Addendums to the TREC Contract - In-Depth

Addendums to the TREC Contract: In-Depth

Presented by: G. Roland Love Independence Title Company Vice President Business Alliances & Field Operations rlove@independencetitle.com 214-202-1959

Presented by the Education Team at Independence Title. TREC Approved Continuing Education Provider License# 403.

CE Policies and Rules ✓ Students must be visible on video. ✓ Students must pay for CE using the link sent to them after class.

✓ Students must attend the entire course. ✓ In order to stay engaged in class please limit distractions. ✓ Visit the TREC website to determine if this course fulfills your CE requirements.

Contract Addenda Cont’d More Recently Updated Addenda and Forms: • Third Party Financing Addendum

11/19/19

Form #40-9

• Addendum Concerning Right to Terminate Due to Lender's Appraisal

11/15/18

Form #49-1

• Addendum Regarding Residential Leases

04/01/21

Form #51-0

• Addendum Regarding Fixture Leases

04/01/21

Form #52-0

• POA Addendum

04/01/21

Form #36-9

• Notice of Buyer’s Termination of Contract

04/01/21

Form #38-7

• Notice of Seller’s Termination of Contract

08/13/18

Form #50-0

• Addendum for "Back-Up" Contract

12/05/11

Form #11-7

• Addendum for Sale of Other Property by Buyer

12/05/11

Form #10-6

• Addendum for Authorizing Hydrostatic Testing

11/19/19

Form #48-1

• Addendum for Reservation of Oil, Gas and Other Minerals

11/18/14

Form #44-2

• Addendum for Seller's Disclosure of Information on Lead-Based Paint

10/10/11

Form #OP-L

Commonly Used Addenda:

Contract Addenda Other Addenda: • Buyer's Temporary Residential Lease • Seller's Temporary Residential Lease

12/05/11 Form #16-5 12/05/11 Form #15-5

• Seller Financing Addendum • Loan Assumption Addendum • Addendum for Release of Liability on Assumed Loan /Restoration of VA Entitlement 1

11/02/15 12/05/11

Form #26-7 Form #41-2

2/05/11

Form #12-3

• Addendum for Coastal Area Property • Addendum for Property Located Seaward of the Gulf Intercoastal Waterway • Addendum for Property in a Propane Gas System Service Area

12/05/11 Form #33-2

• Environmental Assessment, Threatened of Endangered Species, and Wetlands • Short Sale Addendum • Non-Realty Items Addendum

12/05/11 Form #34-4 02/01/14 Form #47-0 12/05/11 12/05/11 10/10/11

Form #28-2 Form #45-1 Form #OP-M

Contract References • • • • • • • •

2. Property: OP-M (Non-Realty Items) E. Reservations: 44-2 (Minerals) 3. Sales Price B. Sum of all financing described in the attached: 40-9 (Third Party), 41-2 (Assumption), 26-7 (Seller Finance).

See also 49-1 (Appraisal), 10-6 (Sale of Other Property), 45-1 (Short Sale), 12-3 (VA Release).

• 4. Leases • A. Residential Leases • B. Fixture Leases

Contract References Cont’d • 5. Earnest Money and Termination Option: 50-0 (Termination) • 6. E. Title Notices

• (2) Membership in Property Owners Association(s) 36-8 (POA) • (4) Tide Waters 33-2 (Coastal Area)

• (9) Propane Gas System Service Area 47-0 (Propane Service System) • 7. Property Condition:

• Access Inspections and Utilities 48-1 (Hydrostatic Testing) • B. Seller’s Disclosure Notice OP-H (not an attached addendum) • C. Seller’s Disclosure of Lead-Based Paint OP-L (Lead Based Paint) • G. Environmental Matters 28-2 (Environmental)

Contract References Cont’d • 10. Possession: 16-5, 15-5 (Leases) • 11. Special Provisions: Must use promulgated addendum, if one. See e.g., 10-6 (Buyer Sale of Other Property) • 12. Settlement and Other Expenses: 45-1 (Short Sale) • 15. Default: 38-6, 50-0 (Notices of Termination) • 19. Representations: 11-7 (Back Up Contract) • 22. Agreement of Parties: See listed addenda.

• Don’t Forget 39-8 Amendment • Others without specific references: • 10-6 (Buyer Sale of Other Property), 34-4 (Property Seaward of Intracoastal Waterway).

Third Party Financing Addendum

• Discuss with Buyer as to what type of financing they require in order to purchase the property.

