Real Estate Section 3 "Contract & Agency" Quiz Questions

In agency representation, the employer is called the... Select one: a. seller. b. agent. c. client. d. broker.

In agency representation, the employer is called the client.

Don owns a store in a shopping mall. He pays base rent of $1,500 per month plus 2.5% of sales in excess of $300,000. If his total sales were $1,200,000 for the year, what was the total rent for the year? Select one: a. $30,000. b. $37,500. c. $40,500. d. $48,000.

The correct answer is: $40,500. $1,500 X 12 = $18,000 base rent. $1,200,000 - $300,000 = $900,000 sales subject to rate. $900,000 X .025 = $22,500 rent based on sales. $18,000 + $22,500 = $40,500 total annual rent.

Mary owns a retail store which is a lessee in a small shopping mall. The store pays a base rent of $1,000 per month plus 3% of annual sales in excess of $240,000. If the store was charged $28,800 in rent for the year, what were its sales for that year? Select one: a. $750,000. b. $800,000. c. $960,000. d. $1,000,000.

The correct answer is: $800,000. $1,000 X 12 = $12,000. $28,800 - 12,000 = $16,800 rent based on sales. $16,800 / .03 = $560,000 (sales above $240,000. $240,000 + $560,000 = $800,000 total sales.

What is a silent lease? Select one: a. A lease that is not in writing. b. A lease that states nothing about a particular issue or circumstance. c. A lease that is not recorded. d. A sublease where the landlord has not been notified.

The correct answer is: A lease that states nothing about a particular issue or circumstance. A "silent lease" is not actually a type of lease. It is a lease that says nothing (is silent) about a particular issue or circumstance.

Which of the following is true of a contract under novation? Select one: a. A new contract replaces the old one. b. The old contract is void. c. The original parties to the contract remain jointly and severally liable with the new parties. d. A new party is assigned the rights of an old party.

The correct answer is: A new contract replaces the old one. A new contract replaces the old one is the basic definition of novation. The old contract is not void, but is extinguished (ceases to be).

On the last day of a valid one year lease, the tenant gave the landlord a check for the next month's rent, which the owner accepted. What is created by the actions of the two parties? Select one: a. An estate for years. b. An estate at sufferance. c. An estate at will. d. A periodic estate.

The correct answer is: A periodic estate. The action of accepting the next month's rent legally creates a new lease for one month or a periodic tenancy.

Which of the following would NOT be an agent? Select one: a. A real estate salesperson handling only referrals. b. A property manager employed by the owner. c. A person working for a multiple listing service. d. A person holding a power of attorney.

The correct answer is: A person working for a multiple listing service. An agency relationship is created when one person (the client) delegates to another (the agent) the right to act on his behalf in a business transaction. All of these choices would be agents except an individual working for a multiple listing service. That person is an employee of MLS.

A legal procedure or action initiated by either buyer or seller to enforce the terms of a sales contract is known as: Select one: a. An option. b. A suit for specific performance. c. A suit for quiet title. d. A statute of frauds.

The correct answer is: A suit for specific performance.

A person that has the legal authority to act for another is: Select one: a. A listing broker. b. An attorney-at-law. c. An attorney-in-fact. d. An ostensible agent.

The correct answer is: An attorney-in-fact. The person is known as an attorney-in-fact and receives his power to act through a power of attorney. Usually the power of attorney is very specific as to exactly what the agent may do. A broker usually does not have the authority to act for someone else. Under the agency agreement (listing) with a broker, the broker's job is to find a ready, willing and able buyer at the terms and conditions set by the client.

A homeowner tells a broker that he would like to sell his house. The broker agrees to sell the house. This agreement would be considered: Select one: a. An express contract. b. An implied contract. c. An illegal contract as it requires a writing. d. An equilateral contract.

The correct answer is: An express contract. This is an example of an express contract. The principal (seller) has expressed what he wants done and the agent (broker) has expressed his intent to comply with the request. This is a verbal listing agreement (contract) and the statute of frauds does not say that verbal real estate contracts are illegal, it just says that they are NOT enforceable.

The Parol Evidence Rule controls which of the following: Select one: a. An oral agreement leading to a written contract. b. A dispute between cooperating brokers. c. A settlement which occurs while a licensee is imprisoned. d. None of the above.

