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Paragraph 6 of One to Four Family Residential Contract Explained

July 6, 2020
By: Stephen Etzel

One to Four Family Residential Contract: Paragraph 6 Explained

Paragraph 6 (D) is one of the most misunderstood sections in the TREC One to Four Family Residential Contract.

License holders use this section to “get out “of the agreement (for example, entering the clause “single-family residential use, or single-family use”). Unfortunately, this practice is not advised or necessary to add to the blank line.

The purpose of this article is to create a broader comprehension of this paragraph to help your business and assist your consumers.

OBJECTIONS: Buyer may object in writing to defects, exceptions, or encumbrances to title: disclosed on the survey other than items 6A(1) through (7) above; disclosed in the Commitment (title) other than items 6A(1) – (9) above, or which prohibit the following use or activity:

To fully understand Paragraph 6, we will need to dissect its meaning.

Defects to title – The defect on title refers to a lien (claim), mortgage or judgment. A title defect can create several issues which can result in the property not being able to legally transfer to someone else.

Exceptions to title – An exception is something that will not be covered in the title policy and Schedule B.

Examples: taxes, covenants, conditions, and restrictions (CC&Rs), easements, reservations, and deed restrictions.

Encumbrances (burdens) to title – An encumbrance is a claim or lien that limits the use of a property.

Examples: encroachment (intrusions), liens (mech liens), easements, and restrictive covenants.

Survey – A detailed description of a property. The survey reveals the land dimensions and the location of any improvements, driveways, easements, adjacent roads, and right -a-ways for utilities.

Items not for Objections (other than) 6A(1) through (7):

(1) Restrictive covenants that are common to the platted subdivision in which the Property is located.

Examples: Residential dwellings, no detached garages, brick homes, size, materials. 

(2) The standard printed exception for standby fees, taxes, and assessments.

(3) Liens created as part of the financing described in Paragraph 3.

(4) Utility easements created by the dedication deed or plat of the subdivision in which the Property is located.

(5) Reservations or exceptions otherwise permitted by this contract or as may be approved by Buyer in writing.

(6) The standard printed exception as to marital rights.

(7) The standard printed exception as to waters, tidelands, beaches, streams, and related matters.

(8) The standard printed exception as to discrepancies, conflicts, shortages in area or boundary lines, encroachments or protrusions, or overlapping improvements:

(i) will not be amended or deleted from the title policy; or (ii) will be amended to read, “shortages in area” at the expense of x Buyer x Seller.

(9) The exception or exclusion regarding minerals approved by the Texas Department of Insurance.

Title commitment schedules and meanings:

SCHEDULE A

Schedule A of the commitment shows details of the transaction.

Section 1 of Schedule A lists the types of policies that are going to be issued (Owner’s Title Policy and/or Lender’s Title Policy). A real estate professional should review this to be sure that their buyer’s name and the sales price are shown accurately.

Section 2 of Schedule A shows the type of interest the buyer will receive i.e. “Fee Simple.”

Section 3 of Schedule A shows who the legal owner of the property is. This is especially important to both the listing and selling agent. They should make sure the names and owners match the contracts. There are several reasons why the names and owners will not be correct, such as death, divorce, bankruptcy, or marriages.

Section 4 of Schedule A shows the legal description, lot and block, metes and bounds, or rectangular government survey. Real property is described by the legal description and that controls the transaction, never the physical property address.

SCHEDULE B

Schedule B is directed to the buyer and lender that will receive a title policy. This schedule includes the EXCEPTIONS to the policy.

An exception is something that will not be covered in the title policy.  A “standard exception” is one that includes promulgated language from the Texas Department of Insurance.

Specific exceptions include restrictions, easements, mineral severances, and setback requirements.

SCHEDULE C

Schedule C can be thought of as the “Clear to Close” because it is a list of items that must be addressed before or at closing so the policy can be issued.

These are called REQUIREMENTS. This section lists the items that may need to be cured. Such as mortgage liens, tax liens, abstracts of judgment, and special assessment liens.

Sellers should pay special attention to this schedule it can also be used as a checklist to guide them through the tasks. Many issues are easily resolved by the closers like a payoff statement on an existing lien or tracking down certified copies of documents. More difficult issues may require the seller and/or listing agent to assist.

SCHEDULE D

Schedule D is the discloser portion and outlines the parties who have a share in any part of the title premiums, including underwriters and title agents.

In conclusion, the purpose of this section is not used to state residential use or single-family dwelling. The title policy (commitment) or survey does not germinate the usage of the property. The proper use would be to identify issues in the survey or title commitment that could prevent the buyer from full usage of the property.

For example, the buyer wants to install a pool, however, the survey reveals a utility easement that could prevent the buyer from doing so. Another example, the title commitment shows a judgment on the property. The buyer would want that cleared before closing. Remember when in doubt consult legal counsel.

This article on Paragraph 6 of One to Four Family Residential Contract is intended for reference only, and should not be considered a substitute for legal or title underwriter advice that is based on specific facts of a transaction.

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ABOUT THE AUTHOR:

Stephen Etzel

Stephen Etzel
Owner of Stephen Etzel Consulting

For over 22 years, he has helped clients in the real estate industry with continuing their education and enhancing their businesses. Teaching is his passion, which is why he enjoys assisting agents and brokers with learning new subjects. He also loves sharing ideas and knowledge to help businesses thrive.

Certifications: GRI, SRES, ABR, CDEI

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