Third Party Financing Addendum

Third Party Financing Addendum

Third Party Financing Addendum

•

¶2A Buyer Approval:

❑

Buyer to give written notice of termination within X days to Seller. If Buyer does not terminate within time period, contract is no longer subject to Buyer Approval.

❑

Contract not subject to Buyer obtaining Buyer Approval

Third Party Financing Addendum

•

¶2B Property Approval: Buyer to give written notice of termination at least 3 days before closing and must provide written statement from lender setting forth the reasons for lender’s determination.

•

If Buyer does not terminate timely, Property Approval is deemed to have been obtained.

Third Party Financing Addendum

Third Party Financing Addendum

• ¶5 includes “settlement statements” in addition to closing disclosures that may be released to brokers and agents as provided under Broker Information on page 9.

Addendum Concerning Right to Terminate Due to Lender’s Appraisal • Not required to be used with Third Party Financing!

• Can be used when the Buyer wishes to modify the right to terminate under ¶2B of the Third Party Financing Addendum.

• Cannot be used if the transaction involves FHA or VA financing.

Addendum Concerning Right to Terminate Due to Lender’s Appraisal

• Box 1 • Buyer agrees to cover the difference if the lender’s appraised value is lower than the sales price.

• Buyer must have additional cash to cover this difference • No $ limit on value difference

Addendum Concerning Right to Terminate Due to Lender’s Appraisal

• Box 2 • Basically the same as Box 1, but with a limit on how much additional cash the buyer is willing to supply to cover the difference.

• TREC Example: • contract purchase price is $350,000, buyer only wants to cover $20,000 difference. Parties put $330,000 in Box 2 (ii).

• If the appraisal comes in at $330,000 or more, the buyer cannot terminate.

• If the appraisal comes in at less than $330,000, the buyer MAY terminate the contract.

Partial Waiver – A Different Example • Sales Price = $500,000 • Loan Amount = $450,000 • LTV Requirement = 90% (note many LTV’s are higher) • Area prices are rapidly increasing appraisals may be running behind or there are other reasons Buyer is willing to pay a premium, but with a cap • Lender may come back an appraisal of value at less than $500,000 – let’s say $450,000.

Partial Waiver – Example - continued • The next step depends on how the lender calculates the amount it is willing to loan.

• If it uses the sales price, it is still at 90%; LTV is satisfied with a $450,000 loan.

• If it uses the opinion of value to calculate LTV and loan amount, then it would only loan .90 x $450,000 = $405,000.

• So you need to know your lender, but most lenders calculate LTV using the lower of Sales price or appraised value - a math problem?

Partial Waiver – Example – Cont’d • So your initial question to the Buyer is “how many more dollars are you willing to put up?”

• For the $500,000 example, a $450,000 appraisal of value would create a lesser problem if the acceptable LTV is higher, but even a 97% LTV requirement (permissible loan amount = $436,500) would require an additional $13,500.00 to get to $500,000 – but again this depends on the lender and the loan program.

Partial Waiver – Example – Cont’d • Even then, if the opinion of value was $425,000 and the lender will loan that amount, will the Buyer put up an additional $25,000?

• So a little guess work here, or pre-contract due diligence – will the lender loan the full amount of an appraisal, or some %? How does it calculate its required LTV? • Depending on that, the Buyer needs to put an opinion of value that calculates to the additional cash below the loan amount in the contract that the Buyer is willing to supplement

Partial Waiver – Example – Cont’d • If the lender is only willing to loan a % of the opinion of value, determine how much more cash the Buyer is willing to add – let’s say $25, 000.00.

• Then the loan amount becomes $425,000, and at a LTV of 90 % against the opinion of value, the opinion of value needs to be $472,222.22, that is $425,000 divided by .90 = $472,222.22.

• Understanding what the lender is going to do with the opinion of value to determine loan amount is critical to determining cash.

Partial Waiver Formula for Determining Opinion of Value • Sales Price (SP) = Cash + Loan Amount • Loan Amount = LTV x Opinion of Value (OV), so • Sales Price = Cash + (LTV x OV) • Cash = cash in paragraph 3 (3ACash) + Additional Cash(AC), • SP = 3ACash + AC + (LTV x OV) • SP-3ACash-AC = LTV x OV • Opinion of Value = (SP- 3ACash –AC) / LTV

Another Waiver of Appraisal Concern • Will an additional cash obligation affect the Buyer’s creditworthiness? See Third Party Financing Addendum.2.A.BUYER APPROVAL. • The ability to terminate for lack of Buyer Approval is limited to a designated number of days after the Effective Date. A later lender withdrawal of Buyer Approval is not a permitted reason to terminate, and the withdrawal could actually be triggered by an additional cash contribution requirement.

