What is the process for buying or selling real estate in Texas?
When buying or selling property in Texas, understanding the legal considerations throughout each phase of the transaction is essential to protect your interests and ensure a smooth process.
This article walks through each critical phase, from pre-contract preparation through closing, outlining the essential documents and highlighting the legal considerations that matter most to each party.
Phase 1: Pre-Contract Preparation
For Sellers: Getting Your Property Market-Ready
Before listing a property, sellers must complete several crucial tasks to prepare the property for sale.
If you would like to work with one, choose a real estate agent and sign a listing agreement. This agreement will govern the terms for selling the property (e.g., the listing price, commission, fees, duration of the agreement, and exclusivity provisions) and outline the responsibilities of the seller and the real estate agent, along with any marketing plans.
Gather records that will be requested later in diligence. This includes the property deed, surveys, proof of repairs or improvements, mortgage payoff information, and applicable leases, easements, or Homeowners Association (HOA) documents. Additionally, if the property was previously purchased, the prior purchase agreement and any related documents may be requested by the new buyer during diligence.
If selling a single-family residential property, begin preparing the Seller’s Disclosure Notice. Texas law requires sellers of single-family residential properties to deliver a notice detailing known defects and property conditions to the buyer on or before the date the purchase agreement is signed. Failing to provide this notice could give the buyer the right to terminate the contract at any time before closing or even sue for damages if problems are later discovered.
The notice should include disclosures relating to structural issues, plumbing or electrical problems, previous flooding, termite infestations, foundation cracks, roof defects, and any other known hazards or defects or material facts affecting the property’s value. A seller must update the disclosure if new issues arise prior to closing.
This notice requirement does not apply to sales of newly constructed homes, commercial properties, or residential properties with more than one unit, or to court-ordered sales, estate sales, sales between family members, or certain land sales.
Texas is partially a “Buyer Beware” (Caveat Emptor) state, but the rules differ based on property type. For example, unlike single-family properties, multi-family residential properties are purchased “as is” without mandatory seller disclosures. Beyond the formal disclosure notice, sellers of both residential and commercial properties have an ongoing duty of disclosure under the Texas Deceptive Trade Practices Act (DTPA). This means any known material fact that could reasonably influence a buyer’s decision should be disclosed throughout the entire transaction.
For Buyers: Preparation and Making an Offer
If you would like to work with one, choose a real estate agent and sign a buyer representation agreement. This agreement will govern the terms for acquiring property (e.g., the compensation structure, geographic market area, duration of the agreement, and exclusivity provisions) and specify the fiduciary duties of the real estate agent to the buyer, including whether the brokerage is authorized to act as an intermediary.
Understand financing options and future ownership structure. Gather proof of income and credit reports to obtain a mortgage pre-approval letter from a lender (i.e., not just a pre-qualification) to demonstrate serious buying intent and lend credibility to future offers made. Determine whether the property should be held personally, jointly, or through an entity, such as a limited liability company.
Conduct preliminary due diligence. This includes reviewing the property’s general condition, as well as surrounding areas, and researching zoning regulations and any applicable restrictions to ensure the property can be used for the buyer’s intended purpose. Buyers should also familiarize themselves with local property taxes, HOA fees (if applicable), and potential homestead exemption benefits to understand the true cost of ownership.
Prepare an offer. If the buyer wishes to move forward with the transaction, the buyer should prepare an offer with an initial proposal of the purchase price, closing date, financing terms, and any contingencies or conditions that must be met for the sale to proceed (e.g., securing financing and obtaining inspection results or appraisals to the satisfaction of the buyer).
In Texas, all agreements for the sale of real estate, including offers, are subject to the statute of frauds and are required to be in writing and signed by the applicable party or parties. Note, that Texas is a community property state, so both spouses typically must sign documents related to the sale or purchase of real estate, even if only one is listed as the buyer or seller.
If the seller accepts the offer, the parties begin preparing the purchase agreement, which will become the final, binding contract for the sale of the property.
Phase 2: Drafting and Negotiating the Purchase Agreement
The purchase agreement outlines all of the terms, conditions, and deadlines for the sale of property. Seller’s legal counsel typically prepares the first draft of the purchase agreement.
For the purchase agreement to be valid in Texas, it must (1) clearly state the parties (i.e., the buyer and seller), a detailed description of the property, the purchase price, and the intent to convey the property, (2) be in writing, and (3) be signed by all of the parties. The purchase agreement should also address the buyer’s earnest money deposit and outline all contingencies (which are both discussed in more detail below) and specify the closing date, financing terms, and responsibility for closing costs.