The correct answer is: An oral agreement leading to a written contract. The Parol Evidence Rule states that a written agreement will override any previous oral agreement.

An agency relationship can be terminated in which of the following ways? Select one: a. Death of the client. b. Renunciation by the agent. c. Revocation by the client. d. Any of these choices.

The correct answer is: Any of these choices. An agency relationship can be terminated in any of these ways.

If the seller makes a counteroffer, when may that counteroffer be withdrawn? Select one: a. At any time before settlement. b. At any time prior to acceptance. c. Within 72 hours. d. Within 24 hours.

The correct answer is: At any time prior to acceptance. Like an offer, a counteroffer may be withdrawn at any time before acceptance by the offeree.

Why do brokers feel that an exclusive right to sell listing gives the broker the best protection? Select one: a. Because the broker would be paid regardless of who finds the buyer. b. Because exclusive right to sell listings permit protection clauses. c. Because exclusive right to sell listings never expire. d. Because exclusive right to sell listings do not have to be included in the local MLS.

The correct answer is: Because the broker would be paid regardless of who finds the buyer. A broker who gets an exclusive right to sell listing would be paid the commission regardless of who finds the buyer.

Broker Bob has opened an escrow account and has deposited a buyer's earnest money deposit in that account. Broker Bob later learns that a different customer is about to file a lawsuit against him so he deposits $100,000 of his own money in that account. This action constitutes: Select one: a. Conversion. b. Commingling. c. Disintermediation. d. Wise business practice.

The correct answer is: Commingling. Broker Bob has commingled his own money with clients' money, which is a violation. [Conversion is theft of the money.]

Which of the following is NOT required in an open listing? Select one: a. Signature of the client. b. Definite termination date. c. Agreed upon commission or fee. d. Description of the property.

The correct answer is: Definite termination date. An open listing will remain in effect for a "reasonable period" of time. Definite termination dates are required for exclusive listings. Some states may recognize verbal listings, but as with all real estate contracts, if it is not in writing, it is not enforceable.

The protection clause in a contract: Select one: a. Protects the buyer and seller from breach of contract. b. Assures the broker will be paid a commission. c. Ensures the broker a commission if the seller and buyer enter into a contract after the listing has expired. d. Safeguards the borrower from foreclosure by a lender.

The correct answer is: Ensures the broker a commission if the seller and buyer enter into a contract after the listing has expired. If, after a listing expires, the seller enters into a contract with a buyer that was introduced to the property during the listing period, a commission is due and payable to the listing broker. Usually there is a time limit included in the clause.

A clause in a lease which enables the lessor to raise the rent in the future is called a(n): Select one: a. Protective covenant. b. Restrictive covenant. c. Subordination clause. d. Escalator clause.

The correct answer is: Escalator clause.

During the period of time after a real estate contract is ratified, but before title actually passes to the buyer, the status of the contract is: Select one: a. Voidable. b. Executed. c. Executory. d. Implied.

The correct answer is: Executory. Before the contract is completed, it is said to be executory. Once it is complete, it has been executed.

The phrase "a person who is placed in a position of trust to act for someone else's benefit" is the definition of the term: Select one: a. Fiduciary. b. Agent. c. Trustor. d. Intermediary.

The correct answer is: Fiduciary. The question gives the definition of the term "fiduciary."

A salesperson took a listing on a property which had a crack in the foundation caused by water seepage. It was obvious that the owner had filled in and painted over the crack although the owner advised the sales agent that the seepage problem had been corrected, when in fact it had not. If the salesperson shows the property without advising potential buyers of the seepage problem, the salesperson would be guilty of: Select one: a. Fraud. b. Misrepresentation. c. Puffery. d. Nothing.

The correct answer is: Fraud. This is fraud because it would be intentional misrepresentation of a material adverse fact about the physical condition of the property actually known by the licensee.

Mr. Gregory has a home for sale with a sign, FOR SALE BY OWNER, in the front yard. Salesperson Gary calls, identifies himself and asks for the key to show the property. Mr. Gregory agrees. Which of the following best describes any agency relationship that may exist? Select one: a. Mr. Gregory is Gary's client. b. Gary is Mr. Gregory's agent. c. Gary's broker is the agent of Mr. Gregory for a reasonable time. d. No agency relationship exists.

