EARNEST MONEY CONTRACT: BUYING AND SELLING RURAL LAND NEAR HOUSTON

Typically the FARM AND RANCH CONTRACT Promulgated By The Texas Real Estate Commission (TREC) is used for rural property.

There is an abundance of resources related to contracts and closings associated with rural land. TREC requires license holders to have 3 hours of education related to contracts every two years. Many professional organizations such as the Texas Chapter of the Realtors Land Institute and title companies provide this training.

There are a lot of differences between the Farm and Ranch Contract and the Residential One to Four Family (Resale) Contract. These differences include; accessories specific to farm and ranch, timber and water reservations, crops, surface leases, agricultural development districts, sales price adjusted based on acreage revealed in the survey and more. Let’s take a look at the 11 pages including 23 paragraphs that make up the contract.

The buyer and seller don’t need to be an expert on every line of the contract but your land broker should be very knowledge. If you have any questions or concerns please have an attorney read it before signing. The following content is for information only and certainly does not constitute advice, legal or otherwise.

SECTION 1. PARTIES:

The full and legal names of the buyer(s) and the seller(s) are entered. They will need to match the following identifying documents at closing. Anyone having an interest should be included.

SECTION 2. PROPERTY:

The property includes; land, improvements, accessories, and crops except for reservations and exclusions (see items E. And F.)

A. LAND: The main requirement here is the legal description. An address is not sufficient but good to have. I try to include appraisal district ID. Attaching a survey is helpful. Your land agent will provide this.

B. IMPROVEMENTS: This item includes both Farm and Ranch Improvements and Residential Improvements which are permanently installed and built in items. This item does not require filling in any data but you should read it carefully in case something needs to be excluded.

C. ACCESSORIES: The primary difference between accessories and improvements is that accessories are not permanently attached. The Farm and Ranch lists common items found on rural properties. Items checked will convey to buyer whole those not checked can be removed by the seller. Be sure and read Residential Accessories language.

D. CROPS: Seller maintains right to harvest crops after date of closing. In other word they keep possession of crops until harvest.

E. EXCLUSIONS: If an improvement, accessory or crop is to be excluded, it needs to be listed here. If an item is to be moved after closing, possession agreements must be included here.

F. RESERVATIONS: This an extremely important item and may require discussion with an attorney. Any reservations must be made by using an addendum. This is not the place for a Special Provision. We will discuss Special Provisions in Section 11.

SECTION 3. SALES PRICE:

A. CASH DOWN PAYMENT:

B. SUM OF ALL FINANCING: Information about any loan(s) is described in an Addendum.

C. SALES PRICE: Total of cash downpayment and all financing.

D. ADJUSTMENTS: If the sales price is to be adjusted based on a survey, it will be adjusted by a per acre amount. The adjustment can be made to cash downpayment or loan or allocated to each.

SECTION 4. LEASES:

The seller cannot create or change an existing lease or convey any interest in the property without written permission from the buyer. Additionally, the seller must disclose any residential , fixture, natural resource, any farm or ranch leases and furnish a copy of any lease to the buyer. A buyer may terminate the contract after the negotiated date and the earnest money returned.

SECTION 5. EARNEST MONEY AND TERMINATION OPTION:

Which party chooses the title company? This item is negotiable but generally if the seller pays for both the owner policy and the lender policy then the seller can choose the title company. If the buyer pays for the owner policy then the buyer chooses the title company.

One of the most often asked question is how much should the earnest money be. Custom and negotiation set that parameter. 1% of the sales price with a minimum of $1,000 is an answer I often give but there are no absolutes. The earnest money amount is negotiation. I have dealt with owners who would not deal with anyone who put up less than 5%. That concept can be flipped by the buyer having the attitude that they want the seller to notice their offer in a positive way. The amount of the earnest money shows the seriousness of the buyer.

The buyer can buy the unrestricted right to terminate the contract for a specified period of time. The most common use of this option period is for inspections. This section provides for; an option fee (usually several hundred dollars), an option period (usually 10 to 30 days) and the choice of whether the option fee will credited to the sales price at closing. The option fee must be paid to the buyer within 3 days of the effective date of the contract. Time is of the essence for this paragraph. The option fee and period is negotiated.

Sometimes a dispute arises as to who should get the earnest money if a contract falls through. Usually the title company will hold the money until an agreement is reached and proper written notice is received. Hopefully, it will not be necessary for attorneys to be involved.

SECTION 6. TITLE POLICY AND SURVEY:

A. TITLE POLICY: Determines which party is going to pay for the owner’s title policy. This item is negotiable. The owner’s title policy protects the buyer. There are standard policies and extended coverage policies. If financing is involved, the lender will require purchase of lender’s title insurance as well as owner’s title insurance. If the seller pays for both policies they can choose which title company and venue will be used for the closing. The basic rates for title insurance are set by the state of Texas. You can call the title company to find out the cost. You should read the standard exceptions (1 thru 7) and fill in ‘shortages in area ‘ box for #6 if there is concern about survey.

