Chapter 7 - contracts

On an exclusive listing, a broker is not disciplined for failure to: a) attach a tax statement to the listing. b) give a copy of the listing agreement to the seller. c) include a definite termination date. d) represent the best interests of their client.

a. attach a tax statement to the listing. An exclusive listing requires a definite termination date. Further, copies of all documents that are signed need to be given to the person who signed them. A tax statement does not need to be attached to the listing.)

A salesperson obtains a listing on a family member's house. After taking the listing, the salesperson changes brokers. The listing: a) belongs to the salesperson's previous broker. b) belongs to the salesperson. c) belongs to the multiple listing service (MLS). d) is terminated by the change of employing broker.

a. belongs to the salesperson's previous broker. (The broker is the agent to the principal and the salesperson is an agent of the broker. The listing was generated under the prior broker's license and thus stays with that broker.)

Mutual consent is typically evidenced by: a) offer and acceptance. b) fraud. c) duress. d) agreement over some contingencies.

a. offer and acceptance. (Mutual consent implies both parties have agreed to the contract. Thus, one party has made an offer and the other has accepted.)

Writing "without recourse" on the back of a check creates a(n): a) qualified endorsement. b) blank endorsement. c) restrictive endorsement. d) open endorsement.

a. qualified endorsement. ("Qualified" suggests the endorser meant to set certain restrictions on the check. In this instance, if the check is not honored, the endorser is not liable.)

Acknowledgment by a notary public of the signature on a deed is done as a prerequisite for: a) recording the deed at the county recorder's office. b) providing constructive notice of the grantee's rights in the property. c) proving the validity of the deed. d) avoiding forgeries.

a. recording the deed at the county recorder's office. (Recording requires a notary acknowledgment verifying the identity of the signors. Even if a deed is valid, it cannot be recorded without acknowledgment.)

Brokers Phoebe and Saul both have an open listing on a property. Broker Phoebe showed the property to a prospective buyer, but the buyer decided not to buy. Two weeks later, Broker Saul contacted the same buyer and arranged a sale of the property. The seller is obligated to pay a commission as follows: a) the full amount to Saul. b) the full amount to Phoebe. c) fifty percent to each broker. d) to be negotiated.

a. the full amount to Saul. (An open listing guarantees the entire commission to the procuring broker (Saul in this example.))

A contract based on an unlawful purpose is: a) void. b) voidable. c) unenforceable. d) enforceable, if in writing.

a. void. (Any contract to perform an illegal act is void by definition. This is one of the four essential conditions of a contract.)

Under which one of the following listing contracts must an owner pay a commission, regardless of who sells the property? a) An exclusive agency listing. b) An exclusive right to sell listing. c) A net listing. d) An open listing.

b. An exclusive right to sell listing. (Similar to Question 24, an exclusive right to sell listing agreement guarantees a commission will be paid to the broker regardless who sells it.)

Which of the following is true concerning an option? a) A fiduciary duty exists between the optionor and the optionee. b) Only the optionor is bound to perform under the terms of an option. c) Consideration does not actually have to change hands so long as the option says it has. d) The optionee has created a legal interest in the property.

b. Only the optionor is bound to perform under the terms of an option. (The optionor is the owner of the real estate. Thus, the optionor is the only party obligated to perform under the terms of the option.)

When damages resulting from a breach of the contract are not adequate, each of the following may request specific performance, except the: a) purchaser. b) broker. c) attorney-in-fact for one of the principals. d) seller of a parcel of land.

b. broker. (The parties to an escrow do not include the broker. Thus, the damages described do not include the broker's fee nor would the broker have any authority to demand specific performance.)

In a contract, the terms "adequate, valuable, good or sufficient" refer to: a) capital. b) consideration. c) character. d) compensation.

b. consideration. (Consideration is something of value provided to both participants to a contract which induces them to perform. Question 3 is premised on a similar topic. Get in the habit of recognizing when a question or answer choice offers information which relates to a later question.)

The typical listing contract authorizes a broker to: a) find a purchaser and obligate their principal to a contract to sell. b) find a purchaser and accept a deposit with an offer to purchase. c) guarantee a third party that an offer meeting the terms of the listing will be accepted by their principal. d) transfer the real property that is the subject of the listing.

b. find a purchaser and accept a deposit with an offer to purchase. (Each of the wrong answers can be seen as incorrect. An agent cannot obligate the seller to accept an offer nor can they transfer property owned by the seller.)

