Real Estate Contracts and Agency
What action returns a contract's parties to their positions before the contract, including return of any deposit? A) Rescission B) Subordination C) Cancellation D) Substitution
A) Rescission - A rescission occurs when one party cancels or terminates the contract as if it had never been made. Cancellation terminates the contract without a return to the original position. Substitution is an appraisal principle of value. Subordination is used as a placeholder and indicates a mortgage or other interest will not move in front of a newer recording.
An agent for a brokerage firm has six listings. Another agent for the same firm represents a buyer who wants to purchase one of the six listings. The firm's broker appoints the listing agent as an agent for the seller, while appointing the other agent to represent the buyer in the same transaction. The broker has both the seller and the buyer sign a statement acknowledging that arrangement. The arrangement that results is A) designated agency. B) undisclosed agency. C) implied agency. D) single agency.
A) designated agency. - The brokerage firm represents both parties to the transaction as a dual agent, and the broker designates two salespersons from the company to represent opposite sides in the same transaction. Implied agency occurs when an agency relationship is accidental. In single agency, a broker represents only one party to a transaction. The broker in this case has disclosed the firm's dual agency and the designated agent to each party in the transaction.
A real estate broker's responsibility to keep the principal informed of all of the facts that could affect a transaction is the duty of A) disclosure. B) obedience. C) care. D) accounting.
A) disclosure. - It is the real estate professional's duty to keep the consumer informed of all facts or information that could affect a transaction. The broker also owes the principal care and accounting. The broker must act with reasonable care while acting on behalf of the consumer.
Consideration could be all of the following EXCEPT A) earnest money. B) something of value. C) a promise. D) money.
A) earnest money. - Consideration is defined as a promise, money, or something of value. Earnest money is not consideration; it is the seller's remedy in a liquated damages contract.
A void contract is one that A) is unenforceable. B) can be terminated by one party but not the other. C) does not have earnest money listed as consideration. D) has all the essential elements of a contract.
A) is unenforceable. - A void contract lacks some or all of the essential elements of a valid contract and so was never a contract in the eyes of the law. Earnest money is not a requirement of a valid contract, so not having earnest money in a contract does not make the contract void. A valid contract can be rescinded by agreement of all parties but is not voidable by an action of only one of the parties.
When the buyer is in default and the seller keeps the earnest money, the contract MOST likely provided for A) liquidated damages. B) executed damages. C) actual damages. D) specific performance.
A) liquidated damages. - Earnest money is not consideration; it is the seller's remedy in a liquated-damages contract if the buyer defaults.
The remedy available only to the seller as compensation if a buyer is in default is known as A) liquidated damages. B) actual damages. C) consideration. D) rescission.
A) liquidated damages. - When parties agree that a certain amount of money will compensate the nonbreaching party in the event one party defaults on a contract, that money is called liquidated damages. Earnest money typically serves as liquidated damages in a purchase contract in case the buyer defaults. Actual damages refer to monies awarded by a court to a plaintiff for a wrong committed against the plaintiff. Rescission is the mutual agreement of the parties to return to their original state. Consideration is an essential element of a contract—something of value offered by one party and accepted by the other.
A broker is hired as a buyer's agent. The buyer confides he filed for bankruptcy two years ago. The buyer would like to find a seller who is willing to carry the loan. In this situation, a correct statement about the broker's responsibility regarding disclosure of the bankruptcy when presenting the offer to purchase is that the broker is A) required to disclose the bankruptcy because it is a material fact. B) not required to disclose the bankruptcy because the seller might reject the offer. C) not required to disclose the bankruptcy because the broker has no agency relationship with the seller. D) required to disclose the bankruptcy under the Equal Credit Opportunity Act (ECOA).
A) required to disclose the bankruptcy because it is a material fact. - The broker is obligated to disclose any material fact—something that might make a party to the transaction change their mind, regardless of the agency or non-agency relationship the broker has with the seller. The ECOA is a federal law prohibiting discrimination in the granting of credit and does not regulate disclosures required in a real estate transaction.
Last month, a broker took a listing on a property. She now learns that her client has been declared incompetent by the court. Her listing now is A) terminated. B) still valid. C) the basis for a commission if the broker produces a buyer. D) binding, as the broker was acting in good faith.
A) terminated. - A listing contract may be terminated if either party dies or becomes incapacitated. Once terminated, the contract is not binding, and there is no basis for a commission to the broker.
If upon receipt of an offer to purchase his property the seller makes a counteroffer, the original offer is A) terminated. B) contingent on the counteroffer. C) binding on the buyer but not the seller. D) binding on the seller but not the buyer.
A) terminated. - When the original offer is rejected by the seller, it ceases to exist and is considered to be terminated. The buyer may accept or reject the seller's counteroffer, which is, in effect, a new offer.
A purchase agreement would likely be voidable under all of these circumstances EXCEPT A) the buyer didn't read or understand the contract. B) the purchaser is a minor. C) the seller signed under duress. D) the seller made a material misrepresentation to the buyer.
A) the buyer didn't read or understand the contract. - Part of due diligence on the part of a buyer or seller is to fully read and understand all legal documents they are signing or consult an attorney or other advisor for help. Duress, fraud, misrepresentation, and minors always make contracts voidable.
A contract for the sale of real estate that does not state the consideration and provides no basis on which the consideration could be determined is considered A) void. B) voidable. C) executory. D) enforceable.
A) void. - Consideration is an essential element of a real estate contract, along with competent parties, meeting of the minds, lawful objective, and in writing. Without all the elements, a contract is void and cannot be voidable, executory, or enforceable.
The seller has accepted monetary consideration and has agreed to sell his property for an agreed upon amount within a specified timeframe, if the buyer then chooses to purchase. This contract is called A) a land contract. B) an option contract. C) a sales contract. D) a listing contract
B) an option contract. - In an option contract, the seller accepts option money and agrees to sell his property for a specified amount within a specified timeframe, if the buyer chooses to purchase in the future.
All of the following are essential elements of a contract EXCEPT A) consideration. B) words of conveyance. C) mutual agreement. D) lawful objective.
B) words of conveyance. The essential elements of a valid contract are the following: competent parties, mutual agreement, lawful objective, consideration, and in writing. Words of conveyance are required in deeds.
A bilateral contract is one in which A) something is to be done by one party only. B) only one of the parties is obligated to act. C) the promise of one party is given in exchange for the promise of the other party. D) a restriction is placed in the contract by one party to limit the performance by the other.
