Clients in the process of buying or selling a home often need clarification of the Texas Real Estate Commission's One to Four Family Residential Contract form (the "Contract"). Many parts of the Contract are not only extremely significant, but can also be difficult to fully comprehend. While the following tips are by no means a comprehensive explanation, they will help you gain a better understanding of the Contract. This knowledge will be helpful for the homebuyer as he or she enters into one of the most important financial transactions of their lives. (The Contract can be downloaded here .)

Get Advice Before Signing the Contract

Buying a home can be the biggest decision of one's life, not to mention the largest financial commitment you will ever make. Given the magnitude of this transaction, it is important that everyone understand the document they are signing. Thus, the advice of a qualified attorney can be very helpful.

Pay Close Attention to the Financing Contingencies in Paragraph 4

When using third party financing, both the buyer and the seller should be aware of paragraph 4(A)(2) of the Contract. This paragraph provides the parties one of the two following options: (a) have the contract subject to the buyer being approved for financing or (b) to not have the contract subject to the buyer being approved for financing. The buyer should realize that if (b) is checked the buyer must still fulfill his obligations under the contract regardless of his inability to obtain financing for the purchase.

Earnest Money Default

Paragraph 5 of the contract provides blank spaces that can be filled in to show that the buyer must deposit earnest money and/or additional earnest money. Earnest money is money given by a buyer to a seller at the beginning of the contract. Earnest money is intended to give the seller a reassurance that the buyer also has something at risk if the transaction does not go through. If the buyer does not deposit the earnest money and/or additional earnest money within the specified periods of time, then the buyer will be in default under the terms of the Contract and the seller can terminate the relationship without adverse consequences.

Title Policy and Survey

A title insurance policy (the "Policy") is usually issued by a title insurance company. The Policy insures homebuyers against errors in a title search and is a contract of indemnity which guarantees that the title to the property is as reported. If the title is not as reported, the issuer of the Policy will generally reimburse the buyer up to the amount of the Policy. The Policy is designed to reduce losses caused by defects in title from the past.

Depending upon which option is chosen in paragraph 6(A), either the buyer or the seller will have to pay for a Policy. This step is required by most, if not all, third party lenders who are agreeing to lend the borrower money to purchase the home. In my experience, it is customary that the seller pay for the Policy. However, the parties are free to negotiate this item any way they see fit.

The party that is obligated to pay the expense of the survey will be determined in paragraph 6(C), depending upon which box is checked within that paragraph. If the buyer desires to object to any issues that are presented by the title commitment, its accompanying documents, or the survey, then the buyer should insert a period of time into paragraph 6(D) to afford himself an opportunity to make such an objection. However, the seller will want to close the sale as quickly as possible, and might object to the insertion of a long time period.

Property Condition

Texas Property Code § 5.008 is a seller's disclosure list to the buyer, and sets forth a significant description of the property's condition. Examples from § 5.008 include, but are not limited to, the condition of the property's roof, walls and fences. The buyer and the seller should both examine the disclosure provision and determine how important it is to each of them. The buyer and the seller can negotiate whether to waive this provision by checking one of the boxes in paragraph 7(B). However, in actual application this provision is rarely waived and, therefore, in most transactions § 5.008 dictates that the seller must provide certain disclosures to the buyer. The seller can be liable for damages to a buyer if the seller fails to make such disclosures.

Default

The default language found in paragraph 15 is arguably the most significant portion of the Contract. In the case of buyer's default, paragraph 15 provides the seller with the following remedies: the seller would be able to sue the buyer to force the sale of the property and seek such other relief as provided by law or terminate the Contract and receive back the earnest money. The seller should be aware that the buyer also has similar remedies to choose from in the case of a seller's default. Such remedies include the buyer's ability to sue the seller to force the sale of the property in accordance with the contract and seek such other relief as may be provided by law or terminate the contract and receive back the earnest money.

Termination Option

Paragraph 23 sets forth the Option Fee in the Contract. This is a fee paid by the buyer to the seller in exchange for the unconditional right to terminate the contract during the option period. The buyer is not required to purchase this option. However, if the buyer does purchase the Option Fee, and it is submitted within two days of the date the contract is signed, then the buyer will have the unrestricted right to terminate the Contract by giving notice of termination to the seller within the specified option period.

For instance, suppose the seller refuses to make specific repairs called for by the buyer's inspector. The buyer may be unwilling to purchase the house if the repairs are not made by the seller. The buyer's option fee will provide the buyer with the unconditional right to terminate the contract within the specified option period. Additionally, the seller must understand that while paragraph 23 can provide the buyer with an unrestricted right to terminate the Contract, the seller will not have that same right.

A better understanding of the Contract by all the parties to a transaction will help everyone better understand the other's point of view, making the negotiating process run more smoothly, and cutting down on surprises after the Contract is signed.

Brett L. Slobin is an attorney in the Houston law firm of Slobin & Slobin , P.C. His practice focuses on commercial and residential real estate.