The correct answer is: Gary's broker is the agent of Mr. Gregory for a reasonable time. An agency agreement between Gary's BROKER (agent) and Mr. Gregory (client) exists by implication. Gary did identify himself and the seller agreed to let him show the property. In absence of a specified time, the agency would continue for a reasonable time.

An agreement in which rent is increased at specified intervals is known as: Select one: a. Graduated rental lease. b. Participation lease. c. Acceleration lease. d. Net lease.

The correct answer is: Graduated rental lease. A graduated rental lease has provisions for rent increases at prescribed intervals. An acceleration lease could apply to the same type of situation, but 1 is the better answer.

A graduated lease is defined as one: Select one: a. That includes an option to purchase. b. In which all expenses are paid by the lessor. c. In which there may be an increase or decrease in rent at a stated future time. d. Whereby rent increases with each new tenant.

The correct answer is: In which there may be an increase or decrease in rent at a stated future time. A graduated lease can be compared to an adjustable rate mortgage. The rent will increase or decrease based on some future factor.

A financing agreement that exposes the buyer to the greatest risk would be: Select one: a. Installment land sales contract. b. Sale and leaseback. c. Purchase money mortgage. d. Junior mortgage.

The correct answer is: Installment land sales contract. In an installment land sales contract, the seller holds legal title until all the purchase money has been paid. The buyer has only equitable title, therefore would be at risk.

Two brokers from different firms agree that they will charge the same commission rate for all property listed by their offices. Such action: Select one: a. Is common practice. b. Is in violation of antitrust laws. c. Is prohibited by RESPA. d. Violates the Fair Housing Law.

The correct answer is: Is in violation of antitrust laws. The action of the brokers described in the stem of the question is in direct violation of anti-trust antitrust laws. You should never discuss commission rates with another licensee from another firm.

Which of the following is (are) true regarding the Multiple Listing Service? Select one: a. It can only accept residential listings. b. It can establish minimum and maximum commission rates. c. It can refuse to accept open listings. d. All of these choices.

The correct answer is: It can refuse to accept open listings. The MLS is an advertising arm of the real estate industry and as such, the license law and regulations do not address their activities. Multiple Listing Services do take commercial listings. Most refuse to accept open listings because the terms of an open listing provide little protection for the listing brokers interest. If the MLS were to establish commission rates, it would be in violation of federal antitrust Laws.

If the landlord (owner) of property dies during the period of a valid lease, what effect would it have on the lease and the tenant? Select one: a. The lease is void, by operation of law. b. The lease would be voidable, at the option of the tenant. c. The right of possession would revert to the estate of the deceased. d. It has no effect.

The correct answer is: It has no effect. Upon the death of the landlord, the lease (contract) continues in effect between the tenant and the estate or heirs of the landlord. Death of either of the parties to a contract has no effect on the contract, EXCEPT in an agency type contract.

What tax benefits does a business owner gain if she sells the building the business operates from and leases it back from the buyer? Select one: a. It may convert a low-deductible mortgage payment into an entirely deductible lease payment. b. The gain on sale will be tax-deferred. c. The business owner will be able to take depreciation deductions. d. All of these are benefits to the business owner.

The correct answer is: It may convert a low-deductible mortgage payment into an entirely deductible lease payment. Mortgage payments by owners are only deductible to the extent of the interest paid, but rent payments are entirely deductible. The other answers are incorrect because the sale will (presumably) generate a taxable capital gain. Also, the business owner will no longer be entitled to depreciation deductions, which now go to the buyer.

A contract for the sale of land in which the buyer makes regular payments, takes possession, but does not receive title is known as a(n): Select one: a. Mortgage. b. Land contract. c. Lease. d. Option.

The correct answer is: Land contract. What is described could be either a land sales contract, an installment contract or a contract for deed. In each of these the buyer makes payments, takes possession but the seller retains legal title until all payments are made.

When a contract is breached, the injured party: Select one: a. May not sue for money damages. b. May not sue for specific damages. c. May rescind the contract bilaterally. d. May rescind the contract unilaterally.

The correct answer is: May rescind the contract unilaterally. When a contract is breached, the injured party may rescind the contract unilaterally.