C) the promise of one party is given in exchange for the promise of the other party. - In a bilateral contract, both parties agree to do something, and promises are exchanged. A unilateral contract is a one-sided agreement that does not obligate a second party.
In order for a purchase agreement to be binding on all parties, it must contain certain essential elements. Of the following, which is essential for a purchase agreement to be valid? A) Notarization B) Competent grantor C) Recordation D) Lawful objective
D) Lawful objective - The essential elements of a contract are competent parties, mutual agreement, lawful objective, consideration, and the document in writing. To be valid, a contract does not need to be recorded or notarized. Competent grantor is a requirement of a valid deed.
The listing contract on a residential property states that it expires on May 2. Which event would NOT terminate the listing? A) The house is destroyed by fire on April 25. B) The owner dies on April 29. C) The contract is not renewed prior to May 2. D) On April 15, the owner tells the listing broker that the owner is dissatisfied with the broker's marketing efforts.
D) On April 15, the owner tells the listing broker that the owner is dissatisfied with the broker's marketing efforts. - A mere complaint to the broker by the principal does not end the listing, whereas expiration of the listing with no renewal, death of the owner, or destruction of the property would end the listing.
A buyer signed a purchase agreement, but then the seller decided not to sell. The buyer sued the seller successfully and was able to purchase the house. What was the contract remedy if the seller was in default? A) Mutual agreement B) Unilateral rescission C) Liquidated damages D) Specific performance
D) Specific performance - The buyer does not have the option of liquidated damages since the seller has not brought any earnest money to the contract. Mutual agreement is when the parties terminate and return all items of value to each party as if the contract did not exist. Unilateral rescission occurs if one party is terminating the contract.
If, upon the receipt of an offer to purchase a property, the seller makes a counteroffer, the prospective buyer is A) relieved of the offer, which is now void. B) bound to accept the counteroffer. C) relieved of the original offer, which has terminated. D) bound by the original offer, which is still active.
C) relieved of the original offer, which has terminated. - Countering an offer terminates the original offer and creates a new offer. The original offer is terminated, not void.
A principal broker authorizes one agent in her firm to represent the seller and another to represent the buyer in the same real estate transaction. Each agent is A) a designated agent. B) a single agent. C) a dual agent. D) a universal agent.
A) a designated agent. - A designated agent or representative is a person authorized by a real estate brokerage to act as the agent of a specific principal. The designated agent has a fiduciary relationship toward the principal, and the brokerage is a dual agent in the transaction. In single agency, a brokerage represents only the buyer or the seller in a transaction. Universal agency empowers an agent to do anything the principal could do personally.
A broker helps a buyer and a seller with paperwork but does not have fiduciary obligations to either party. The broker's activity in this situation is that of A) a transaction broker. B) a single broker. C) a dual agent. D) a designated agent.
A) a transaction broker. - In some states, a broker may be an agent of neither party to a transaction, but help both the buyer and the seller with necessary paperwork and formalities in a transaction. The broker acts as a transaction broker or facilitator but not as an agent of either party.
What is the major difference between an assignment and a novation? A) Assignments transfer duties but not liability, and novation transfers both. B) Novations are not used in rentals. C) A novation is similar to a sublease. D) An assignment is better for the landlord than a novation.
A) Assignments transfer duties but not liability, and novation transfers both. - Novations may be used anytime a new contract is needed and puts the owner and tenant in a clear position since the tenant has full responsibility and liability for the lease. An assignment is similar to a sublease.
A contract between two or more parties, each making a promise to perform certain acts, is called A) a bilateral contract. B) an implied contract. C) a voidable contract. D) a unilateral contract.
A) a bilateral contract. - Promises exchanged for promises define bilateral contracts. A promise exchanged for performance is a unilateral contract. Implied contracts are created by actions.
A contract that has been fully performed is A) executory. B) executed. C) unenforceable. D) voidable.
B) executed. - Prior to execution, the contract is executory. Once the parties have performed, it is called executed.
In regard to an offer and acceptance all the following are true EXCEPT A) to offer means to put forward for acceptance or rejection. B) a counter offer reverses the legal positions of the offeror and offeree. C) in real estate, an oral acceptance creates a binding contract. D) an offer can be revoked at any time before acceptance.
C) in real estate, an oral acceptance creates a binding contract. - The oral acceptance of an offer does not create a binding contract. The offer must be signed followed with communication of acceptance to become a binding contract.
A listing agent loses the seller's house keys. The agent has breached her fiduciary duty of A) disclosure. B) loyalty. C) care. D) accounting.
D) accounting. - The fiduciary duty of accounting requires real estate professionals to be accountable for money and the property of others that come into their possession in the performance of the agent's duties. The duty of care requires that agents use their skill and experience to the client's benefit. The duty of disclosure includes keeping the client informed of all relevant facts related to the transaction. The duty of loyalty means the agent must place the client's interests above all others, including the agent's own self-interest.
A seller has told the listing agent that the agent must only represent the seller in the sale of the property. In this case, the first guide for the agent is to obey A) the concept of caveat emptor. B) any state dual agency requirements. C) the common law of agency, even if a state agency statute exists. D) all lawful instructions of the owner.
D) all lawful instructions of the owner. - A real estate broker hired by a seller must obey all lawful instructions of the owner. A state's agency statute may modify aspects of the common law of agency, in which case, the broker must comply with the agency statute. A selling broker is not required to engage in dual agency. Caveat emptor is a warning to purchasers, not brokers.
The seller told the buyer that the property had no roof leaks. But when the buyer had the property inspected, a roofing contractor found leaks and said they had been leaking for months. The contract between the seller and the buyer is probably A) implied. B) valid. C) void. D) voidable.
D) voidable. - Duress, fraud, misrepresentation, and minors always make contracts voidable. The seller either misrepresented the property or committed fraud, which means the contract is voidable by the buyer. The buyer may choose to move forward and continue the sale or terminate the contact. If the buyer terminates, the seller would have to return the earnest money.
An amendment to a contract is created A) by adding provisions to an accepted contract. B) only if using fill-in-the-blank agreements. C) before the original contract is written. D) only by attorneys before the closing.
A) by adding provisions to an accepted contract. - An addendum is a change to an original contract. An amendment is created to make changes or to add provisions after the original contract is created.
