LESSON 4: COVENANTS, COMMITMENTS, NOTICES

Question 1

What does Paragraph 5 of the One to Four Family Residential Contract address?

Answer 1

It outlines the amount of earnest money to be agreed upon by the parties.

Question 2

Is earnest money an essential element of the contract?

Answer 2

No, earnest money is not essential. A contract without it would still be valid.

Question 3

Who should the buyer’s agent make the check payable to when earnest money is involved?

Answer 3

The check should be made payable to the escrow agent, often the title company.

Question 4

Can option money and earnest money be combined?

Answer 4

Yes, according to Paragraph 5A, they can be combined and delivered to the Title Company.

Question 5

When must the earnest money check be deposited with the escrow agent?

Answer 5

The check must be deposited by the close of business on the second working day after the contract is fully executed.

Question 6

What happens if the buyer fails to deposit the earnest money?

Answer 6

The buyer will be in default if the earnest money is not deposited.

Question 7

Can buyers always get their earnest money back if the transaction doesn’t close?

Answer 7

No, it depends on the situation. Some expenses may be deducted from the earnest money (Paragraph 18B).

Question 8

What happens if the transaction does not close and the parties do not agree on where the earnest money goes?

Answer 8

Paragraph 18C specifies that a written demand must be made to the title company to release the earnest money.

Question 9

What is required for a written demand for earnest money?

Answer 9

It must be a written demand, and a phone call or visit will not work (Paragraph 18C).

Question 10

What is the procedure if one party refuses to release the earnest money?

Answer 10

If there is no objection within 15 days, the escrow agent may disburse the earnest money to the party making the demand (Paragraph 18C).

Question 11

What is the role of the title company when there is a dispute over earnest money?

Answer 11

The title company will typically interplead the earnest money into court, removing itself from the dispute.

Question 12

What happens if a party refuses to sign a release of earnest money?

Answer 12

The party will be liable for liquidated damages, including attorney’s fees and costs (Paragraph 18B).

Question 13

What is the time frame for written objections to the demand for earnest money?

Answer 13

The other party has 15 days to object in writing (Paragraph 18C).

Question 14

What is the remedy if mediation is required for an earnest money dispute?

Answer 14

Mediation must occur before any legal action can be filed if it is checked in Paragraph 16.

Question 15

Where can lawsuits over earnest money be filed?

Answer 15

Lawsuits can be filed in Justice Court for claims up to $10,000, or in County Court at Law for higher amounts.

Question 16

What happens in small claims court for earnest money disputes?

Answer 16

It provides an informal proceeding to resolve disputes under $10,000, often without lawyers.

Question 17

Are inspections required during the option period?

Answer 17

No, inspections are not required, but they are typically done during the option period for due diligence.

Question 18

What does the option money allow the buyer to do?

Answer 18

It gives the buyer the right to terminate the contract within a specified period for any reason.

Question 19

Is option money refundable?

Answer 19

No, option money is never refundable once the contract is accepted.

Question 20

How is the option period extended?

Answer 20

It can be extended through a TREC Amendment form, with an additional option fee paid to the seller.

Question 21

How are option fees used in Texas real estate contracts?

Answer 21

The option fee is paid to the seller for the buyer’s right to terminate the contract within the option period.

Question 22

What is a termination option in Texas real estate contracts?

Answer 22

It gives the buyer the unrestricted right to terminate the contract in exchange for an option fee.

Question 23

What is the typical range for option fees in Texas?

Answer 23

Option fees typically range from $100 to $200.

Question 24

Who pays the option fee in a Texas real estate transaction?

Answer 24

The buyer pays the option fee, which is non-refundable.

Question 25

What is a restrictive covenant?

Answer 25

A restrictive covenant is a provision in a deed limiting the use of the property and prohibiting certain uses.

Question 26

How do restrictive covenants enhance property values?

Answer 26

They are intended to enhance property values by controlling development.

Question 27

Who enforces restrictive covenants?

Answer 27

Surrounding property owners who have similar covenants in their deeds can enforce them in a court of law.

Question 28

What types of restrictions are common in restrictive covenants for residential developments?

Answer 28

Common restrictions include single-family dwellings, no detached outbuildings, setbacks from the street and lot lines, and minimum square footage for dwellings.

Question 29

What happens if a person violates a restrictive covenant?

Answer 29

A person who is benefited by the covenants, usually an adjacent property owner, may sue to enforce the restrictions.

Question 30

What is the legal status of racially restrictive covenants?

Answer 30

Racially restrictive covenants were declared unenforceable in state courts by the U.S. Supreme Court in Shelley v. Kraemer (1948) as they violate the Fourteenth Amendment.

