Chapter 3 of 618% of exam

Real Estate Contracts and Texas Promulgated Forms

Contracts are the backbone of every transaction. This chapter explains what makes a contract valid and enforceable, the standard TREC promulgated forms Texas agents must use, and important buyer protections like the option period. Because agents are not attorneys, this chapter also clarifies what license holders may and may not do with contracts. TREC forms are updated periodically, so always use the current version.

Elements of a Valid Contract

A contract is a legally enforceable agreement, and real estate contracts must meet specific requirements. Missing an essential element can make a contract void or unenforceable. Real estate contracts also fall under the statute of frauds.

Offer and acceptance

There must be mutual assent, with acceptance matching the offer's terms under the mirror image rule; a change is a counteroffer.

Consideration

Each party must give something of legal value, such as money for a promise to convey.

Legal capacity and purpose

Parties must be competent (minors' contracts are typically voidable) and the object must be lawful.

Statute of frauds

Contracts transferring an interest in real estate must be in writing and signed to be enforceable.

Texas Promulgated Forms and the Agent's Role

To protect consumers and promote consistency, TREC promulgates standardized contract forms that license holders generally must use for common residential transactions. Agents complete these forms but must avoid practicing law. Knowing the boundary keeps agents out of legal trouble.

Use promulgated forms

License holders generally must use current TREC forms for typical residential deals.

Fill in the blanks only

Agents may complete factual blanks but may not draft custom legal language or give legal advice.

Refer complex matters

Unusual clauses or legal questions should be referred to a licensed attorney.

Seller's Disclosure Notice

For most residential property, sellers must disclose known conditions and defects based on their actual knowledge.

Earnest Money, Contingencies, and the Option Period

Purchase contracts include deposits and conditions that allocate risk between buyer and seller. These provisions give buyers a chance to investigate and secure financing. The Texas termination option is a distinctive buyer protection.

Earnest money

A good-faith deposit showing serious intent, typically credited toward the purchase at closing and potentially forfeited on unexcused default.

Financing contingency

Allows the buyer to terminate and usually recover earnest money if the specified loan cannot be obtained.

Option (termination) period

For an option fee, the buyer may terminate for any reason during the option period, commonly used to complete inspections.

Time is of the essence

Stated deadlines are strictly enforced, and missing them can constitute default.

Contract Performance, Breach, and Remedies

Contracts can be classified by how they are formed and performed, and the law provides remedies when a party defaults. Real estate's uniqueness makes some remedies especially important. Understanding these terms helps agents explain consequences to clients.

Executed vs. executory

An executed contract is fully performed; an executory contract still has obligations remaining.

Liquidated damages

A clause pre-setting damages on default, often the earnest money, avoiding the need to prove actual loss.

Specific performance

A court order compelling a party to convey the unique property as agreed rather than pay money.

Void vs. voidable

A void contract has no legal effect from the start; a voidable one is valid until a party with the right disaffirms it.

Transfer of Contract Rights

Contract rights and duties can sometimes be transferred to others, and doing so has legal consequences for liability. Agents should recognize these concepts when clients ask about substituting parties. Contract language may limit these transfers.

Assignment

Transfers the assignor's rights to an assignee, though the assignor may remain liable unless released.

Novation

Substitutes a new contract or party with all parties' consent, releasing the original obligor.

Anti-assignment clauses

Contracts may restrict or prohibit assignment without the other party's consent.

Parol evidence rule

Prior oral statements generally cannot contradict the terms of a complete written contract.

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Real Estate Finance and Lending

Last updated: July 2026