The broker receives an earnest money deposit with a written offer to purchase that includes a 10-day acceptance clause. On the fifth day, before the offer is accepted, the buyer notifies the broker that she is withdrawing the offer and requests the return of her earnest money deposit. In this situation, A) the buyer has the right to revoke the offer at any time until it is accepted and recover the earnest money. B) the buyer may revoke the offer but will not have the earnest money returned since the buyer failed to give the seller the full acceptance time. C) the seller and broker have the right to each retain half of the deposit. D) the buyer cannot withdraw the offer because it must be held open for the full 10 days.
A) the buyer has the right to revoke the offer at any time until it is accepted and recover the earnest money. - The offeror (the buyer) may revoke the offer at any time before the offer is accepted, even if the person making the offer agreed to keep the offer open for a set period of time. At that point, the earnest money deposit should be refunded to the buyer.
A buyer signs a contract under which he is given the right to purchase a property for $130,000 anytime in the next six months. The buyer pays the current owner $500 at the time that contract is signed. Which of the following BEST describes this agreement? A) A bilateral contingency contract B) A unilateral option contract binding the seller C) A bilateral executory sales contract D) An installment land contract binding both parties
B) A unilateral option contract binding the seller - The buyer has the right to buy in the future but is not bound to buy, which creates an option contract.
Which of the following is NOT required to create a valid sales contract? A) Offer and acceptance B) Earnest money C) Consideration D) Signatures
B) Earnest money - Earnest money is not consideration and is not necessary to create a binding contract.
A legally enforceable contract in which two parties exchange promises to do something for each other is known as A) a unilateral contract. B) a bilateral contract. C) a void contract. D) an option contract.
B) a bilateral contract. - A bilateral contract is one in which both parties make a promise to the other. A unilateral contract is a one-sided contract in which one party makes a promise to induce a second party to do something. A void contract lacks one or all of the essential elements of a contract. An option contract is a unilateral contract in which only one party makes a promise to perform—in this case, to hold open the right for a buyer to purchase a property in the future.
After the buyer's offer was accepted, the buyer had the home inspected. The seller has agreed in principle to making certain repairs prior to closing. What, if anything, should now be done? A) Send an email to the buyer's lender confirming the agreements B) File a Universal Commercial Code document with the appropriate authority C) Follow up with a written memorandum D) Rewrite the purchase agreement to include that the seller is making the repairs
C) Follow up with a written memorandum - Verbal representations of material facts or of agreements outside the contract must be confirmed in writing, by letter, or in the body of the contract, which is rare.
To create an executory contract, the offeree must accept the offer A) before the end of the business day of receiving it. B) within 24 hours of receiving the offer. C) without any changes to the offer. D) only after it has been approved by an attorney.
C) without any changes to the offer. - An offer must be accepted without any changes. Time frames for acceptance are created in the offer and can vary. Contracts do not have to be written or approved by an attorney to be valid.
Good faith as applied to agency is BEST defined as A) putting the interest of a principal above those of an agent. B) following all lawful instructions of a principal. C) using professional skills to support all parties in a transaction. D) using honest and sincere intentions.
D) using honest and sincere intentions. - All parties to a contract are to use their best good-faith effort to fulfill the contract. Putting a principal's interest above an agent's is loyalty. Following lawful instructions of a principal is obedience, and using professional skills is considered to be skill and care for all consumers, including a principal.
A seller accepts the buyer's offer to purchase his property. Before closing, the seller changes his mind, and the buyer sues for SPECIFIC PERFORMANCE. What is the buyer seeking in this lawsuit? A) Money damages B) Conveyance of the property C) Deficiency judgment D) New contract
B) Conveyance of the property - A suit for specific performance is a lawsuit to require the breaching party perform as promised—in this case, for the seller to sell the home. A suit for specific performance will not result in a new contract, deficiency judgment, or money damages for the buyer.
A person approaches an owner and says, "I'd like to buy your house." The owner says, "Sure," and they agree on a price. What kind of contract is this? A) Void B) No contract C) Implied D) Unenforceable
D) Unenforceable - Until the parties put the agreement into writing, it is unenforceable since under the statute of frauds, all transfers of real estate must be in writing.
At the time a buyer was negotiating the purchase of a lot on which to build a new home, the seller represented that the soil was firm enough to support the construction of a building when, in fact, the seller knew it was not. This contract is A) voidable by the buyer because of fraud. B) void because of the seller's misrepresentation. C) voidable by the seller because of the mistake. D) valid because no harm was done yet.
A) voidable by the buyer because of fraud. - The contract is voidable because it contains all the essential elements of a contract but could be rescinded due to fraud by the seller. A void contract lacks one of the essential elements of a contract. In this voidable contract, the buyer has the right to terminate, but the seller does not. The contract is not valid since the seller has misrepresented the property.
An agent forgot to get the buyer to sign the offer. What is the status of the offer? A) Voluntary B) Valid C) Void D) Voidable
C) Void - The offer is missing an essential element and is void. Duress, fraud, misrepresentation, and minors always make contracts voidable. A contract that is binding and enforceable is valid.
The time and place that earnest money is to be deposited is first decided by A) the state real estate law. B) the state trust account law. C) federal and state finance laws. D) the purchase contract.
D) the purchase contract. - The purchase contract establishes the amount of earnest money, if any, and the time and place the funds will be deposited. If there is no mention of the time and place, state real estate trust account laws are to be followed.
The typical relationship between a listing broker and a seller represents what type of agency? A) General B) Universal C) Special D) Implied
C) Special - The broker serves the client—either a buyer or a seller—usually by performing the specific brokerage acts spelled out in the employment contract (listing or buyer brokerage agreement). Specific assignments create a special agency. In a general agency relationship, the agent is authorized by a principal to perform any and all acts associated with a particular job or business. Implied agency arises out of the words or conducts of the parties. A universal agent is a person empowered to do anything a principal could do personally and is a general agent.
A buyer makes an offer on a house, and the seller accepts the offer. At this point, the buyer has what type of title to the property? A) Equitable B) Legal C) Voidable D) Possessory
A) Equitable On formation of the contract between both parties, the contract is now an executory contract with the buyer having equitable title. Voidable is a term used to describe a contract that is able to be voided because of duress, fraud, misrepresentation, or because one party to the contract is a minor. In the executory stage, the seller holds legal title and possession until closing, unless a different time of possession is negotiated.