Click below for excellent discussion of Section 6 exceptions, endorsements and other items included in Section 6, Title Policy and Survey.

HOME SECURITY: UNDERSTANDING AND NEGOTIATING TITLE INSURANCE

B. COMMITMENT: This is a document showing what the title commitment (to include exception documents) will cover although it is not the final policy because the buyer has a time period to object or amend the commitment.

C. SURVEY: This item covers 4 scenarios regarding a survey. Surveys are expensive and time consuming. Provision of a survey is an area of negotiation. However, title companies, lenders and buyers are becoming more likely to require a new survey dated after the effective date of the contract.

1. Deals with who will pay for using and/or furnishing an old survey or to recertify an existing survey. Also who will pay if title company or lender requires a new survey.

2. Buyer obtains and pays for new survey

3. Seller obtains and pays for new survey

4. No survey is required

D. OBJECTIONS: If there is an exception to any use or activity the buyer wants to object to they must be included in the blank provided. In other word declare all uses and activities to which the property will be put. Also specify time buyer has to object.

E. EXCEPTION DOCUMENTS: Allows seller the opportunity to provide the buyer with any exceptions of which the seller is aware.

F. SURFACE LEASES: Prior to closing seller must provide copies of written leases or give notice of oral leases by listing on the blank space.

G. TITLE NOTICES: This section has 10 items, however, there are no blanks to fill in or opportunities to negotiate. You should read and understand. Ask your agent if you have any questions.

SECTION 7. PROPERTY CONDITION:

A. ACCESS, INSPECTIONS AND UTILITIES: The seller must provide reasonable access to the buyer and their inspectors which generally means giving notice. Inspectors must be licensed by TREC. Hydrostatic testing must be authorized by the seller in writing separately from the contract. Hydrostatic testing is not necessary for residences with PVC pipe (generally since 1970). All utilities must be turned on at owners expense during contract period. The seller is responsible for keeping all utilities on during the time the contract is in effect. Basically, the seller must afford the buyer every opportunity to inspect the property during the option period.

B. SELLERS DISCLOSURE: Essentially, the seller’s disclosure needs to be provided as early in the process as possible. The seller (not their agent) must fill out this form and both parties should sign it. The buyer needs time to consider the condition of the residence. Time of delivery of any disclosure notice is negotiable.

C. SELLERS DISCLOSURE OF LEAD BASED PAINT: Seller must disclose disclosure of lead based paint and lead based paint hazards for structures older than 1978 regardless of whether lead based paint is present. There is a manual produced by the federal government that must be provided.

D. ACCEPTANCE OF PROPERTY CONDITION: Buyer can check 1. ‘As Is’ or 2. ‘As Is’ provided seller completes certain specific repairs at sellers expense and as of a certain date. Regardless of which option, the buyer can still conduct inspections and if there are problems submit an amendment regarding repairs.

E. COMPLETION OF REPAIRS: All repairs by seller must be completed by closing date. The work needs to be done by licensed or competent contractors. Any warranties can be transferred to buyer if they pay for them. If repairs are not completed by closing an extension can be negotiated. There are a lot of scenarios but the parties can enter into amendments agreeable to both to include adjustment of sales price in place of actual repairs.

F. LENDER REQUIRED REPAIRS AND TREATMENTS: This section states that neither party must pay for or make repairs required by the lender. Accordingly, the contract will terminated. However, the parties can negotiate the repairs to include a change in sales price as in E above.

G. ENVIRONMENTAL MATTERS: If a buyer is concerned about their intended use of the property due to environmental issues then a TREC promulgated addendum should be used.

H. SELLER’S DISCLOSURES: The seller states that they have no knowledge of a number of issues listed in this section. This does not mean that those issues are not present, just that the seller is unaware of them.

I. RESIDENTIAL SERVICE CONTRACTS: This is a point of negotiation. Basically the seller reimburses a specified amount towards a residential service contract on closing. The buyer will purchase the contract.

J. GOVERNMENT PROGRAMS: Basically, the seller provides all information regarding any government program to the buyer.

SECTION 8. BROKERS AND SALES AGENTS:

A. DISCLOSURE: Texas law requires any real estate broker or agent to disclose any interest whatsoever in the property under contract.

B. BROKERS FEES: Brokers’ fees are not a part of this contract. They can be found in separate written agreements such as the Buyer Representation agreement in the case of the buyer or in the Listing Agreement in the case of the seller.

SECTION 9. CLOSING:

The closing date is negotiated and entered in this paragraph. It can also be 7 days after any objections to title policy or survey are cured or waived. This section outlines duties of buyers and sellers. All loans and assessments are paid out of sales proceeds. If the property is leased, the seller transfers security deposits to buyer and delivers written notice to tenants. The closing agents will explain these items to the parties.