Addendum Concerning Right to Terminate Due to Lender’s Appraisal

• Box 3 • Buyer may terminate if the appraisal does not satisfy the lender’s underwriting requirement.

• AND, even if it does satisfy them, buyer may still terminate if the appraisal is less than an agreed value.

• Good option to use if Buyer is concerned a lower appraisal might still meet the lender’s underwriting requirements or there is a question as to market value.

New Addendums • Residential Lease(s) • Fixture Leases (think solar panels and propane tanks) • Mandatory if they exist • Create new rights for Buyer to terminate if not handled timely or properly • Presumes leases will be assumed • Tenant or Vendor will typically need to be part of the conversation

Addendum Regarding Residential Leases

Mandatory use 04/01/2021

Addendum Regarding Residential Leases

Mark box A if the intention is for any leases to be terminated by closing.

Mandatory use 04/01/2021

Addendum Regarding Residential Leases

Mark box B if the leases are to be assigned and assumed by the buyer at closing.

Mandatory use 04/01/2021

Addendum Regarding Fixture Leases

Mandatory use 04/01/2021

Addendum Regarding Fixture Leases

Mandatory use 04/01/2021

Addendum Regarding Fixture Leases

Mandatory use 04/01/2021

Addendum for Property Subject to Mandatory Membership in a Property Owners Association

Mandatory use 04/01/2021

New POA Addendum • This Addendum is amended to delete the separate paragraph D requiring the Buyer to pay “any deposits for reserves required by the Association.”

• These charges are lumped into paragraph C, which establishes an amount Buyer will pay in total ( excluding the paragraph A Subdivision Information charges which are handled separately).

Addendum for Property Subject to Mandatory Membership in a Property Owners Association

Addendum for Property Subject to Mandatory Membership in a Property Owners Association

Notice of Buyer’s Termination of Contract

Final adoption should take place at the February meeting.

Notice of Seller’s Termination of Contract • 2 options to select when Seller terminates.

❑ (1) Buyer failed to • deposit EM timely • and before notice of • Seller’s termination ❑ (2) Other

Addendum for “Back-Up” Contract • ¶A: EM and Option Fee paid according to the Back-Up Contract. All other requirements contingent on termination of 1st Contract.

• ¶B: If 1st Contract does not terminate by specific date, Back-Up Contract terminates.

• If First Contract terminates, Effective Date of Back-Up Contract is amended.

• ¶D: Option Period runs from Effective Date of Back-Up and continues after Amended Effective Date

Addendum for Sale of Other Property by Buyer (10-6)

Addendum for Sale of Other Property by Buyer

• ¶A: Enter Buyer’s other property address and date they need to sell it in order to proceed with the purchase of their new property.

• ¶B: Enter the amount of days after Seller notifies Buyer of new offer that Buyer will need to waive the contingency.

Addendum for Sale of Other Property by Buyer

• ¶C: To waive the contingency, Buyer will notify Seller and deposit $___ of additional EM.

Addendum for Authorizing Hydrostatic Testing • Paragraph 7A – refers to this form • Advises consulting a licensed plumber about risks.

Addendum for Reservation of Oil, Gas, and Other Minerals

Addendum for Seller’s Disclosure of Information on Lead-Based Paint and Lead-Based Paint Hazards as Required by Federal Law

Buyer’s Temporary Residential Lease

Buyer’s Temporary Residential Lease

Seller’s Temporary Residential Lease

Seller’s Temporary Residential Lease

Seller Financing Addendum

Seller Financing Addendum

Loan Assumption Addendum

Loan Assumption Addendum

Addendum for Release of Liability on Assumed Loan and/or Restoration of Seller’s VA Entitlement

Addendum for Coastal Area Property

Addendum for Property Located Seaward of the Gulf Intercoastal Waterway

Addendum for Property in a Propane Gas System Service Area

Environmental Assessment, Threatened or Endangered Species, and Wetland Addendum

Short Sale Addendum

Non-Realty Items Addendum

Thank you for attending!

• You will find an optional TREC Instructor Evaluation in the back of your book.

• We hope to see you at one of our closing tables soon! ☺

• For more information about Independence Title and the services we offer, contact your Business Development Representative.