A buyer who owns the property in equity has which type of contract? A) Executory B) Liquidated damages C) Option D) Lease
A) Executory During any point in the executory contract (time period between signed offer to title transfer), the buyer has equitable title (also called the owner in equity). An executory purchase contract can be liquidated damages or specific performance. In an option contract, only one party is bound and there is no equity of title.
After a long period of negotiation, the seller and the buyer are under contract. The buyer's lender has some issues with getting the final numbers, so the buyer asks to postpone the closing by three days. The seller agrees to the change. To make the change binding and enforceable, the seller and the buyer should sign A) an amendment. B) an addendum. C) an ad valorem. D) an attachment.
A) an amendment. - The document that modifies a contract is an amendment. Attachments are items that explain and are added to offers, such as an addendum for a long legal description. Ad valorem is used in property taxes
All of the following events terminate an agency relationship EXCEPT A) an appraisal with a value less than the selling price. B) destruction of the property. C) completion of the purpose of the agency. D) bankruptcy of the principal.
A) an appraisal with a value less than the selling price. - If an appraisal reveals a market value less than the stated selling price in a contract, the parties will have to renegotiate their contract if both parties are still interested in the sale. The appraisal does not affect any agency relationship. Completion of the agency's purpose, destruction of the property, and bankruptcy of the principal terminate an agency relationship.
A couple enters a real estate office asking to see a property listed with another brokerage office. A real estate salesperson calls the listing agent and makes an appointment to show the property. Without having the couple sign a written buyer agency contract, the salesperson drives the couple to the house and even recommends that before they buy the house, they secure an independent property inspection. He also confides to the couple that he knows the owners are getting a divorce and want to sell the house quickly. In this case, the salesperson has created A) an implied agency relationship with the buyers. B) a universal agency relationship with the buyers. C) a general agency relationship with the buyers. D) an express agency relationship with the buyers.
A) an implied agency relationship with the buyers. - The salesperson has unintentionally created an agency relationship with the buyers. There is no formal oral or written agency contract with the buyers. Express agency occurs when two parties enter into an oral or written formal agency agreement. Universal agency empowers the agent to do anything the principal could do personally, such as authorized by a power of attorney. General agency allows the agent to act for the principal in a wide range of matters, as authorized, for example, in a property management contract.
When a party is in default in a contract due to missing a payment deadline, the contract is considered A) breached. B) executed. C) unilateral. D) illegal.
A) breached. - Anytime one of the parties misses a deadline or payment, that party is in breach of the contract.
Shortly before closing on her home, a seller learns that her listing broker is related to the buyer. The listing broker has not disclosed that relationship to the seller. If the seller later refuses to pay the listing broker his commission, will the broker likely prevail in a lawsuit to recover the commission? A) No, because the seller may rescind a listing agreement at any time prior to closing. B) No, because the broker has violated his fiduciary duties to the seller. C) Yes, because the disclosure of a relationship between the buyer and the listing broker is not relevant to the transaction. D) Yes, because a seller must pay commission if the broker produces a ready, willing, and able buyer.
B) No, because the broker has violated his fiduciary duties to the seller. - The broker has violated the duty of disclosure to his client, as the relationship may be relevant to the seller's decision to accept the buyer's offer. The broker may have also established an undisclosed dual agency in bringing a relative into the transaction. The broker's actions do not automatically provide the seller with a reason to terminate the listing contract.
Two salespeople working for the same broker obtained offers on a property listed with their firm. The first offer was obtained early in the day. A second offer for a higher purchase price was obtained later in the afternoon. The broker presented the first offer to the seller that evening. The broker did not inform the seller about the second offer so that the seller could make an informed decision about the first offer. Which of the following statements is TRUE? A) The broker's actions are permissible, provided the commission is split between the two salespeople. B) The broker has no authority to withhold any offers from the seller. C) The broker was smart to protect the seller from getting into a negotiating battle over two offers. D) After the first offer was received, the broker should have told the salespeople that no additional offers would be accepted until the seller decided on the offer.
B) The broker has no authority to withhold any offers from the seller. - It is the broker's duty to keep the principal informed of all facts or information that could affect a transaction. A broker for the seller has a duty to disclose all offers. A commission split does not affect the broker's responsibilities to submit all offers to the seller.
Which of the following gives the BEST evidence of the buyer's intention to carry out the terms of the real estate purchase contract? A) The provision that ''time is of the essence.'' B) The earnest money deposit. C) The agreement to seek mortgage financing. D) The ''subject to'' clause.
B) The earnest money deposit. - The earnest money deposit is customary in real estate transactions to provide evidence of a buyer's intention to carry out the terms of the contract in good faith. It is also the seller's only remedy in a liquidated damages contract. A buyer may pay cash and not require mortgage financing, so an earnest money deposit is the best evidence of the buyer's intention to purchase, even though earnest money is not consideration and not required to have a valid sales contract. The "subject to" clause and the "time is of the essence" clause do not relate to the buyer's intentions but are requirements of the contract.
A brokerage represents the owner in the sale of the owner's property. Which of the following events will terminate that agency relationship? A) The broker discovers that an adequate commission cannot be made due to the low market value of the property. B) The owner's property was destroyed by fire. C) The owner abandons the property. D) The broker engages other brokers to help sell the property.
B) The owner's property was destroyed by fire. - The destruction or condemnation of a property during a listing period terminates the listing. The agency relationship remains in effect with any of the other events.
A buyer agency contract states that the contract expires on April 30. Which event would NOT terminate the buyer agency contract? A) Death of the broker B) The salesperson leaving the brokerage firm C) Mutual agreement to end the contract D) Death of the buyer
B) The salesperson leaving the brokerage firm - The contract is with the buyer and the firm, not the salesperson. If the salesperson leaves, the principal broker may assign another salesperson to assist the buyer. The buyer and the principal broker may come to a mutual agreement to terminate the contract. The death of either party terminates the contract.
Upon acceptance and communication of acceptance, an offer is considered A) valid. B) a contract. C) unilateral. D) a counteroffer.
B) a contract. - An offer alone lacks acceptance. Once acceptance is communicated to all parties, the offer, if a purchase contract, becomes an executory contract. A unilateral contract exchanges a promise for performance. Valid contracts are binding and enforceable. Counteroffers terminate the original offer.
All of the following documents would create an agency relationship EXCEPT A) a property management contract. B) a sales contract. C) a listing contract. D) a buyer agency contract.