The type of lease where the tenant pays all the maintenance and taxes is called a: Select one: a. Net lease. b. Percentage lease. c. Ground lease. d. Gross lease.

The correct answer is: Net lease. A net lease is one which stipulates the tenant (lessee) will pay a fixed amount as rent and some or all of the costs of maintaining the building, including taxes, insurance, utilities, repairs, etc.

With which of the following are rental payments guaranteed to increase during the term of the lease? Select one: a. Escalator clause b. Percentage lease c. Index lease d. None of these options

The correct answer is: None of these options Only graduated leases are guaranteed to have rent increases, but that was not a choice in this question. Rental increases are likely in index leases and leases with escalator clauses, but not guaranteed. In percentage leases rent increases would occur with increases in sales.

Broker Boyd takes a listing on a property owned by Foster at a price of $75,000 with no more than 20% down. Five days later, Boyd secures a written, all cash, offer for $75,000 on the Foster property. Foster refuses the offer. What can Boyd do under the circumstances? Select one: a. Demand that Foster accept the offer. b. Demand that Foster pay him a full commission since he secured a full price offer. c. Demand that Foster pay at least half commission. d. Nothing, since the offer does not meet the terms of the listing contract.

The correct answer is: Nothing, since the offer does not meet the terms of the listing contract. In order to earn a commission, a salesperson must find a ready, willing and able buyer, on the exact terms of the seller. The fact that the offer was all cash and not just 20% cash means that it was not on the exact terms of the seller.

A buyer and seller entered into a valid contract. The buyer, for personal reasons, asked to be released from the contract. The buyer located someone else to buy the property. The seller entered into a new contract with the other person and released the first buyer from any obligation. This would be an example of: Select one: a. Assignment. b. Novation. c. Implied consent agreement. d. Redemption.

The correct answer is: Novation. This is a novation of the contract. The difference between assignment and novation is that one party agrees to substitute another party and relieve the first party from liability. With an assignment the first party remains at least secondarily liable.

Licensee Larry has held a real estate license for many years and has completed many residential transactions but never any commercial transactions. His neighbor owns a small strip mall and asks Licensee Larry to sell the property. Licensee Larry should be especially careful to consider which of the following duties to the client? Select one: a. Disclosure. b. Accounting. c. Confidentiality. d. Reasonable care and due diligence.

The correct answer is: Reasonable care and due diligence. Since Licensee Larry has no experience in commercial transactions, he should give special consideration to whether or not he can provide reasonable skill and due diligence. He should either decline the listing or partner with someone who can help him.

A seller contacted 3 brokers and asked each to suggest the listing price for his property. Broker A said $78,000. Broker B said $79,000. Broker C said $91,000. The seller listed with Broker C and the house later sold for $76,000. Broker C is guilty of violating which of his or her agency responsibilities? Select one: a. Loyalty. b. Reasonable care. c. Disclosure. d. Accountability.

The correct answer is: Reasonable care. Of the duties listed, reasonable care best describes this situation. The agent must exercise care to properly advise his client, thereby looking out for his client's best interests.

A restaurant owner leases some space in a shopping mall for a restaurant. The lease requires that the restaurant serve only Portuguese menu items. This is an example of a(n): Select one: a. Protective covenant. b. Restrictive covenant. c. Subordination clause. d. Escalator clause.

The correct answer is: Restrictive covenant.

The right of a landlord to reenter or regain possession of the premises upon expiration of a lease is known as: Select one: a. Redemption. b. Reversion. c. Remainder. d. Recovery.

The correct answer is: Reversion. When the landlord leased the property, he gave up his right of possession. Upon termination of the lease agreement, the right of possession REVERTS to the landlord.

Harry leases a small office building from Sally. Included in the lease is a clause that states that should Sally ever decide to sell the building, Harry would have the right to purchase the building by matching any offer Sally is willing to accept. This is an example of a(n): Select one: a. Option. b. Habendum clause. c. Right of first refusal. d. None of the above.

The correct answer is: Right of first refusal. The question gives an example of a right of first refusal

Barry, a sales agent with XYZ Realty lists a property. Helen, also a sales agent with XYZ, presents an offer from one of her clients and the offer is accepted. Which of the following best describes the position of the broker and XYZ in this situation? Select one: a. The broker is an agent for the buyer only. b. The broker is an agent for the seller only. c. The broker is agent of the seller and sub-agent of the buyer. d. The broker is a dual agent.