SECTION 10. POSSESSION:

A. BUYER’S POSSESSION: The majority of property transactions see the seller moving out on or before the closing date. In some cases the seller needs to have additional time to move out after closing. This is common with farm and ranch properties. A lease can be negotiated to facilitate such a situation. Sometimes a special provision can be made for a short period of time. Insurance coverage could be impacted by possession by buyer before closing or by seller after closing.

B. SMART DEVICES: This section is an explanation of treating all internet devices having to do with the property under contract.

SECTION 11. SPECIAL PROVISIONS:

TREC prohibits license holder from adding information for which there is an addendum or other form promulgated by TREC for mandatory use. Only factual statements and business details specific to this transaction should be included in this paragraph. It may be wise to consult an attorney regarding use of this section.

SECTION 12. SETTLEMENT AND OTHER EXPENSES:

This paragraph describes the expenses at closing which each party will pay. These items will be detailed in the Closing Disclosure.

SECTION 13. PRORATIONS AND ROLLBACK TAXES:

A. PRORATIONS: Taxes, interest, assessments, fees, dues, and rents are prorated through the closing date. There are no fields to fill in.

B. ROLLBACK TAXES: This has to do with a change in use of the land. An example would be from agriculture exempt to subdivision development. Any assessments of additional taxes are the responsibility of the party who changed the use. There are no fields to fill in.

SECTION 14. CASUALTY LOSS:

If there is a casualty loss after effective date of contract but before closing, the seller is responsible for restoration of the property to its previous condition. Both parties should read this section. There are no fields to fill in.

SECTION 15. DEFAULT:

If either party fails to comply with the contract, they are in default. If a party fails to comply, the other can sue them for specific performance or seek other relief as provided by law or terminate the contract and receive the earnest money. There are no fields to fill in.

SECTION 16. MEDIATION:

In the case of dispute, all parties to the contract agree to mediation. The costs of mediation will be shared equally. The mediation is non-binding. There are no fields to fill in.

SECTION 17. ATTORNEY’S FEES:

In the event of litigation, any party to this contract to include; buyers, sellers, agents and brokers who prevails in court will recover reasonable attorney fees and court costs. There are no fields to fill in.

SECTION 18. ESCROW:

A. ESCROW: The escrow agent is not a party to the contract and is not liable for performance or non-performance of any party to the contract.

B. EXPENSES: Earnest money to be applied first to cash down payment and then to buyers expenses.

C. DEMAND: This section deals with release of earnest money upon termination of the contract. Discussion of execution of release by parties.

D. DAMAGES: This section deals with any party wrongfully failing or refusal to sign release and their liability.

E. NOTICES: Escrow agent’s notices will be sent in compliance of Paragraph 21 of the contract .

SECTION 19. REPRESENTATIONS:

The seller can keep showing and taking backup contracts on the property until closing.

SECTION 20. FEDERAL TAX REQUIREMENTS:

The Internal Revenue Service requires that if a seller is a ‘foreign person’ they must reveal that to the buyer. The buyer will then withhold funds to comply with IRS requirements. If the buyer or a seller is a “foreign person” you should consult with an attorney and tax professional. There are no fields to fill in.

SECTION 21. NOTICES:

All notices must be in writing. The decision here is whether the party or the agent is listed. Time is of the essence with some notices.

SECTION 22. AGREEMENT OF PARTIES:

This paragraph deals with addendum. Addendums are part of the contract. Numerous addendums are listed and also a space for others.

SECTION 23. CONSULT AN ATTORNEY BEFORE SIGNING:

Real estate brokers and agents cannot give legal advice. Either party can list their attorney here. Please read contract carefully.

EXECUTION OF CONTRACT:

Either broker can execute the contract. This should be done when acceptance is unequivocal and the other broker is informed.

RATIFICATION OF FEE:

Listing broker agrees to pay buyers broker at closing.

BROKER INFORMATION AND AGREEMENT FOR PAYMENT OF BROKERS’ FEE:

Listing Broker agrees to pay Buyers’ Broker.

RECEIPTS

Option Fee receipt, Earnest Money receipt, Contract receipt and Additional Earnest money receipt are on page 11.

CLOSING:

Your agent doesn’t have to be at the closing unless you want them to be there. The main assistance your agent can provide is to answer any questions you might have about the contract. Also, many agents will provide assistance to you after the closing with vendors, advice, etc.

SUMMARY:

Please read the entire earnest money contract. You don’t need to be an expert on every section and you should rely on your land broker with any questions or advice. Much of the contract is negotiated. Also, have an attorney read over it if you believe that is necessary. A lot of people do.

LET US HEAR FROM YOU:

We would very much to hear your comments and questions. Many of you can probably add a lot on this topic. Share your experiences. If you are looking at your first contract give us a call.

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Allen Realty Advisors represents buyers and sellers of fine quality rural land near Houston. We specialize in weekend retreats, country estates, farms and ranches, recreational property and investment land. Our market area is generally within 100 miles (two hours) of Houston.