B) a sales contract. - A sales contract is a contract between an owner and a buyer to purchase a property. It does not create a relationship in which a person acts on behalf of another. The other contracts create agency relationships establishing the duties of a brokerage firm on behalf of a principal.
An investor does not want to be obligated to purchase a property but would like to have the right to purchase a property within 60 days for $300,000. The investor should try to negotiate A) a contract for deed. B) an option contract. C) a purchase agreement. D) a purchase money mortgage.
B) an option contract. - An option contract would allow the investor the time to determine if she wants to buy and has the advantage of locking the seller into selling at a price agreed to at the beginning of the process. Contract for deed and purchase money mortgages are forms of seller financing and would not give this type of flexibility. Both require a purchase agreement to create the terms of the financing.
A contract in which one party purchases the right to buy at a fixed price within a specified period is A) a listing contract. B) an option contract. C) a lease contract. D) a purchase contract.
B) an option contract. - An option is a unilateral contract binding on the seller with an obligation to sell for a set price if the buyer decides to buy. Typically, if the buyer does not buy, the seller will keep the option fee, which the amount of was set by the option contract. Listing, lease, and purchase contracts are all bilateral contracts.
Whether or not state law requires the time when an agent must disclose his firm's agency alternatives, good business practice requires that an agent make a disclosure about agency A) at the closing of a real estate transaction. B) before any confidential information is disclosed about an individual's financial situation. C) when performing ministerial acts for a customer. D) after an offer is made on a property.
B) before any confidential information is disclosed about an individual's financial situation. - Many states have mandatory agency disclosure laws. Whatever the law requires, agents should disclose their firm's agency alternatives and any agency relationship by which the agent is bound before any confidential information is provided about an individual's motivation or financial situation.
A landowner subdivides her acreage and offers the lots for sale. A broker tells her that he can sell the lots. After the broker sells some of the lots, the landowner refuses to pay him a commission. The broker can A) sue the landowner for breach of contract. B) do nothing. C) report the landowner to the real estate licensing authorities. D) file a lien against the landowner's remaining lots.
B) do nothing. - An oral agreement does not constitute a valid agency contract entitling the broker to a commission. Unless the broker has been employed by the seller under a valid written agency contract, the broker is not entitled to a commission. The broker has no grounds for a lien or for a suit. Real estate licensing authorities do not regulate or arbitrate commission disputes between a broker and a prospective client.
In a preprinted sales contract, several words were crossed out or inserted by the parties. To eliminate future controversy as to whether the changes were made before or after the contract was signed, the usual procedure is to A) redraw the entire contract. B) have both parties initial or sign in the margin near each change. C) write a letter to each party listing the changes. D) have each party write a letter to the other approving the changes.
B) have both parties initial or sign in the margin near each change. - If there are minor changes in a contract, the initialing or signature at the changes notes the party saw and agreed to the change. The best course of action if there are many or major changes to a contract is to draft a new one with all the agreed to changes.
A promise, or something of value, made by one party to induce another party to enter into a contract A) is the meeting of the minds. B) is legal consideration. C) is the authorization to perform. D) are words of conveyance.
B) is legal consideration. - Legal consideration is a promise, or something of value, made by one party to induce another party to enter into a contract. In a purchase contract, it is the promise of the seller to sell and the buyer to buy. Words of conveyance are used in deeds to create the estate being transferred.
In an appointment with a seller, a salesperson presents a competitive market analysis that provides a reasonable market value for the seller's property. The seller insists on pricing the property $15,000 higher than the salesperson's suggested price. Under these circumstances, the salesperson A) may change the listing price in the contract once it is executed. B) may choose to refuse the listing. C) must accept the listing with the seller's higher listing price. D) must hire an appraiser to conduct a formal appraisal.
B) may choose to refuse the listing. - An unrealistic listing price may make it difficult for the broker to properly market the property within the time period of the listing. The salesperson is not required to accept the listing with the higher listing price or to hire an appraiser for a formal appraisal. The salesperson may not change the listing price in a listing contract without the explicit permission of the seller.
A broker was told by her principal not to advertise her property in a certain newspaper, which was out of the area. The broker complied because she A) had never advertised in that newspaper anyway. B) must obey the lawful instructions of her principal. C) is allowed to advertise only in local newspapers. D) was not intending to advertise the property at all.
B) must obey the lawful instructions of her principal. - The fiduciary relationship obligates the agent to act in good faith at all times, obeying the principal's instructions in accordance with the contract. The seller has a right to advertise in a newspaper of her choice, provided any advertisement does not violate fair housing laws.
A broker lists a property for sale at $100,000 with a 5% commission. He later obtains an oral offer from a prospective buyer to purchase the property. The seller indicates to the broker that the offer would be acceptable if it were submitted in writing. Before it can be put in writing, the buyer backs out and revokes the oral offer. In this situation, the broker would be entitled to A) the standard rate of commission for the area. B) no commission. C) only a partial commission. D) a commission of $5,000.
B) no commission. - The broker only earns a commission with the procuring of a ready, willing, and able buyer who purchases the property on the seller's terms. There is no standard rate of commission for a locality, as commission rates are determined by individual agreements between a broker and client.
One contract was substituted for another contract, and there was a release of liability from the original contract. The term that defines the release is A) alienation. B) novation. C) assignment. D) exchange.
B) novation. - Novation is a new contract replacing the old with the full release of liability. The transfer of rights and duties—but not the liabilities—from one person to another person is an assignment. Alienation is the process of transferring ownership via a deed.
A listing agent's duty of care to a seller includes all of the following EXCEPT A) helping the seller evaluate an offer to purchase and write a counter offer, if needed. B) sharing the seller's financial situation with a buyer in order to expedite a sale. C) helping the seller arrive at a realistic listing price and commission splits for the multiple listing service entry. D)making reasonable efforts to market the property.
B) sharing the seller's financial situation with a buyer in order to expedite a sale. - An agent representing a seller may not disclose confidential information to a buyer without the seller's explicit permission, even to expedite the sale of the property. All the other activities are examples of an agent exercising the duty of care for the seller.
When a buyer and a seller enter into a purchase agreement (contract of sale), the legal remedy that each has to force the other party to perform the terms of the agreement is A) unilateral rescission. B) specific performance. C) actual damages. D) liquidated damages.