Question 31

What types of deed restrictions are unenforceable in Texas?

Answer 31

Restrictions related to wood shingle roofs and private transfer fees (with some exceptions).

Question 32

What are stand-by fees?

Answer 32

Fees charged by a water district to unimproved property in an area where potable water and sewers are available.

Question 33

How does the title company handle taxes in a real estate transaction?

Answer 33

The title company cannot insure taxes are paid unless they have proof of payment or collect the taxes due at closing.

Question 34

What is a special assessment?

Answer 34

A charge the government or homeowners associations can assess against real estate parcels for public projects, levied only if the property has received a unique benefit from the project.

Question 35

What is the role of the title company in verifying special assessments?

Answer 35

The title company cannot insure against special assessments unless they can verify there are none that are unpaid.

Question 36

What is a utility easement?

Answer 36

A utility easement is a right allowing a utility to use specific areas of another's property for gas, electric, water, and sewer lines.

Question 37

Does the title company insure against utility easements?

Answer 37

No, the title company does not insure against utility easements that are part of the public record and attached to the deed.

Question 38

What are reservations or exceptions in title policies?

Answer 38

They refer to things the buyer agreed to in the contract, such as the seller retaining certain rights, like minerals.

Question 39

What are marital rights in relation to title insurance?

Answer 39

Marital rights can affect a married person's ability to convey or affect real property without the consent of the other spouse, and title companies may require both spouses' signatures.

Question 40

When does the title company require the signature of a spouse?

Answer 40

A spouse's signature is typically required to sever their homestead rights, even if the property is separate property.

Question 41

What is the impact of waters, tidelands, and beaches on property titles?

Answer 41

Properties near waters may be subject to loss due to erosion, and title insurance policies make exceptions for these issues.

Question 42

What are coastal community protections?

Answer 42

Coastal habitats protect communities from erosion and flooding and support resilience against climate change, sea-level rise, and extreme weather events.

Question 43

What is the standard exception regarding discrepancies in boundary lines?

Answer 43

Title policies may have an exception for discrepancies, conflicts, shortages in area, boundary lines, encroachments, protrusions, or overlapping improvements.

Question 44

Can the exception for discrepancies be amended?

Answer 44

Yes, it can be amended to read "shortages in area" at the expense of the buyer or seller if an acceptable survey is provided.

Question 45

What does the general exception in a title commitment policy mean: "Any discrepancies, conflicts, shortages in area or boundary lines, encroachments, or protrusions"?

Answer 45

It means that the title insurance does not cover these issues unless specifically amended, such as with the "Shortages in Area" exception.

Question 46

What can you do if you want coverage for discrepancies, conflicts in boundary lines, encroachments, and protrusions in your title insurance?

Answer 46

You can request an amendment to remove the general exception and only cover "Shortages in Area," which requires an accurate survey to be submitted and approved.

Question 47

Who negotiates the payment for the owner's title policy and which title company will be used?

Answer 47

The parties involved in the transaction negotiate who will pay for the owner's title policy and select the title company.

Question 48

What is not covered by a title policy?

Answer 48

Items such as utility easements and restrictions shown in the public record (e.g., dedicated deeds or plats) are not covered.

Question 49

What does the Title Commitment document represent?

Answer 49

The Title Commitment is a legal contract between you and the title insurance company, confirming the promise to issue a title policy subject to specific terms and requirements.

Question 50

What does the Title Insurance Company evaluate before issuing a title policy?

Answer 50

The Title Insurance Company evaluates whether the title is insurable, identifying any exceptions and exclusions that may not be covered under the title policy.

Question 51

What are "Minerals and Mineral Rights" in a title policy?

Answer 51

Minerals and mineral rights may not be covered by the policy, and exclusions or exceptions may apply unless optional endorsements are purchased to insure such rights.

Question 52

What is Schedule C in the Title Commitment?

Answer 52

Schedule C lists the requirements that must be met for the Company to issue the title policy, including addressing any issues with title or the use of the property.

Question 53

What does Schedule B in the Title Commitment list?

Answer 53

Schedule B lists the exceptions to coverage, such as restrictions, easements, and other matters affecting the title, including both standard and special exceptions.

Question 54

Can you request changes to your title insurance policy before it is issued?

Answer 54

Yes, you can request changes such as amending the "area and boundary" exception or adding an exception to "rights of parties in possession."

Question 55

What must be done for the "area and boundary" exception to be amended?

Answer 55

You must submit a survey to the title company, and if the survey is acceptable, the title policy will cover discrepancies, conflicts in boundary lines, encroachments, and protrusions.

Question 56

What is the "rights of parties in possession" exception in title insurance?