The correct answer is: The broker is a dual agent. The Broker is agent of the seller by virtue of Barry's listing. The Broker is an agent of the buyer by virtue of the fact that the buyer is Helen's CLIENT (important word). The broker is therefore a dual agent. All agency agreements are with the broker, NOT the sales agents that procured the listing.

Chris, a salesperson working for Broker Janet, is assigned to work on a listing that started on January 3. The listing is a 90 day exclusive right-to-sell agreement. On March 1, Chris is killed in an automobile accident. What is the status of the listing agreement? Select one: a. The listing becomes an open listing. b. The listing terminates by operation of law. c. The listing remains valid. d. The seller may now list the property with another broker.

The correct answer is: The listing remains valid. The listing agreement is a contract between the seller and the BROKER (Janet). Chris's death has no effect on the contract, which remains valid until the expiration date.

Which of the following statements about options is true? Select one: a. The optionor can void the option if another offer is submitted. b. The optionee can allow the option to expire. c. The optionee can extend the option period automatically. d. Options only involve raw land.

The correct answer is: The optionee can allow the option to expire. An option is the right to purchase a property within a specified time period on specified terms and can be allowed to expire by the optionee, without further liability, by not exercising the option.

The listing price of a property is established by: Select one: a. The multiple listing service. b. The owner. c. The appraiser. d. The listing salesperson and/or the employing broker.

The correct answer is: The owner. It is the owner that sets the price. Licensees should be prepared to advise owners concerning the best price based on market conditions etc, but it is the owner's decision.

A buyer makes an offer to purchase a piece of property. The seller changes the date of occupancy by one day and signs the contract. If the purchaser does not agree with this change, which of the following is true? Select one: a. The buyer only has 72 hours to accept a change of this type. b. The purchaser has no further liability. c. The seller and purchaser could both sue for specific performance. d. The seller may keep the deposit as liquidated damages.

The correct answer is: The purchaser has no further liability. Any change, regardless of how minor, must be approved by both parties. The original offer is terminated by the counteroffer and the buyer has no further liability as to the property.

A tenant and landlord enter into a six-month lease on July 1, 20xx to expire on Dec. 31, 20xx. Which of the following statements is correct? Select one: a. The landlord must serve notice to quit at least 30 days prior to the expiration of the lease. b. The tenant must give the landlord 30 days notice of his intent to vacate the property on December 31, 2001. c. The tenant must vacate the property on December 31, without notice. d. None of these choices is correct.

The correct answer is: The tenant must vacate the property on December 31, without notice. When there is a lease with a definite termination date (an estate for years) the lease ends on the day specified and NO notice is required by either party.

When a buyer purchases property under an installment sales contract, the seller retains: Select one: a. Title to the property b. A remainder estate c. Possession d. A life estate

The correct answer is: Title to the property One disadvantage to a buyer under an installment contract is that the seller retains legal title.

Which of the following would be a violation of anti-trust law? Select one: a. Two brokers agree that each will market his services only in specific areas of the community. b. Jim, a broker, advertises that his firm will only represent buyers. c. An independent broker refuses to join the local Association of Realtors. d. A real estate company has some sales agents working as independent contractors and other sales agents working as employees.

The correct answer is: Two brokers agree that each will market his services only in specific areas of the community. When brokers agree to limit their marketing efforts to a particular area or agree to charge the same commission rates, it is a violation of anti-trust laws.

Which of the following is subject to the Statute of Frauds? Select one: a. Six-month lease for an apartment b. Tenancy at will c. Two-year lease for real property d. Month to month rental

The correct answer is: Two-year lease for real property A lease for more than one year must be in writing under the Statute of Frauds.

When does a broker earn his commission? Select one: a. When the listing is taken. b. When the title insurance policy is given to the purchaser. c. When closing is complete and title passes. d. When the offer to purchase has been signed and accepted by the seller.

The correct answer is: When the offer to purchase has been signed and accepted by the seller. The broker EARNS a commission when the broker brings a ready, willing and able buyer to buy on the seller's terms. The broker is PAID when the deal closes and title is transferred.