B) specific performance. - Specific performance is defined as suing to perform. This is the remedy being used as the default when the suing party wants the other party to complete the terms of the transaction. In a purchase agreement, this is available to both the buyer and seller. Actual damages are a remedy in a lawsuit to receive money in return for a breach of contract, which does not necessarily require the performance of the contract. Liquidated damages occur when the buyer's earnest money is kept, and unilateral recession is a one-sided termination when one party feels the other party has failed to complete their side of the agreement.
The legal proceeding or legal action brought by either the buyer or the seller under a purchase contract to enforce the terms of the contract is known as A) lis pendens. B) suit for specific performance. C) liquidated damages. D) an attachment.
B) suit for specific performance. - In a suit for specific performance, the court may force the buyer or seller to go through with the sale and convey the property as previously agreed. Lis pendens is a recorded legal document giving constructive notice of an action filed in court. An attachment is the legal process in which a defendant in a lawsuit seizes property by judicial order or levy, holding the property as security for satisfaction of a judgment. Liquidated damages, which is keeping the earnest money, is the seller's remedy if the buyer is in default.
To assign a contract for the sale of real estate means to A) permit another broker to act as agent for the principal. B) transfer one's rights under the contract. C) record the contract with the county recorder's office. D) allow the seller and the buyer to exchange positions.
B) transfer one's rights under the contract. - An assignment is a transfer of the interest of one person to another. In an assignment, rights are assigned to a third party, but the original party remains primarily liable unless specifically released. Assignment of a contract does not change the broker/agent relationship.
A contract that exchanges a promise for performance is A) bilateral. B) unilateral. C) implied. D) executory.
B) unilateral. - In a unilateral contract like an option, the seller promises to sell if the buyer decides to buy (perform). Bilateral contracts have both parties promising to each other. An implied contract is created by actions and an executory contract is yet to be performed.
Due diligence is BEST defined as A) the requirement to have an inspection on a property. B) using a good-faith effort to carry out the terms of a contract. C) a seller's obligation to complete a property disclosure. D) all the acts required of all parties to a transaction.
B) using a good-faith effort to carry out the terms of a contract. - Buyers are expected to use due diligence to verify the property will meet their needs, is zoned properly, and is in an acceptable condition. The seller is expected to use due diligence to make sure the title being passed is marketable.
A contract for the sale of real estate that does NOT state the consideration and is NOT signed by the parties is considered to be A) valid. B) void. C) enforceable. D) executory.
B) void. - A contract is void when no consideration is stated; consideration is an essential element of a contract. An executory contract is one that has been signed by both parties, but all the requirements of the contract have not yet been performed. A contract that lacks all the essential elements is not valid, but void and unenforceable.
During the period of time after a real estate sales contract is signed, but before title actually passes, the status of the contract is A) voidable. B) unilateral. C) executed. D) executory.
D) executory. - An offer becomes an executory contract upon acceptance and executed upon completion of the duties. Duress, fraud, misrepresentation, and minors always make contracts voidable. Only one party is bound in a unilateral contract.
Upon notice that an offer has been accepted, what should the listing broker do with the earnest money deposit? A) Have the buyer's broker, who typically holds the money, deposit it into the listing broker's trust account B) Hold the earnest money until all the contingencies have been met and then deposit it into a trust account C) Deposit the earnest money into the brokerage or title company's trust account D) Give the earnest money to the seller to hold until closing
C) Deposit the earnest money into the brokerage or title company's trust account - Upon acceptance of the offer, which creates an executory contract, the earnest money is deposited into the brokerage or a title company's trust account. The money may not be held by the buyer's broker or seller or until the contingencies are completed.
A buyer and a seller agree on a purchase price of $200,000 for a house. The contract contains a clause stating that "time is of the essence." Which statement is TRUE? A) A "time is of the essence" clause is not binding on either party. B) The closing must take place within a reasonable period before the stated date. C) If the closing date passes and no closing takes place, the party who failed to close is considered to be in default. D) The closing date must be stated as a particular calendar date and not simply as a formula, such as "two weeks after loan approval."
C) If the closing date passes and no closing takes place, the party who failed to close is considered to be in default. - The nondefaulting party may have remedies to retain the earnest money (liquidated damages) or to sue the defaulting party to perform the contract terms (specific performance).
A woman tells her neighbor, a real estate broker, that she is thinking about selling her home. The broker contacts several prospective buyers to whom she has shown her firm's listings in the past month. One of the buyers makes an attractive offer on the woman's home without even seeing the property. The broker goes to the woman's house and presents the offer, which the homeowner accepts. What is the agency relationship between the homeowner and the broker? A) Express agency B) Universal agency C) Implied agency D) General agency
C) Implied agency - The homeowner and the broker did not have an oral or written agency contract, but the broker's actions implied to prospective buyers that the broker was acting as the homeowner's agent. Express agency occurs when two parties enter into an oral or written formal agency agreement. Universal agency empowers the agent to do anything the principal could do personally, such as authorized by a power of attorney. General agency allows the agent to act for the principal in a wide range of matters, as authorized, for example, in a property management contract.
Which of the following requires that real estate sales contracts be in writing? A) Caveat emptor law B) Statute of limitations C) Statute of frauds D) Truth in Lending Act
C) Statute of frauds - The statute of frauds requires all transfers of interests in real estate be in writing; the exception is a lease of 3 years or less. The statute of limitations sets the amount of time that lawsuits must be filed within. The Truth in Lending Act sets disclosure requirements for lender fees. Caveat emptor means buyer beware.
A person approaches an owner and says, "I'd like to buy your house." The owner says, "Sure," and they agree on a price and write it down on a piece of note paper and sign it. What kind of contract is this? A) Unenforceable B) Voidable C) Valid D) Void
C) Valid - Anytime a buyer and seller agree in writing with notice and acceptance, a valid contract is formed. If the offer is missing an essential element, it is void and unenforceable. Duress, fraud, misrepresentation, and minors always make contracts voidable.
The sales contract says the buyer will purchase the property only if an attorney approves the sale by the following Saturday. The attorney's approval is A) a consideration. B) a lis pendens C) a contingency. D) a warranty.
C) a contingency. - A contingency requires something to happen or the contract can be terminated and the earnest money returned. A lis pendens is notice of a pending law suit. A warranty promises that certain stated facts are true. Consideration is one of the essential elements of the contract to make it valid and is something of value offered in exchange for something from another.