To be enforceable, the listing of a business opportunity: a) needs to be in writing. b) never has to be in writing. c) does not always have to be in writing. d) needs to be exclusive.

c. does not always have to be in writing. (Be wary of "never" and "always" in questions such as this. In this case, a business opportunity sale may include real estate which requires the listing to be in writing. Recognize that an open listing is not exclusive and yet is still valid and enforceable.

Upon the default of a buyer under a land sales contract, the seller: a) instructs the trustee to initiate foreclosure. b) requests a deficiency judgment against the buyer through the courts. c) files a quiet title action. d) files a lis pendens action.

c. files a quiet title action. (In the instance of a land contract, also known as a contract sale, there is no trustee. Further, the vendor already has legal title to the property so answer selection D would impact them (the seller) rather than the vendee (the buyer). Thus, on a default by the buyer, the seller files a quiet title action.)

A buyer and seller initial the liquidated damages clause in a real estate purchase agreement. The buyer later defaults. The amount recoverable is: a) given to the seller when escrow opens. b) limited to 3% of the selling price. c) given to the seller after the default. d) used to pay any costs incurred by the seller and then returned to the buyer.

c. given to the seller after the default. (The amount recoverable under a liquidated damages provision in a purchase agreement is not always limited to 3%, only for one-to-four unit residential property. The only answer that is true is C.)

Under a(n) __________ , the agent's fee is set as all sums received exceeding a net price established by the owner. a) open listing b) cancelled listing c) net listing d) exclusive agency listing

c. net listing (The answer is in the question. A net listing gives an established amount to the seller and all the excess to the broker.)

When an existing contract is replaced by an entirely new contract, it is an example of: a) assignment. b) rescission. c) novation. d) reconstruction.

c. novation. (This question illustrates the need to be familiar with real estate terminology. Under a novation, there is a substitution or exchange of a new obligation or contract for an old one by the mutual agreement of the parties. Refer to the Real estate glossary at the back of this book for definitions to critical real estate terms you are likely to encounter on the state exam.)

Under a land sales contract, title is conveyed to a buyer when they pay ___________ the remaining unpaid amount on the purchase price. a) one-fourth b) one-half c) three-fourths d) all

d. all (Like most contracts, such as the purchase of an automobile, title is not conveyed until the final payment has been made.)

A listing agreement in which a seller agrees to pay a broker a commission if they produce a "ready, willing, and able" buyer and agree to use due diligence in procuring a buyer is an example of a(n): a) bilateral executory contract. b) unilateral executory contract. c) unilateral executed contract. d) bilateral executed contract.

a. bilateral executory contract. (Bilateral refers to a promise to perform made by one party in exchange for a promise to perform made by another party. Executory means the promised activities will be performed by both parties in the future.)

A listing agreement needs to comply with all the legal requirements for a valid contract, including: a) offer and acceptance. b) the full performance of an unlawful purpose. c) the guarantee of an unspecified consideration. d) acknowledgment and recording.

a. offer and acceptance. (Answer choice A is the only acceptable answer. You cannot guarantee or perform illegal acts. Listings are not recorded, nor do they require acknowledged signatures.)

Seller Vega listed a vacant lot with Broker Wright for $120,000. Prospective buyer Marty submitted an offer at a purchase price of $100,000 with the offer to expire in 30 days. The next day, Seller Vega countered at $110,000. Buyer Marty rejected the counter. Three days later, Seller Vega delivered to Broker Wright a signed acceptance of Buyer Marty's initial $100,000 purchase offer. When Broker Wright told Buyer Marty of Seller Vega's acceptance, Marty stated he did not intend to buy the property. Based on the foregoing actions: a) there is no contract. b) the contract is unenforceable. c) a unilateral contract has been made. d) the buyer must submit a counteroffer.

a. there is no contract. (When a counteroffer is made, no matter what the reason may be, the original offer is voided.)

The right of possession and equitable title is held by the: a) vendee. b) vendor. c) trustee. d) trustor.

a. vendee. (The reference to "equitable title" indicates this question is framed in the context of a landsales contract in which the participants are the vendor (seller) and the vendee (buyer). Inmost cases, the party name ending in "or" owns the real estate. The "ee" (vendee) is the buyer and therefore has possession and equitable title of a property, but not legal title.)

