Overview
Texas real estate licensees operate under strict disclosure and ethical obligations governed by TRELA, TREC rules, federal law, and the NAR Code of Ethics. These rules exist to protect consumers, ensure transparency, and maintain professional integrity in all real estate transactions. Understanding what must be disclosed, when, to whom, and by whom is critical for both licensing exams and daily practice.
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Material Fact Disclosures
Key Concepts
A material fact is the foundation of Texas disclosure law — if information would influence a reasonable person's decision to buy, sell, or lease, it must be disclosed.
• Agents cannot conceal material facts, even if the seller instructs them to withhold information
• The Seller's Disclosure Notice (TREC OP-H) is the primary disclosure form for 1–4 unit residential properties
• Agents who discover defects the seller did not mention must independently disclose those defects to buyers
What Must Be Disclosed
• Known structural defects (foundation issues, roof damage, etc.)
• Environmental hazards (mold, flooding history, etc.)
• Conditions affecting the property's value or desirability
• Deaths only if caused by a still-existing condition of the property (e.g., a structural collapse)
Common Exemptions from Seller's Disclosure Notice
| Situation | Exempt? |
|---|---|
| Foreclosure transfer | ✅ Yes |
| Estate/probate sale (executor never occupied) | ✅ Yes |
| New construction (never occupied) | ✅ Yes |
| Standard resale by owner-occupant | ❌ No |
Key Terms
• Material fact — Information that would affect a reasonable person's decision in a transaction
• Seller's Disclosure Notice (TREC OP-H) — Required form disclosing known property defects and conditions
• Caveat emptor — "Buyer beware" — not the standard in Texas; sellers and agents have affirmative disclosure duties
⚠️ Watch Out For
• Death disclosure trap: Texas does not require disclosure of a death unless caused by a currently existing property condition. Many students confuse this with other states' laws.
• An agent's duty to disclose material facts overrides seller instructions — you cannot "just follow the seller's wishes" if doing so means concealing a known defect.
• The Seller's Disclosure Notice covers known defects — sellers are not required to investigate or discover hidden defects.
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Agency & Fiduciary Disclosures
Key Concepts
Texas licensees must be transparent about who they represent and their own interests in any transaction. Fiduciary duties to clients survive beyond the agency relationship in certain areas.
IABS Notice — Information About Brokerage Services
• Must be provided at the first substantive dialogue with a prospective buyer, seller, landlord, or tenant
• Must be delivered before any agency relationship is formed
• Purpose: Inform consumers about types of agency relationships available in Texas
Intermediary Relationships
An intermediary broker represents both the buyer and the seller in the same transaction.
Requirements for a valid intermediary relationship:
1. ✅ Written consent from both parties (in listing agreement AND buyer representation agreement)
2. ✅ Broker must remain neutral — no advocacy for either side
3. ✅ Appointed associates (if used) cannot give advice or opinions favoring one party
Confidentiality After Agency Ends
• A licensee's duty of confidentiality survives termination of the agency relationship
• Confidential client information may never be disclosed without the client's permission — even after the relationship ends
Licensee Personal Interest Disclosure
• If a licensee has a personal interest in a property (buying, selling, or holding an interest), they must:
1. Disclose in writing that they hold a real estate license
2. Disclose their specific interest in the property
3. Do this before entering into any transaction
Key Terms
• IABS Notice — Information About Brokerage Services; required disclosure of agency relationship types
• Intermediary — A broker representing both buyer and seller in the same transaction with written consent
• Fiduciary duty — A legal obligation to act in the best interest of the client
• Confidentiality — The duty to protect private client information; survives agency termination
⚠️ Watch Out For
• Intermediary ≠ dual agency in the traditional sense. Texas uses the specific term "intermediary" — know this terminology for the exam.
• IABS must be given at first substantive dialogue, not just at contract signing — timing matters.
• Appointed associates under an intermediary arrangement are limited in what advice they can give — neutrality is required.
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TREC Rules & License Act
Key Concepts
TRELA (Texas Real Estate License Act), found in Texas Occupations Code Chapter 1101, is the primary law governing licensee conduct. TREC enforces these rules and can suspend or revoke licenses for violations.
Critical TREC Rules to Know
#### Earnest Money Handling
• Must be deposited into a trust account by close of business on the 2nd business day after contract execution
• Unless the contract specifies a different time period
• Applies to brokers — sales agents must deliver earnest money to their broker
#### Commingling (Prohibited)
• Commingling = mixing client trust funds (earnest money) with the broker's personal or business operating funds
• Consequence: License revocation
• A common and serious TREC violation
#### Fair Housing Violations
| Practice | Definition |
|---|---|
| Blockbusting (panic selling) | Inducing owners to sell/rent by making representations about protected-class persons entering the neighborhood |
| Steering | Directing buyers toward or away from neighborhoods based on race, religion, or other protected class |
| Redlining | Refusing to provide services in certain areas based on racial/ethnic composition |
All three violate the federal Fair Housing Act and Texas law.