A real estate agent acting as a single agent owes either fiduciary or statutory agency duties to any of the following EXCEPT A) a seller. B) a buyer. C) a customer. D) a landlord.
C) a customer. - In single agency, the agent represents only one party in any single transaction. The agent owes fiduciary or statutory agency duties exclusively to one principal, who may be a seller, buyer, landlord, or tenant. The customer is the other party not represented by the agent in the transaction.
The transfer of rights, duties, or both—but not liabilities—from one contract to another or from one person to another is A) an addendum. B) an amendment. C) an assignment. D) an acknowledgment.
C) an assignment. - The transfer of rights and duties—but not liabilities—from one person to another person is an assignment. Acknowledgment is a notarized signature. Addendums are items added to offers, and an amendment modifies an executory contract.
An optionee has communicated to the optionor that the optionee will purchase the property. This option contract is now exercised and is BEST described as A) an executed bilateral purchase contract. B) an executed unilateral purchase contract. C) an executory bilateral purchase contract. D) an executory unilateral purchase contract.
C) an executory bilateral purchase contract. - When the buyer informs the seller that he is going to purchase the property, the option is exercised, and an executory bilateral purchase contract exists.
Earnest money A) is required as part of all purchase agreements. B) is considered to be consideration and is required in a purchase offer. C) may become the seller's if the buyer defaults. D) will be a credit to the seller and a debit to the buyer at closing.
C) may become the seller's if the buyer defaults. - Earnest money is not consideration, and therefore, it is not an essential element of a contract or required; it is a show of good faith on the part of the buyer and liquidated damages for the seller, if the buyer defaults.
A salesperson representing a seller suggests to a buyer that the seller might accept less than the listing price. The salesperson in this situation A) no longer represents the seller since he has given advice to the buyer. B) is fulfilling his fiduciary responsibilities to the seller by encouraging a buyer to purchase the property. C) may have unintentionally created an undisclosed dual agency by making this suggestion. D) is simply performing a ministerial act for the buyer.
C) may have unintentionally created an undisclosed dual agency by making this suggestion. - The salesperson, in giving advice to the buyer, may lead the buyer to believe that the salesperson represents the buyer's interests and is acting as the buyer's advocate. The agent may have created an implied agency with the buyer and violated the duties of loyalty and confidentiality to the principal—the seller. The agent's fiduciary responsibilities to the seller continue even with his actions. Performing ministerial acts involves granting services that do not require any discretion or advice.
A buyer and a seller sign a contract for the sale of real property. A few days later, they decide to change several terms of the contract while retaining the basic intent to buy and sell. The process by which the new contract replaces the old one is called A) assignment. B) assemblage. C) novation. D) rescission.
C) novation. - When a new contract replaces an old one, the process is novation. The new contract may be between the same parties or between one of the original parties and a new party. In any event, the parties' obligations under the old contract are terminated.
The type of agency that exists when a broker represents the seller or buyer in a transaction, but not both, is A) designated agency. B) dual agency. C) single agency. D) facilitator or transaction broker.
C) single agency. - When a broker is representing only the seller or buyer in a transaction, the agency is single agency. Dual agency exists when an agent represents two principals in the same transaction. Designated agency is created when an agent is appointed by a broker to act for a specific principal or client when the brokerage firm represents both parties in the same transaction. A transaction broker does not have the fiduciary obligations to either party in a transaction.
In an executory contract, A) the buyer receives legal title to the property. B) the seller grants the buyer possessory rights. C) the buyer receives equitable title to the property. D) the buyer may take possession of the real estate.
C) the buyer receives equitable title to the property. - Equitable title occurs when the buyer and the seller have an accepted offer, which creates an executory contract, at which time the buyer acquires equitable title without yet holding legal title. Legal title will not occur until the deed is passed at closing. The buyer has no right to take possession of the property until all requirements of the contract have been met, usually at the day of closing.
Which of the following does NOT create an agency relationship? A) A property management contract B) A listing contract C) A buyer agency contract D) A payment of money or commissions
D) A payment of money or commissions - The payment of money or commissions does not create an agency relationship. A written contract or actions of the parties create agency. In real estate, a listing contract, buyer agency contract, or property management contract creates an agency relationship between the broker and the principal to the contract.
A buyer and a seller have entered into a binding contract for the sale of real estate. During this phase and until closing, the buyer has which type of title? A) Escalating B) Executory C) Legal D) Equitable
D) Equitable - The buyer has equitable title, which recognizes that he has an interest but has not received legal title. Legal title will pass at closing when the seller gives the buyer the deed.
Under the statute of frauds, all contracts for the sale of real estate must be A) accompanied by earnest money deposits. B) originated by a real estate professional. C) on preprinted forms. D) in writing to be enforceable.
D) in writing to be enforceable. - The statue of frauds requires all documents for the transfer of real estate be in writing; the exception is a lease of 12 months or less.
Designated agency will MOST likely occur under what circumstance? A) Both the buyer and the seller are customers of the firm. B) The seller and the buyer are represented by different brokerage firms. C) The buyer is a client of the firm and the seller is the customer of the firm. D) The buyer and the seller in the same transaction are both represented by the same brokerage firm.
D) The buyer and the seller in the same transaction are both represented by the same brokerage firm. - Designated agency occurs when one brokerage firm practices dual agency in representing both the seller and the buyer in the same transaction. Both parties are clients of the firm. In many states, designated agency is a process that permits the firm's broker to appoint one agent to represent the seller and another agent from the same firm to represent the buyer. Each of the agents is a designated agency for her respective client—the seller or the buyer—and may not share confidential information about the party they represent.
A listing broker is typically A) a universal agent. B) a designated agent. C) a general agent. D) a special agent.
D) a special agent. - A real estate broker is usually a special agent, an agent authorized to represent the principal (the seller) in one specific business transaction, with no power to bind the principal. The listing broker's authority is limited to finding a ready, willing, and able buyer for the property. A general agent represents the principal in a broad range of matters related to a particular business and has a limited power to bind the principal. A property manager is usually a general agent. A universal agent is a person empowered to fully bind the principal as authorized by a general power of attorney. A designated agent is an individual licensee authorized by a broker to represent one party in a transaction in which the other party is also represented by the broker.
The status of a contract that meets all the essential elements and is enforceable is called A) a voidable contract. B) a void contract. C) an unenforceable contract. D) a valid contract.