The Texas Real Estate Commission (TREC) publishes form agreements to streamline real estate transactions. These forms are required to be used by licensed real estate agents and brokers in Texas. These forms are limited, and agents and brokers are not legally permitted to add or modify the standard provisions to address any specialized requests. A lawyer, on the other hand, can draft a custom contract or modify the form contract with provisions tailored to the client’s needs or specific circumstances (e.g., thorough “as-is” clauses, specific contingencies, or detailed warranties), ensuring that important rights, protections, and conditions are clearly spelled out before signing. This is crucial because once a contract is signed, any rights or conditions not explicitly included are generally lost, and oral promises or later additions will have no legal effect. Hiring a lawyer allows clients to maximize their best interests in the transaction and ensures that any custom provisions are legally sound and enforceable, giving the client confidence and legal protection during the transaction.
Earnest Money Deposit
A purchase agreement will often require the buyer to deposit earnest money (typically 1-3% of the purchase price) into an escrow account. This deposit demonstrates the buyer’s serious intent to purchase the property and provides the seller security that the buyer is committed to the deal. Once deposited, the escrow agent (usually a title company, attorney, or bank) holds the earnest money in a trust account and applies it against the buyer’s down payment or closing costs. The escrow agent generally cannot release the earnest money before closing except with written instructions from both parties, but the purchase agreement may specify certain circumstances when the earnest money may be refunded.
Quick Delivery Deadline. The purchase agreement will specify a deadline to deliver the earnest money to the escrow agent. This is typically within three days after the agreement is signed. Failure to deliver the funds can result in a default, giving the seller the right to terminate the contract.
Earnest Money Deposit is Separate from an Option Fee. In Texas, the option fee is a separate, smaller payment to the seller for the right to terminate the contract within a specified period (the option period) for any reason. If the buyer terminates during this period, the option fee is lost, but the earnest money is refunded.
Earnest Money Deposit is Refundable to Buyer if the buyer terminates the purchase agreement during the option period or if a contingency in the purchase agreement fails.
Earnest Money Deposit is Non-Refundable to Buyer if the buyer terminates the purchase agreement after the option period for a non-contingent reason or breaches the contract (e.g., failure to meet provided deadline for inspection).
Extension Fee. To extend either the option period or the inspection period, the buyer must provide additional consideration, typically in the form of an additional nonrefundable fee, an increase in the earnest money deposit, or a combination of the two. Both the buyer and seller must agree to the extension, and the terms governing the extension and additional consideration must be formalized in the purchase agreement.
Contingencies
Contingencies are conditions that must be satisfied during a specified period for the sale to proceed and ultimately close. These contingencies protect both buyers and sellers by providing a clear process for resolving unexpected issues that may arise. In some cases, either party may back out of the contract without penalty if specific requirements are not fulfilled within the contingency period.
Common contingencies include:
Inspections: Allows the buyer to hire a licensed inspector to evaluate the property’s condition during a specified period (the inspection period). If significant defects are discovered, the buyer may request repairs, ask for a price reduction, or terminate the contract. The defects must be material. Cosmetic wear and tear does not justify termination.
Financing: Protects the buyer if mortgage approval fails. Financing contingencies usually last 30-60 days, giving the buyer time to complete loan approval. If the buyer cannot secure financing within this timeframe and has met all contingency terms, they can terminate the contract.
Appraisal: Protects the buyer if the appraisal of the property is lower than the agreed purchase price. An appraisal contingency may allow the buyer to terminate or to renegotiate the price.
Title: Ensures the property has clear ownership without legal disputes. The purchase agreement should include provisions allowing sufficient time for both the buyer and seller to review the title commitment and resolve any issues before closing.
Sale of Buyer’s Home: Makes the transaction dependent on the buyer selling their current home first.
For Sellers: When reviewing contingencies, ensure that deadlines are clear and realistic but firm. Extended contingency periods can leave your property off the market for extended periods. Consider including deadlines for the buyer to deliver appraisal reports, inspection reports, and proof of financing to keep the transaction moving.
Phase 3: Diligence and Preparation for Closing
After the parties sign the purchase agreement, the buyer will begin conducting its diligence of the property and thoroughly examine its physical condition, legal standing, and true market value.
Property Inspection: A licensed inspector evaluates the property’s condition and major components (e.g., the structure and foundation, roof, HVAC systems, plumbing, electrical wiring). This should help the buyer identify any defects, necessary repairs, and potential future problems that are not obvious during a walk-through. In Texas, inspectors are required to follow the Real Estate Inspector Standards of Practice and provide a mandatory inspection report form.
Survey Review: A property survey is a visual representation of the property’s boundaries, easements, encroachments, and any improvements (e.g., buildings, fences, driveways) located on the land. A survey review confirms the property’s boundaries and ensures that no part of a neighbor’s structure is crossing the property line (or vice versa). It also verifies that there are no unrecorded easements that could affect the buyer’s future use of the land. If survey issues are discovered, they must be reconciled with the title commitment to ensure consistency.
Appraisal: Lenders will require an appraisal to confirm the property’s market value before approving any financing for the transaction. Even for cash buyers, an appraisal provides an important check on the property’s true market value. If the appraisal comes in lower than the purchase price, the lender will typically only finance up to the appraised value, and the buyer will either have to renegotiate the purchase price, increase its down payment at closing, or terminate the contract if the agreement provides for a contingency.