Texas DTPA — Deceptive Trade Practices Act
• Allows buyers to sue agents for deceptive acts or misrepresentations
• Potential damages: Up to 3× actual damages for knowing violations
• Covers false statements about property condition, value, or characteristics
Key Terms
• TRELA — Texas Real Estate License Act; governs licensing and conduct of all licensees
• TREC — Texas Real Estate Commission; the state agency that enforces TRELA
• Commingling — Illegal mixing of client funds with personal/business funds
• Trust account — Segregated account where client earnest money must be held
• Blockbusting — Illegal panic selling based on protected-class demographic changes
• DTPA — Texas Deceptive Trade Practices-Consumer Protection Act
⚠️ Watch Out For
• 2 business days for earnest money deposit — not calendar days, not 3 days. Know this number cold.
• Commingling is about where the money is held, not about intent — even accidental commingling is a violation.
• The DTPA applies to real estate agents specifically — licensees are not shielded from consumer protection lawsuits.
• Blockbusting focuses on representations about the neighborhood, not the property itself — distinguish it from material fact disclosures.
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NAR Code of Ethics
Key Concepts
The NAR Code of Ethics applies to REALTORS® (NAR members), not all licensees. It establishes professional standards above and beyond what Texas law requires, organized into Articles under three categories: Duties to Clients, Duties to the Public, and Duties to REALTORS®.
Training Requirement
• REALTORS® must complete a minimum of 2.5 hours of Code of Ethics training
• Required every 3 years as a condition of continued NAR membership
Key Articles to Know
#### Article 1 — Duties to Clients
• Protect and promote the interests of the client
• BUT: also obligated to treat all parties honestly
• Cannot misrepresent or conceal material facts, even to benefit the client
• Client's interest is primary — but honesty to all parties is mandatory
#### Presenting Offers
• REALTORS® must present all written offers and counter-offers objectively and as quickly as possible
• Must present even if the property is already under contract
• Exception: Seller has instructed otherwise in writing
Key Terms
• REALTOR® — A licensed real estate professional who is a member of NAR and bound by its Code of Ethics
• NAR — National Association of REALTORS®; largest real estate trade association
• Article 1 — Core duty: protect client's interests while treating all parties honestly
• Code of Ethics training — Mandatory 2.5-hour ethics education every 3 years
⚠️ Watch Out For
• REALTOR® ≠ real estate licensee. The Code of Ethics only applies to NAR members. Not all licensees are REALTORS®.
• Article 1 creates a dual obligation — client first, but honest to everyone. These are not mutually exclusive.
• The obligation to present all offers continues even if the property is under contract — you cannot simply stop presenting offers without written seller authorization.
• The 3-year ethics training cycle aligns with NAR membership renewal — know the "2.5 hours / 3 years" numbers.
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Environmental & Special Disclosures
Lead-Based Paint Disclosure (Federal Law)
• Applies to: Residential homes built before 1978
• Governed by: Federal Residential Lead-Based Paint Hazard Reduction Act
• Requirements:
- Sellers and agents must disclose known lead-based paint hazards
- Must provide buyers with an EPA-approved informational pamphlet
- Buyers must receive a 10-day inspection period (can be waived in writing by buyer)
• Applies to: Sales and leases of pre-1978 housing
Key Terms
• Lead-based paint disclosure — Federal requirement for homes built before 1978
• EPA pamphlet — "Protect Your Family From Lead in Your Home" — must be provided to buyers/tenants
• 10-day inspection period — Buyer's right to test for lead; can be waived in writing
⚠️ Watch Out For
• The 1978 cutoff is federal, not Texas-specific — applies nationwide.
• The 10-day period can be waived by the buyer, but only in writing. It is not automatic.
• This requirement applies to rentals as well as sales — landlords must also provide the disclosure and pamphlet for pre-1978 units.
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Quick Review Checklist
Use this checklist to confirm your mastery before the exam:
• [ ] Define material fact and explain an agent's duty when they discover one the seller hasn't disclosed
• [ ] Know which properties are exempt from the Seller's Disclosure Notice (TREC OP-H)
• [ ] Explain when the IABS Notice must be provided and why
• [ ] Describe the requirements for a valid intermediary relationship in Texas
• [ ] Know that confidentiality survives the end of an agency relationship
• [ ] State the earnest money deposit deadline: close of business, 2nd business day after contract execution
• [ ] Define commingling and its consequence (license revocation)
• [ ] Define blockbusting and identify it as a Fair Housing Act violation
• [ ] Know the DTPA remedy: up to 3× actual damages
• [ ] Recall the NAR Code of Ethics training requirement: 2.5 hours every 3 years
• [ ] Explain Article 1: protect client interests AND treat all parties honestly
• [ ] Know REALTORS® must present all written offers, even on properties under contract
• [ ] State the lead-based paint disclosure trigger: homes built before 1978
• [ ] Know buyers receive a 10-day inspection period for lead that can be waived in writing
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💡 Pro Tip: Many exam questions test your ability to distinguish between what Texas law requires vs. what the NAR Code of Ethics requires, and between what applies to all licensees vs. only REALTORS®. Always read questions carefully for these distinctions.