Which of the following is true? a) An illegal contract can be an enforceable contract. b) A valid contract can be an unenforceable contract. c) A void contract can be enforced by one party only. d) "Voidable" means "void unless validated."

b. A valid contract can be an unenforceable contract. (An oral contract for more than a year may be valid but unenforceable.)

Heather made an offer to purchase real property. The seller accepted the offer but Heather died before this acceptance was communicated to her by the seller's agent. Based on these facts, which of the following is true? a) Notification of the seller's acceptance to the administrator or executor of Heather's estate compels her estate to perform and close escrow. b) The death of Heather constitutes a revocation of the offer. c) The offer and acceptance constitute an enforceable contract, even if Heather was not aware of the acceptance. d) The accepted offer is binding on the administrator's estate since the deed was not delivered before Heather's death.

b. The death of Heather constitutes a revocation of the offer. (Had the buyer's death occurred after communication of the acceptance of the offer by the seller's agent, her estate would have been responsible to complete the escrow.)

Which of the following statements is correct? a) Brokerage commissions are limited by law. b) Under an exclusive agency listing, the seller may not be liable for a commission if they sell the property themselves. c) A finder may only take part in transaction negotiations when employed by a broker under a written employment agreement. d) A broker may never collect a commission if a sale is consummated after a listing has expired.

b. Under an exclusive agency listing, the seller may not be liable for a commission if they sell the property themselves. (Under an exclusive agency listing, the broker is guaranteed a commission if the property is sold by anyone, unless the seller is excepted in the listing agreement. Though less common, this may occur when a FSBO seller later enters into exclusive agency with a buyer's agent, but personally sells the property to a buyer obtained from their efforts when the property was sold as a FSBO.)

When Jack sells his home, he wants to be relieved of the primary liability for payment of the existing loan. He needs to find a buyer who is willing to: a) take the property subject to the existing loan. b) assume the existing loan. c) execute a land contract. d) make a large down payment.

b. assume the existing loan. (The buyer's assumption of the loan is the only answer selection offered that will relieve the seller of the primary responsibility for the underlying debt. Though the obvious answer would be for the seller to pay off the loan, that answer selection is not provided and therefore cannot be selected.)

A(n) _________ is an example of a bilateral contract in which both the offeror and the offeree are grantors. a) land contract b) exchange agreement c) open listing d) mortgage

b. exchange agreement (This question requires you to identify a bilateral contract in which both parties may be in both positions. Only an exchange agreement provides this opportunity.)

Any intentional concealment of material facts by an agent is regarded as: a) misrepresentation. b) fraud. c) collusion. d) commingling.

b. fraud. (Intentional concealment is the key to the question. This is the condition required to evidence fraud beyond mere misrepresentation.)

The terms "index," "triple net" and "flat" are used to describe: a) linkages. b) leases. c) rural land use. d) freehold estates.

b. leases. (All of these terms relate to leases as they describe how rent is to be calculated and charged.)

The instrument most likely to state that "time is of the essence" is a(n): a) exclusive authorization and right to sell. b) real estate purchase contract. c) open listing. d) option.

b. real estate purchase contract. (The purchase agreement is the only contract offered that would require a response from the opposing party within a stated period of time. This is a good example of a question in which the wrong answers may be eliminated, thus leaving only the correct one remaining.)

An offer is terminated by: a) rejection by the offeror. b) rejection by the offeree. c) revocation by the offeree. d) a request for an extension by the offeree.

b. rejection by the offeree. (This requires knowing who is who in the question. The offeror is the person who made the offer. The offeree is the person who may accept or reject an offer.)

If one party in a contract is coerced or placed under duress by the other party, the contract is _________ at the discretion of the injured party. a) void b) voidable c) illegal d) unenforceable

b. voidable (The party that suffers from duress has the right to cancel the contract. Therefore, the contract is voidable by the injured party only.)

Liquidated damages cannot exceed ______________ in the instance of an owner-occupied one-to-four unit residential property: a) sales price b) actual costs c) 3% of the sale price d) the buyer's cash down payment

c. 3% of the sale price (Liquidated damages are limited to 3% of the sales price on an owner-occupied one-to-four unit residential property (a protected property).)

Which of the following contracts needs to be in writing in accordance with the Statute of Frauds? a) A lease for one year. b) The sale of growing crops. c) A contract that is not to be performed for thirteen months. d) A contract that is to be performed within one year.

c. A contract that is not to be performed for thirteen months. (The Statute of Frauds, based on an old English statute, requires written contracts for actions not to be performed within one year.)