Answer 56

This exception involves the rights of specific persons (like renters or adverse owners) who may occupy the land. The title company may charge for an inspection or you can waive it with a signed form.

Question 57

What does a Title Insurance Policy do?

Answer 57

A Title Insurance Policy indemnifies the insured against losses caused by defects in title or flaws in ownership rights that may be discovered after the purchase of the property.

Question 58

What are the two typical types of title insurance policies issued?

Answer 58

The two typical types are the Owner’s Policy (T-1), which protects the buyer, and the Loan Policy (T-2), which protects the lender’s interests in the property.

Question 59

What does the Owner’s Policy protect against?

Answer 59

It protects the buyer against hidden title problems, such as errors in deeds, mistakes in examining records, forgery, or undisclosed heirs.

Question 60

What does the Loan Policy protect against?

Answer 60

The Loan Policy protects the lender’s interests in the property, covering any issues with the title but not protecting the buyer. It decreases over time as the loan is paid off.

Question 61

What is a Restrictive Covenant in a title commitment?

Answer 61

A Restrictive Covenant is a rule or limitation on the use of the property, often imposed by the developer and applicable to properties within a development or subdivision.

Question 62

What is required from the seller regarding the survey and affidavit as per Paragraph 6C1 of the contract?

Answer 62

The seller must provide a current survey and a Residential Real Property Affidavit to the buyer or else the buyer will obtain a new survey at the seller’s expense.

Question 63

What happens if the existing survey provided by the seller is not acceptable to the title company or buyer's lender?

Answer 63

If the existing survey is not acceptable, the buyer will have to obtain a new survey, with the cost being negotiated between the parties.

Question 64

What is the effect of not providing the survey or affidavit in a timely manner?

Answer 64

If the seller fails to provide the survey or affidavit in a timely manner, the buyer will be responsible for obtaining a new survey at the seller's expense before the closing date.

Question 65

What is a T-47?

Answer 65

The T-47 is a Residential Real Property Affidavit. It’s a notarized document that informs the buyer about the home’s boundaries.

Question 66

Who needs the T-47?

Answer 66

The buyer needs the affidavit, which is used by their lender and title company to decide whether they’ll accept the seller’s survey or require a new one.

Question 67

How do I complete a T-47?

Answer 67

Obtain a copy of the survey, fill in your name, address, and the legal description of the property, and note any changes affecting the survey. Get it notarized.

Question 68

When should I fill in the T-47?

Answer 68

Complete the T-47 before listing your home for sale, to avoid missing deadlines related to providing the survey and affidavit.

Question 69

Why should I fill in a T-47?

Answer 69

Filling out the T-47 may save the buyer from having to pay for a new survey, which can cost between $400-$550.

Question 70

Where can I get a T-47?

Answer 70

You can get the T-47 from your title company, the Texas Department of Insurance, or your agent can provide you with the Texas Association of Realtors version of the form.

Question 71

What is the buyer's right to object in a contract?

Answer 71

The buyer has a limited number of days to object to items found in the title commitment, survey, and exception documents. If objections are not addressed, the contract may end.

Question 72

What is an Abstract or Title Policy?

Answer 72

It’s a legal document advising the buyer to review the property’s title with an attorney or receive a title policy. This is mandatory under Texas law.

Question 73

What is a property owner's association?

Answer 73

A property owner’s association may require the buyer to be a member, with mandatory payments. Copies of restrictive covenants are available from the county clerk.

Question 74

What is Paragraph 7A in a contract?

Answer 74

Paragraph 7A allows the buyer to inspect the property and access utilities during the contract period. The seller must ensure utilities are on for inspections and closing.

Question 75

What should buyers do if they get a disappointing inspection report?

Answer 75

Buyers should assess their willingness to fix issues, gather bids, request seller concessions, and decide whether to move forward based on new terms.

Question 76

What is the TREC Seller's Disclosure of Property Condition?

Answer 76

It is an optional form that the seller must fill out to disclose any known issues with the property. Buyers must review this before making an offer.

Question 77

What is Paragraph 7B in the contract?

Answer 77

It outlines the requirements for the seller to provide the Seller’s Disclosure Notice and the buyer’s right to terminate the contract if the notice isn’t delivered on time.

Question 78

What does "Completion of Repairs and Treatments" mean?

Answer 78

It means the seller must complete all agreed repairs before closing and provide transferable warranties if applicable.

Question 79

What is a Residential Service Contract?

Answer 79

A Residential Service Contract is an optional service that covers home repairs. The buyer can choose a company and negotiate for the seller to reimburse the cost at closing.

Question 80

What is a Home Warranty?

Answer 80

A home warranty covers the repair of home appliances and systems, offering protection from unexpected breakdowns and providing budget stability.