Overview
Texas real estate contracts are governed by a combination of state statutes, TREC regulations, and common law principles. License holders must understand contract formation, required disclosures, and proper use of TREC promulgated forms to protect all parties in a transaction. This guide covers the essential concepts from contract creation through closing, performance, and termination.
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Contract Formation & Validity
The Four Essential Elements
Every valid real estate contract in Texas must contain all four of the following elements:
| Element | Description |
|---|---|
| Offer & Acceptance | Mutual assent / "meeting of the minds" |
| Consideration | Anything of legal value exchanged |
| Legally Competent Parties | Parties must have legal capacity to contract |
| Lawful Purpose | The contract's objective must be legal |
> ⚠️ Real estate contracts also require a fifth practical requirement: they must be in WRITING to be enforceable under the Statute of Frauds.
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The Statute of Frauds
• Any agreement for the sale or conveyance of real estate must be in writing
• Any lease longer than one year must be in writing
• Without a written agreement, the contract cannot be enforced in court
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Mutual Assent (Meeting of the Minds)
• Achieved when one party makes a valid offer and the other accepts exactly as offered
• Any modification = a counteroffer, which legally terminates the original offer
• The original offeror is no longer bound once a counteroffer is made
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Types of Contracts
| Contract Type | Definition | Example |
|---|---|---|
| Valid | All elements present, fully enforceable | Standard executed purchase agreement |
| Void | No legal effect from the beginning; missing essential element | Contract with illegal purpose |
| Voidable | Appears valid but can be voided by one party | Contract signed by a minor or under duress |
| Executory | One or both parties still have obligations to perform | Contract between acceptance and closing |
| Executed | All obligations have been fully performed | Contract at or after closing |
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Key Terms — Contract Formation
• Consideration — Anything of legal value: money, a promise to act, or a promise to refrain from acting
• Mutual Assent — Agreement of all parties to the same terms; "meeting of the minds"
• Counteroffer — A response that changes any term of the original offer; terminates the original offer
• Executory Contract — A contract with remaining obligations still to be performed
• Void Contract — Has no legal effect whatsoever from inception
• Voidable Contract — Valid until the injured party elects to void it
⚠️ Watch Out For
• Void vs. Voidable: A contract with a minor is voidable (the minor can void it), not automatically void. A contract for an illegal purpose is void. This distinction is a frequent exam trap.
• Counteroffers kill original offers. The seller cannot "go back" to the original offer after making a counteroffer — a common misconception.
• Don't confuse executory (in progress) with executed (completed).
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TREC Promulgated Forms
Authority & Requirement
• TREC (Texas Real Estate Commission) is authorized by the Texas legislature to create and require the use of standard contract forms
• Texas license holders must use TREC promulgated forms
When Non-TREC Forms Are Permitted
A license holder may use a non-TREC form only if:
1. The form was prepared by the buyer or seller (not the agent)
2. The form was prepared by a Texas licensed attorney
3. The transaction falls under a specific exemption (e.g., new home contract by a builder)
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Primary TREC Contract Forms
| Form | Name | Use |
|---|---|---|
| TREC 20-17 | One to Four Family Residential Contract (Resale) | Existing 1–4 family homes |
| Third Party Financing Addendum | Financing contingency | Buyer's right to terminate if financing falls through |
| Addendum for Sale of Other Property (Form 10-7) | Sale contingency | Purchase contingent on sale of buyer's current home |
| Seller's Disclosure Notice | Material defect disclosure | Seller discloses known defects to buyer |
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Addenda
• An addendum is attached to and made part of the main contract
• Addenda add, modify, or clarify specific terms
• TREC promulgates standard addenda for common situations: financing, HOA, property condition, sale of other property, etc.
• All addenda must be referenced in the contract and signed by all parties
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Seller's Disclosure Notice
• Required to be completed by the seller (not the agent)
• Discloses known material defects and conditions
• Agents may not complete this form on behalf of sellers
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Key Terms — TREC Forms
• Promulgated Form — A standardized form created and required by TREC
• Addendum — A document attached to a contract that modifies or adds terms
• Third Party Financing Addendum — Protects buyer if specified financing cannot be obtained
• Seller's Disclosure Notice — Seller's written disclosure of known property defects
⚠️ Watch Out For
• License holders cannot draft their own contract forms; this constitutes unauthorized practice of law.
• The Seller's Disclosure Notice is the seller's responsibility — the agent does not complete it.