Which of the following is true concerning an option? a) No consideration is necessary to create an option. b) An option is void if the consideration is inadequate. c) An option is valid so long as consideration is actually delivered. d) None of the above.

c. An option is valid so long as consideration is actually delivered. (The amount of consideration is not relevant. However, the consideration itself needs to be delivered to create a valid and enforceable option.)

Anita signs a real estate purchase contract as a buyer. The contract states the offer to purchase is valid for three days. One day later, Anita wishes to rescind her unaccepted offer. Which of these answers is correct? a) Anita may revoke her offer, but is responsible for her agent's commission. b) Anita is bound to perform since the offer is irrevocable for three days. c) Anita may revoke the offer and recover her deposit. d) Anita may revoke the offer but will lose her deposit.

c. Anita may revoke the offer and recover her deposit. (Until the offer has been accepted, and the acceptance has been communicated to the buyer, Anita is free to revoke the offer.)

A broker receives an offer from a buyer. The deposit is in the form of a personal promissory note for $20,000 payable to the seller in 60 days, plus 10% interest. Which of the following is true? a) The broker cannot accept a note as a deposit. b) The broker needs to present the offer and not mention the form of deposit to the seller. c) The broker needs to accept the promissory note but must notify the seller the deposit is in the form of a promissory note. d) Any deposit for the purchase of real property needs to be in the form of cash or a certified check.

c. The broker needs to accept the promissory note but must notify the seller the deposit is in the form of a promissory note. (A deposit for the purchase of property may be made in any form. However, the broker needs to disclose the form and amount of the deposit to the seller.)

When does a broker not have to present an offer to purchase real property to their principal? a) When all the contingencies have not been removed. b) If the offer is for a commercial property. c) When the offer is patently frivolous or the broker is acting on written instructions of the principal. d) When the broker has disclosed to the seller in writing why they did not present the offer.

c. When the offer is patently frivolous or the broker is acting on written instructions of the principal. (While this is the correct answer, as a matter of prudent practice, an agent is to disclose the existence of all offers to the seller, unless the seller explicitly instructs otherwise.)

The most essential element of an enforceable listing contract is that it provides: a) written authority for the broker to accept a deposit. b) an offer to purchase property by a ready, willing and able buyer. c) a written contract documenting the broker's employment. d) a mutual agreement concerning the broker's commission.

c. a written contract documenting the broker's employment. (The critical element to recognize in this question is that a listing contract is an employment contract.)

Failure to perform as agreed under a contract is known as a(n): a) novation. b) illegal act. c) breach. d) damages.

c. breach. (The failure to perform under a contract is known as a breach. The concept of answer selection A. novation will be referenced in Question 38.)

A real estate transaction in which the buyer gains possession of a property while the seller retains legal title until the debt is fully repaid is an example of a(n): a) mortgage. b) trust deed. c) land sales contract. d) sublease.

c. land sales contract. (Neither trust deeds nor mortgages transfer possession without concurrently transferring legal title.)

The authority of the broker to accept a good faith deposit from a buyer is provided for in the: a) deposit receipt. b) escrow instructions. c) listing agreement. d) lease agreement.

c. listing agreement. (Question 23 covered a similar issue of broker authorization. The authorization is contained in the listing (employment) contract.)

The hold harmless clause in a listing agreement protects the agent from liability for: a) any type of lawsuit. b) misrepresentations by the agent to third parties. c) misinformation about the property from the seller. d) damages resulting from the buyer misrepresenting their loan qualifications.

c. misinformation about the property from the seller. (This clause is in the listing contract between the seller and the broker, for the broker to be "held harmless." Logically, it is protection against actions by the other party to the contract.)

An offer to perform in accordance with contractual obligations is an example of: a) a conditional offer. b) a covenant. c) tender. d) performance.

c. tender. (To make an offer is to "tender" the offer. Refer to the Real Estate Glossary if any of these terms are unknown.)

When a broker has a nonexclusive listing, to be legally entitled to a commission, they need to be able to prove they: a) timely provided a conflict of interest disclosure to the buyer. b) somehow contributed to ultimate sale of the property. c) they were the procuring cause of the sale d) aggressively marketed the property.

c. they were the procuring cause of the sale (To collect a commission, the broker needs to locate a buyer who is ready, willing and able to buy, and they must prove they were the procuring cause of the sale.)

