed Restriction

Private limitation written into a deed affecting property use.

Easement Appurtenant

Permanent right benefiting adjacent property, transferring with title.

Easement in Gross

Right to use land not tied to ownership of adjoining parcel, e.g., utility line.