• Memorize which TREC form number applies to which transaction type (e.g., Form 20-17 for resale 1–4 family).
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Listing & Buyer Agreements
Types of Listing Agreements
| Type | Key Feature | Commission Owed If Seller Finds Buyer? |
|---|---|---|
| Exclusive Right to Sell | Most common; broker earns commission regardless of who sells | ✅ Yes |
| Exclusive Agency | Broker earns commission unless seller sells independently | ❌ No |
| Open Listing | Seller can list with multiple brokers; only selling broker earns commission | ❌ No |
| Net Listing | Broker keeps everything above seller's minimum net price | ⚠️ Discouraged |
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Why Net Listings Are Problematic
• Creates a conflict of interest — broker benefits from a lower sale price
• Broker is incentivized to accept the seller's minimum rather than maximize the sale price
• Discouraged and considered unethical in Texas real estate practice
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Required Elements of a Valid Listing Agreement
A listing agreement must contain ALL of the following:
1. ✅ Definite termination date
2. ✅ Description of the property
3. ✅ Listing price
4. ✅ Commission amount or rate
5. ✅ Signatures of all parties
> ⚠️ A listing agreement without a definite termination date is not enforceable in Texas.
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Protection Clause (Safety/Extender Clause)
• Protects the broker's commission for a specified period after listing expiration
• Applies if the buyer was introduced to the property during the listing term
• Prevents sellers from waiting out the listing then selling to the broker's buyer without paying commission
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Buyer Representation Agreement
Establishes:
• The broker's duties to the buyer
• The buyer's obligations to the broker
• The compensation structure
• The duration of the representation
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Key Terms — Listing & Buyer Agreements
• Exclusive Right to Sell — Broker earns commission regardless of who procures the buyer
• Exclusive Agency — Seller may sell independently without owing commission
• Net Listing — Broker's compensation is anything above seller's net minimum; discouraged
• Protection Clause — Extends broker's right to commission for a set period after listing expires
• Buyer Representation Agreement — Contract establishing broker's duty to represent the buyer
⚠️ Watch Out For
• Exclusive Right to Sell vs. Exclusive Agency: This is a classic exam question. In Exclusive Agency, the seller can avoid the commission by selling themselves. In Exclusive Right to Sell, there is NO such exception.
• A listing agreement without a termination date is unenforceable — always required.
• Net listings are not illegal in Texas but are heavily discouraged and considered unethical.
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Contract Performance & Termination
Earnest Money
• A deposit demonstrating the buyer's serious intent to purchase
• Applied toward the purchase price at closing
• Must be deposited with the escrow agent within 3 days of the effective date
• If the buyer defaults: earnest money may be forfeited to the seller
• If the seller defaults: buyer is entitled to a refund of earnest money (plus may pursue other remedies)
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The Option Period
| Feature | Detail |
|---|---|
| What it is | Agreed number of days giving buyer unrestricted right to terminate |
| Cost | Buyer pays an Option Fee directly to the seller |
| Refundable? | Generally non-refundable |
| If buyer closes | Option Fee is typically credited toward purchase price |
| Earnest money | Earnest money is NOT forfeited if buyer terminates during Option Period |
> The Option Period is distinct from the earnest money — the Option Fee buys the right to walk away for any reason.
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The Effective Date
• The date final acceptance is communicated to the offeror
• Starts the clock on ALL contract deadlines:
- Option Period
- Earnest money deposit (3 days)
- Financing period
- Inspection periods
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Contract Remedies for Default
| Remedy | Description | Availability |
|---|---|---|
| Earnest Money Forfeiture | Seller retains deposit if buyer defaults | Seller |
| Specific Performance | Court orders defaulting party to complete the sale | Either party |
| Actual Damages | Monetary compensation for losses | Either party |
| Rescission | Contract cancelled; parties restored to original positions | Either party |
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Methods of Contract Termination
| Method | Description |
|---|---|
| Performance | All obligations are completed (closing) |
| Rescission | Cancellation by mutual agreement or legal right; restores parties to prior status |
| Novation | Old contract replaced by a new one; original party fully released |
| Assignment | Rights transferred to a third party; original party may remain liable |
| Contingency Failure | A required condition (e.g., financing) is not met |
| Default | One party fails to perform; other party may exercise remedies |
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Novation vs. Assignment
| | Novation | Assignment |
|---|---|---|
| Original party's liability | Fully released | May remain liable |
| What changes | Entire contract or party replaced | Rights/obligations transferred |
| Requires consent of all parties | ✅ Yes | Depends on contract terms |
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Key Terms — Performance & Termination
• Earnest Money — Good-faith deposit applied to purchase price at closing
• Option Period — Unrestricted right to terminate in exchange for Option Fee
• Option Fee — Non-refundable payment for the Option Period; paid directly to seller
• Effective Date — Date final acceptance is communicated; starts all deadlines
• Specific Performance — Court-ordered completion of contract obligations
• Rescission — Cancellation returning parties to pre-contract status
• Novation — Replacement of old contract/party; original party fully released
• Assignment — Transfer of rights to third party; original party may remain liable
• Contingent Contract — Sale dependent on a condition being met (e.g., financing, inspection)
⚠️ Watch Out For
• Option Fee vs. Earnest Money: These are two separate payments. The Option Fee goes directly to the seller; earnest money goes to an escrow agent. Only the Option Fee is automatically non-refundable.