D) a valid contract. - When a contract meets all of the essential elements and is enforceable, it is a valid contract. Duress, fraud, misrepresentation, and minors always make contracts voidable. Void or unenforceable real estate contracts lack an essential element and do not exist in the eyes of the court for enforcement.
The amount of earnest money deposit is determined by A) listing broker's office policy on such matters. B) meeting the acceptable minimum of 5% of the purchase price. C) real estate licensing statutes. D) agreement between the parties.
D) agreement between the parties. - The amount of earnest money deposit is determined by agreement of the parties. Under the terms of most listing agreements, a real estate broker is required to accept a "reasonable amount" as earnest money. Brokerage firms and license law may not set the amount of earnest money required. The amount is set by the seller and negotiated by the buyer.
A couple offers to purchase a house for $120,000, including its draperies, with the offer to expire at noon on Saturday. The sellers reply in writing on Thursday accepting the $120,000 offer but excluding the draperies. On Friday, while the buyers consider this counteroffer, the sellers decide to accept the original offer, draperies included, and state that in writing. At this point, the buyers A) are legally bound to buy the house, although they have the right to insist that the draperies be included. B) must buy the house but may deduct the value of the draperies from the $120,000. C) must buy the house and are not entitled to the draperies. D) are not bound to buy.
D) are not bound to buy. - The sellers' counteroffer is regarded in law as a new offer. They have rejected or terminated the buyers' original offer by changing something in it and thereby releasing the buyers from the original offer. At this point, the sellers can keep both their draperies and their house, and the buyers are not bound by any agreement to buy the property.
In a dual agency situation, a broker may represent both the seller and the buyer if A) both parties are represented by attorneys. B) the broker informs either the buyer or the seller of this fact. C) the broker determines dual agency is the only option to sell the property and get paid a full commission. D) both parties give their informed consent, usually in writing, to the dual agency.
D) both parties give their informed consent, usually in writing, to the dual agency. - Dual agency, in states that allow it, requires informed written consent from both parties. The broker must have written consent from both parties; consent from only one party will not permit dual agency. The dual agency relationship does not determine payment of commissions and does not require attorney representation by either party.
The essential elements of a contract includes all of the following EXCEPT A) consideration. B) lawful purpose. C) offer and acceptance. D) competent grantor.
D) competent grantor. - Competent grantor is a requirement of a deed but not an essential element of a contract. Offer and acceptance, lawful purpose, consideration, voluntary consent, and legally competent parties are the essential elements of a contract.
A listing salesperson acting as the seller's agent is holding an open house. The state does not allow dual agency. A buyer starts a conversation about the property and tells the salesperson she is an investor looking for a number of properties. The salesperson states the seller of the property will take less and the salesperson can represent the buyer in the purchase of this property and others. In this case, the salesperson A) may act as the buyer's agent without disclosure since it is an open house. B) is guilty of conversion of agency and could be fined. C) can act as a subagent to the seller and full agent to the buyer. D) is an undisclosed dual agent who acted in bad faith.
D) is an undisclosed dual agent who acted in bad faith. - The salesperson and the seller's agent should have disclosed her agency relationship, not shared the seller's confidential information. He cannot represent the buyer in the purchase of the property since dual agency is not allowed in the state.
A buyer under an executory contract has found numerous inspection issues the seller is unwilling to repair. The seller and the buyer agree to terminate the contract with all things of value returned to each party. This is known as A) specific performance. B) liquidated damages. C) mutual performance. D) mutual rescission.
D) mutual rescission. - When both parties to a contract are returned to their original position, it is known as mutual rescission. Liquidated damages and specific performance are types of purchase contracts chosen as a remedy for default by one of the parties. Mutual performance is when both parties complete the contract.
All of the following are examples of due diligence in a purchase contract EXCEPT A) the buyer has a property inspection and calls zoning to verify the property zoning will meet her needs. B) the seller orders title work and agrees to pay for the owner's policy at closing. C) the buyer has an attorney review the title commitment. D) the broker completes a comparative marketing analysis for a listing appointment.
D) the broker completes a comparative marketing analysis for a listing appointment. - The broker is using due diligence, but for a listing, not the purchase contract. Due diligence is all parties to the transaction working in good faith to close.
A buyer in a fast-selling market has written a number of offers in hopes of getting at least two accepted. The buyer then plans to terminate those offers the buyer does not want during the inspection period. The buyer can buy only one property and the broker representing him as an agent knows this and is helping with the process. In this case, A) the broker will be sure to get paid, which is second to helping the buyer. B) the buyer has a good business plan which is standard in seller's markets. C) the buyer is acting in good faith, but the broker is acting in bad faith. D) the buyer and broker are acting in bad faith.
D) the buyer and broker are acting in bad faith. - The broker and buyer, in presenting offers they have no intention of closing, are acting in bad faith.
A seller may keep the buyer's earnest money as liquidated damages if A) that is stated in the listing agreement as a remedy for the seller. B) the seller failed to perform an essential element of the contract. C) the seller and the broker agree that the buyer defaulted and the contract calls for specific performance. D) the buyer defaults and the purchase agreement stipulates liquidated damages as a remedy.
D) the buyer defaults and the purchase agreement stipulates liquidated damages as a remedy. - A liquidated damages purchase contract allows the seller to keep the earnest money if the buyer defaults. Typically, the buyer will have specific performance remedies if the seller is in default.
The clause in a contract that makes timely performance a condition of the contract is called A) the within a reasonable time clause. B) the drop dead clause. C) the unity of time clause. D) the time is of the essence clause.
D) the time is of the essence clause. - Time is of the essence means that timely performance is a condition of the contract.
A contract that has no legal force or effect is A) valid. B) voidable. C) unenforceable. D) void.
D) void. - When a contract has no legal force or effect, it is void and unenforceable. When a contract meets all of the essential elements and is enforceable, it is a valid contract. Duress, fraud, misrepresentation, and minors always make contracts voidable.
A contract between two parties that legally binds one party to perform, but allows the other party to disaffirm it, is A) void. B) bilateral. C) executed. D) voidable.
D) voidable. - Voidable contracts have one side obligated but the other party able to rescind the contract if they wish. A contract with a minor is always voidable; for example, if an adult agrees to buy a property a minor owns, the contract is voidable by the minor. Executed contracts are closed and completed. Void contracts lack an essential element and bilateral contracts exchange promises.