A husband signed a contract to sell community real estate without his wife's signature. The contract is: a) voidable. b) binding. c) unenforceable. d) void.

c. unenforceable. (Both owners of community property need to be involved in the sale of property held by both parties.)

Which of the following is an acceptable termination date for an enforceable exclusive listing of residential real property? a) 30 days from completion of construction of the property. b) 3 days after the service of notice of rescission by either the seller or the listing agent. c) 60 days after receipt of a conditional loan commitment. d) 180 days after the listing agreement is signed.

d. 180 days after the listing agreement is signed. (An exclusive listing requires a specific termination date. This is generally based on the date the listing contract is signed.)

A listing agreement can be described as: a) a promise for a promise. b) a bilateral contract. c) an executory contract. d) All of the above.

d. All of the above. (All of the answer selections are correct.)

Broker Greg took a listing on a commercial office complex and received an option to purchase the property within one month. On the 25th day of the listing, Broker Greg decides to buy the property. Before buying the property, Broker Greg is required to: a) disclose the existence of any outstanding offers received on the property to the seller. b) disclose all material information to the seller. c) obtain written consent from the seller which acknowledges any profit or anticipated profit. d) All of the above.

d. All of the above. (This is an example of full disclosure. All of these conditions need to be met in order for the broker to correctly exercise their option to purchase the property.)

Which of the following contracts must be in writing in order to be enforceable? a) An agreement by a buyer to assume an existing loan secured by a deed of trust. b) An agreement which is not to be performed within one year of being entered into. c) A listing to lease real property for one year. d) Both a. and b.

d. Both a. and b. (This is very similar to Question 1. A slight derivation on another question will likely exist on the state exam.)

In order to qualify for recording with the County Recorder, a land sales contract needs to: a) have a policy of title insurance issued. b) contain a granting clause. c) include a bill of sale. d) be signed by both the buyer and seller and be acknowledged before a notary public.

d. be signed by both the buyer and seller and be acknowledged before a notary public. (Unlike a transfer by grant deed, a land sales contract needs to be signed by both parties. The signatures require acknowledgment before a notary public to be recorded.)

The essential elements of an enforceable contract are: a) express, consideration, mutuality, lawful object. b) mutuality, written, competent parties, lawful object. c) communicated, written, competent parties, lawful object. d) competency, mutual consent, lawful object, consideration.

d. competency, mutual consent, lawful object, consideration. (Note that Question 1 showed that not all contracts need to be in writing, eliminating both answer choices B and C.)

The following persons may not lawfully enter into a valid contract to purchase property, except: a) unemancipated minors. b) minors who are wards of the court. c) convicts. d) international buyers.

d. international buyers. (Foreign buyers may lawfully enter into a valid contract to purchase property.)

Broker Matthews took a 90-day exclusive agency listing to sell a property owned by Tyler. After 30 days without selling the property, Tyler sent Broker Matthews a letter cancelling the listing. One week later, Tyler enters into open listings with several other brokers. Two weeks later, one of the brokers sold the property. In this situation, Tyler: a) did not have the right to give open listings to the other brokers. b) had a right to relist the property and had the right to cancel Matthew's listing. c) owes the commission only to the broker who procured a buyer. d) is liable for payment of a commission to Matthews as well as to the selling broker.

d. is liable for payment of a commission to Matthews as well as to the selling broker. (The open listing guaranteed payment to the procuring broker. The exclusive listing is a bilateral contract which cannot be voided unilaterally. Therefore, the seller owes a commission to both brokers.)

All of the following are essential elements of a contract, except: a) an offer. b) acceptance. c) consideration. d) performance.

d. performance. (Performance is not essential to form a valid contract. Performance may be required to complete the activity called for in a contract after it has been signed (offer and acceptance), but is not necessary to the formation of a contract.)

A real estate buyer can rescind an offer until: a) the seller has agreed to an appointment. b) the offer has been presented to the seller. c) the seller has accepted the offer. d) the seller's acceptance has been communicated to the buyer.

d. the seller's acceptance has been communicated to the buyer. (As shown in Question 43, it is the communication of the acceptance of the offer to the buyer that limits their ability to rescind the offer.)

Under a land sales contract for the sale of real property, legal title is held by the: a) trustor. b) beneficiary. c) vendee. d) vendor.

d. vendor. (This is the reverse version of Question 18. Again, the vendor (seller) holds legal title to the property until the debt is repaid in full.)