Title Search: The title company conducts a thorough search of the property’s ownership history to verify the legal ownership of the property and to identify any outstanding liens, judgments, or other encumbrances that could affect the title. In Texas, liens are particularly common as sellers may owe unpaid property taxes, contractors may have filed mechanic’s liens, or prior divorces may have created title complications.
For Sellers: Outstanding liens must be paid from the sale proceeds at closing, and if sufficient funds don’t exist to clear all liens, the sale cannot close. The title company and your attorney can assist with obtaining payoff letters from all lenders and identifying any liens that need to be addressed.
For Buyers: The title search protects you from inheriting unknown debts. Title insurance protects against issues that might arise after closing, such as claims from prior owners or undiscovered liens. In Texas, buyers and their lenders typically each obtain separate title insurance policies.
Title Insurance
Once the property’s title is deemed “clean,” the title company issues title insurance, which protects the buyer and lender from title defects for as long as they own or hold a lien on the property. Title insurance requires a one-time premium. In Texas, title insurance rates are standardized across all title companies in the state to ensure consistent and fair pricing.
Title insurance protects against issues that existed before the buyer purchases the property (e.g., undiscovered liens, prior ownership disputes, forged documents, or missing heirs claiming ownership). It does not cover exceptions explicitly listed in the title commitment or future encumbrances (e.g., a new lien for unpaid property taxes that become due after closing).
Understanding the Title Commitment
The title commitment is a formal document from the title company outlining the conditions under which it will issue title insurance. This document is crucial, as it provides a detailed history of the property’s title and identifies potential issues that could prevent ownership transfer.
The title commitment contains four key sections:
Schedule A: Contains basic transaction information, including the buyer and lender’s names, property legal description, and current owner information.
Schedule B: Lists exceptions to coverage (i.e., matters the title insurance will NOT cover) including existing liens, easements, restrictive covenants, and unpaid property taxes.
Schedule C: Lists actions required before the title company will issue the final policy, such as paying off liens or mortgages and resolving ownership disputes.
Schedule D: Discloses fees and entities involved in the transaction.
A title commitment is usually issued within 20 days after the title company receives the signed purchase agreement and earnest money, with extensions often possible if needed. The commitment is valid for 90 days after its issuance. If more than 90 days have passed, an updated commitment will be required.
Phase 4: Closing
The closing phase represents the long-awaited culmination of your real estate transaction. This final period focuses on the execution of legal documentation, the transfer of funds, and the recording of documents to officially transfer ownership between the parties.
Good Standing/Governing Documents: If conducting the real estate transaction through an entity (instead of as individuals), buyer and seller may need to provide governing documents (e.g., operating agreement, bylaws) and a certificate of good standing for the entity (in Texas, this is called a Certificate of Fact and is issued by the Texas Secretary of State).
Final Walk-Through: Before closing, the buyer performs a final inspection of the property to confirm the property is in the same condition as when the contract was signed (minus normal wear and tear) and that any repairs negotiated during the diligence phase have been completed correctly. If issues are found, funds may be placed in escrow until the problems are resolved after closing, or the closing itself may be delayed.
Review of the Closing Disclosure and Settlement Statement: The Closing Disclosure (CD) is a standardized five-page form that provides a final, detailed summary of the transaction’s costs, including loan terms (if applicable) and final closing figures, and outlines all costs and payments for both the buyer and the seller (e.g., proration of property taxes, insurance premiums, title fees, and any other closing costs).
Funding and Escrow: The buyer provides funds for its down payment and its portion of any closing costs. The lender provides the agreed-upon financing amount. The title company holds all funds and documents in a temporary escrow account until all conditions are met and all parties have signed.
Signing of Legal Documents
The parties sign the documents necessary to legally transfer title and finalize the mortgage or any other outstanding items.
Seller Documents:
Deed: To transfer ownership of real estate to the buyer.
Bill of Sale: To transfer any personal property included in the transaction.
Buyer Documents:
Deed: Must accept the deed (signed by seller) to transfer ownership, but buyer does not need to sign the deed.
Promissory Note: To promise to repay the loan.
Deed of Trust (or Mortgage): To secure the loan against the property.
Recordation and Disbursal
Once all documents are signed, and the title company confirms all lender and contractual requirements are satisfied, the transaction is officially closed.
Recordation: The Deed and the Deed of Trust are sent to the county clerk’s office to be officially recorded in the public records, formally establishing the buyer as the new owner.
Disbursal: The title company then disburses all funds to the appropriate parties in accordance with the settlement statement. Commissions are paid to the agents, fees are paid to the service providers (e.g., appraisers, inspectors, attorneys), any debts are repaid in accordance with the payoff letters, and the seller receives the remaining proceeds.
Real estate transactions involve significant financial and legal commitments from both parties. From reviewing the purchase agreement to assisting with the complex logistics of closing, attorneys play a vital role in protecting their client’s interests through every step of the transaction.
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Disclaimer: This article is for general informational purposes only and does not constitute formal legal advice.