What is the primary difference between a gross lease and a net lease? Select one: a. The method of determining rent increases. b. The length of the lease. c. Who pays the property taxes, insurance and maintenance costs. d. The size of the space rented.

The correct answer is: Who pays the property taxes, insurance and maintenance costs. In a gross lease the lessor pays those costs. In a net lease, the lessee pays those costs.

Which of the following is essential for a contract for the sale of real property to be upheld by a court? Select one: a. Written form b. Earnest money deposit c. Removal of all liens and encumbrances d. All of the above

The correct answer is: Written form A contract for the sale of real estate must be in writing to be enforceable. Earnest money deposits are common, but not mandatory. Not all liens and encumbrances may be removed -- property tax liens and easements, for instance, are not usually removable.

A 17-year old inherits property from his grandfather and immediately enters into a contract to sell the property. Can he later refuse to sell the property? Select one: a. Yes, because contracts with minors are void. b. Yes, because contracts with minors are voidable. c. Yes, because the contract is unenforceable. d. No, the contract is valid and binding on all parties.

The correct answer is: Yes, because contracts with minors are voidable. He can refuse to sell the property because contracts with minors are VOIDABLE by the minor, not because they are void or unenforceable.

To be legally binding, a real estate sales contract must contain a Select one: a. termite clause. b. list of personal property. c. legal description. d. commission.

The correct answer is: legal description. A real estate sales contract must include a legal description of the property. The other choices are usually included, but the contract would still be binding without them.

When a property is sold with an existing lease... Select one: a. the entire lease interest is transferred. b. the original lessor remains primarily liable on the lease. c. the original lessee has no liability under the lease. d. the assignee would pay the rent to the assignor.

The correct answer is: the entire lease interest is transferred. When a leased property is sold, the entire lease interest is transferred with the property. The new owner is bound by the terms of the lease.

The loan contingency clause in a valid sales contract will contain all of the following except: Select one: a. the amount of the loan. b. the name of the lender. c. the date of the commitment. d. the interest rate of the loan.

The correct answer is: the name of the lender. A loan contingency clause will include the amount of the loan, the interest rate and the date by which the loan must be approved, but not the name of the lender.

A lease provision that prohibits using certain premises for a drugstore is called a Select one: a. protective covenant. b. use covenant. c. restrictive covenant. d. condemnation covenant.

The correct answer is: use covenant. The question gives an example of a use covenant. While it is a type of restrictive covenant, the "use covenant" choice is more specific and the better answer.

The buyer in a contract for deed is known as the: Select one: a. vendor. b. vendee. c. obligor. d. obligee.

The correct answer is: vendee. The buyer in a contract for deed (installment sales contract) is known as the vendee.

An open listing contract in which the seller agrees to pay a commission to the first broker who produces a ready, willing, and able buyer is a bilateral contract. Select one: a. True b. False

The statement is false. An open listing is a unilateral contract. The seller promises to pay upon performance, but the broker does NOT promise to do anything.

Money paid upon the signing of a contract is known as principal. Select one: a. True b. False

The statement is false. Money paid at contract signing is an earnest money deposit.

Net listings are acceptable in most states. Select one: a. True b. False

The statement is false. Net listings are usually illegal in most states.

It is necessary to prove that money damages were suffered in order to rescind a contract. Select one: a. True b. False

The statement is false. Rescission does not require proof of damages.

A listing contract signed by both the seller and broker, in which the seller promises to pay and the broker promises to do things such as advertise and show the property, is a unilateral contract. Select one: a. True b. False

The statement is false. The question states that both parties make promises, so this is a bilateral contract.

"Time is of the essence" means a reasonable time within which a contract (or portion of a contract) must be performed. Select one: a. True b. False

The statement is false. When the phrase "time is of the essence" is used, it means that the contract must be performed within the specified time limit when time is of the essence.

In a revaluation lease, the rent is adjusted automatically according to the reappraisal of the real estate. Select one: a. True b. False

The statement is true.

A client is obligated to her agent for... Select one: a. indemnification against loss not caused by the agent. b. reimbursement. c. performance. d. all of the above.

A client is obligated to her agent for indemnification against loss not caused by the agent.