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Important Updates to the One to Four Family Residential Contract

December 16, 2020
By: Claude Rich

TREC Updates One to Four Family Residential Contract

In November 2020, Trec approved changes to the One-to-Four Family Residential Contract that clarify contract terms that were unclear in the role escrow plays in the transaction. These changes will take effect on April 1, 2021.

What are the major changes?

There are some significant changes to the TREC One-To-Four Family Residential Contract (“Contract”) worth highlighting. These include changes to earnest money and option fee, residential and fixture leases, controls and smart devices, full disclosure of broker/agent, and addendums.

Earnest Money and Option Fee

One of the most significant changes to the Contract is that the escrow agent must now receive both earnest money and option fee. Before this change, the Contract required the earnest money to be paid to the escrow agent and the option fee paid to the Seller. This change eliminates the extra strep the escrow agent must take if they receive the option fee because they would then need to notify the buyer and their agent that the fee must be re-delivered to the seller.

Another change to the Contract is the option fee is now credited towards the purchase price. The escrow agent can now deposit both the earnest money and option fee without turning around and paying the option fee to the seller. 

The Contract states that earnest money and option fee can be paid by check, wire, or third party payment system, and can be in one payment or multiple checks or payments. If a single payment, then the option fee is deducted first, and the remainder goes towards the earnest money.

Paragraph 23 of the old contract is now incorporated into Paragraphs 5(B) (C) and (D), which relate to the buyer’s termination option and failure to timely deliver the earnest money and option fee. Time frames have remained unchanged.

TREC Contract Updates CE Course

Residential and Fixture Leases

The Contract now requires affirmatively disclosing and providing copies of all residential leases and fixture leases. A potential buyer now has the opportunity to review any existing residential and/or fixture leases before purchasing the property. Leases can either be provided pre-contract or post-contract formation. If post, the seller must provide copies within 3 days of the Effective Date. The buyer and seller have the ability to set the time pursuant to which the buyer has the right to review and/or terminate. Fixture leases, such as those for solar panels, water softener, etc., are subject to the same disclosure obligations. A matching addendum accompanies each type of lease to the contract.

Controls and Smart Devices

The new Contract now addresses both controls and smart devices by defining these terms in Paragraph 2(C) and Paragraph 10(C) respectively.

Controls were previously mentioned in Section 2(C) but now receive a more specific definition. Controls are the seller’s transferable rights to any software or hardware used or needed to operate any pool equipment, garage doors, and/or security systems that are not fixtures (Example: Arlo, Google Nest).

Smart devices received their own consideration as well. Smart devices relate to software, hardware, non-realty items that are transferred with the home, and items in a fixture lease that will remain on the property post-transfer. The provision requires the seller to provide the buyer with any usernames and passwords, but an affirmative obligation to remove or terminate the seller’s access to those devices.

Full Disclosure of Broker/Agent

A smaller change to the Contract is the requirement in Paragraph 8 for full disclosure of a broker/agent relating to having a beneficial interest in the transaction. Affirmative disclosure is now required if the broker/agent represents a related party in a transaction, is a trustee of a trust buying or selling a property, or has ownership in an entity that is 10% or greater.

Addendum

As it relates to Residential and Fixture Leases, each disclosure is now accompanied by an addendum that must be included as part of the Contract. It’s important to familiarize yourself with these addenda as they are likely to be an integral part of future contracts.

We believe these changes modernize the contract to address certain inconsistencies with the prior agreement. Mainly, the role of earnest money and option fee being paid to separate parties, the existence of residential leases and the ability of the buyer to review those leases before entering into a contract, or within a set time thereafter, smart homes and their devices, and full disclosure of related part representations.

If you have questions about any of the adopted changes or would like a copy of the redline changes, please contact Claude Rich.

 


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