• Novation releases the original party; assignment does not. This is a frequent exam question.
• The effective date is when acceptance is communicated — not when it is signed.
• If a buyer terminates during the Option Period, they keep their earnest money but lose the Option Fee.
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Agency & Representation in Contracts
Required Disclosures
| Disclosure | When Required | Who Provides It |
|---|---|---|
| IABS Form | First substantive communication about a specific property | License holder |
| Seller's Disclosure Notice | Before buyer's acceptance | Seller |
• IABS (Information About Brokerage Services) discloses available agency relationships and broker obligations under Texas law
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Intermediary Relationship (Texas "Dual Agency")
• In Texas, representing both buyer and seller is called intermediary status
• Requires written consent from both parties
• The broker must remain neutral and cannot favor either party
• The broker may appoint associated license holders to work with each party separately
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Procuring Cause
• The broker whose actions initiated the unbroken chain of events leading to a successful sale
• Determines which broker is entitled to a commission in disputed situations
• Key factor: Was there a continuous, direct effort linking the broker's introduction to the final sale?
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Key Terms — Agency & Representation
• Intermediary — Texas term for a broker representing both buyer and seller with written consent
• IABS Form — Required disclosure about available brokerage relationships
• Procuring Cause — The broker whose unbroken efforts led directly to the completed sale
• Dual Agency — Representation of both parties; called "intermediary" in Texas
⚠️ Watch Out For
• Texas does not use the term "dual agency" — it is called intermediary. The exam may test whether you know this distinction.
• The IABS form must be provided at first substantive communication — not at the time of signing a contract.
• Procuring cause disputes often arise when a buyer switches agents — the key is the unbroken chain of events.
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Quick Review Checklist
Use this list to confirm your mastery before the exam:
Contract Formation
• [ ] Name the four essential elements of a valid Texas real estate contract
• [ ] Explain the Statute of Frauds and which agreements must be in writing
• [ ] Distinguish between void and voidable contracts with examples
• [ ] Explain what a counteroffer does to the original offer
• [ ] Define executory vs. executed contracts
TREC Forms
• [ ] Identify who has authority to promulgate contract forms in Texas
• [ ] Know the three circumstances when non-TREC forms may be used
• [ ] Identify TREC Form 20-17 and its purpose
• [ ] Know what the Third Party Financing Addendum protects
• [ ] Know who completes the Seller's Disclosure Notice
Listing & Buyer Agreements
• [ ] Distinguish Exclusive Right to Sell from Exclusive Agency
• [ ] Explain why net listings are discouraged
• [ ] List all required elements of a valid listing agreement
• [ ] Explain the protection/safety clause
• [ ] Know what a Buyer Representation Agreement establishes
Performance & Termination
• [ ] Explain earnest money — amount, timing (3 days), and what happens on default
• [ ] Explain the Option Period and Option Fee — who pays whom, refundability, and credit at closing
• [ ] Know what the effective date is and why it matters
• [ ] Distinguish specific performance from rescission
• [ ] Distinguish novation from assignment (original party's liability)
Agency & Representation
• [ ] Know when and to whom the IABS form must be provided
• [ ] Explain intermediary status and written consent requirement
• [ ] Define procuring cause and when it applies
• [ ] Know that Texas calls dual agency "intermediary"
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> 💡 Final Tip: On the Texas real estate exam, always read questions carefully for words like "must," "may," "always," and "never" — Texas contract law has very specific rules about what is required versus permitted, and small word choices can change the correct answer entirely.