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Paragraph 1 of One to Four Family Residential Contract Explained

August 31, 2020
By: Stephen Etzel

Paragraph 1 in One to Four Family Residential Contract

These basic housekeeping efforts should be addressed before filling in Paragraph 1 (Parties) in TREC’s One to Four Family Residential Contract.

TREC promulgates six sales contracts for the public and license holders’ use. Before drafting any contract, you should always check the right corner of the form for the current date. Using an out of date contract could be considered an unauthorized practice of law. Unfortunately, professionals using contract software can easily overlook and assume the system will automatically pull the current contract template.

For example, if you are working with a past client, the last form used will be recalled, which may or may not be out of date. Usually, when starting a new client template, the software will use the current form.

Of the six available sales contracts, there are two resale/used (1-4 family, Condo), two new (New Home Complete and Incomplete), and two land (Farm and Ranch, Unimproved).

Knowing the types of sales contacts is not enough. It is critical to the transaction that you know when to use each form.

Examples:

– A One to Four Family Contract is used for single dwellings, duplex, triplex, quadruplex, and townhouses (when the land is owned fee simple)

– A Condominium Contract is used when selling a unit (paint to paint). The building has a legal description, not the unit. A survey is not required for a condo and no addendum for HOA is required. This information is located within the contract.

– A New Home Incomplete Contract is used when the new home builder has not completed the construction of the dwelling and the closing will occur after the home is built.

– A New Home Complete Contract is used when the new home builder has completed the construction, and no one has occupied the home.

– An Unimproved Contract is used for unimproved land or property that does not have buildings or additions on the land. This contract is generally used when the land has been platted and has a Lot/Block legal description.

– A Farm and Ranch Contract would be used generally when selling rural property with metes and bounds legal description.  Additionally, it is used for properties that are relevant to farms and ranches that may address cops, livestock, mineral rights, pasture leases, and other unique issues not addressed in other contracts.

Before filling in Paragraph 1, understand who the buyer(s) are and who has the authority to enter the contract.

Buyer(s) could be an individual, executor (will), administrator (without a will), corporation, LLC, partnership, life tenant, or trust.

Examples:

Individuals: must be legally competent (18, sane, and sober) with limited exceptions.

Corporation: the officer must show proof of authority by providing a corporate resolution.

LLCs are formed by members. Only the managing member(s) has the authority through an operating agreement, or in the event that the LLC is manager-managed, an authorized manager.

Partnerships/Limited Liability Partnership (LLP, LP) may have a general partner, or other legal forms allowing authority or all partners must sign.

Life Tenants have the exclusive right of possession, management, and control of the property during the term of the measuring life and have homestead rights. The life tenant also has the right to any income or royalties they may produce and sell or lease the property for the duration of the measuring life.

Trusts are made up of three parties. The Trustor (creator), Trustee (owns and manages the trust), and the Beneficiary (the one(s) that benefit from the trust corpus). There are several types of trusts: Land, Living, Testamentary, Revocable, Irrevocable, Spendthrift, and Crummey Trust. The only party with authority to transfer out of the trust is the Trustee.

Common Types of Trusts:

– A Land Trust is a legal entity that takes ownership of or authority over, a piece of property. It is often used for the privacy of the owner, to avoid probate and protect against judgments and liens.

– A Living Trust “inter vivos” can be a revocable (changed) or irrevocable (not changed) trust. This is a written document which, during the owner’s lifetime, their assets are placed into a trust and then transferred by the Trustee to their named beneficiaries upon the owner’s death. A Living Trust is used to avoid probate.

– A Testamentary Trust is created through a will, after death. This trust may be created to form a child’s trust to name a designated trustee to manage property left to a minor.

– A Spendthrift Trust is created for the benefit of a person unable to control their spending. The trustee has full authority to make decisions as to how the trust funds may be spent by the beneficiary.

– A Crummey Trust (named after Clifford Crummey, the first taxpayer to use this technique in the 1960s) is part of an estate planning that may be used to take advantage of the yearly gift tax ($15,000) exclusion when transferring money or assets to another person.

In conclusion, Paragraph 1 is the first consideration in the contract (promise exchange for a promise) and the blueprint to the transaction. Performing these basic “housekeeping” practices could avoid issues in the future.

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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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