Unit 19

amendment

A change to the existing content of a contract (i.e., if words or provisions are added to or deleted from the body of the contract). Must be initialed by all parties.

Installment Contract

A contract for the sale of real estate whereby the purchase price is paid in periodic installments by the purchaser, who is in possession of the property even though title is retained by the seller until a future date, which may not be until final payment; also called a contract for deed or

Stigmatized Property

A property that has acquired an undesirable reputation due to an event that occurred on or near it, such as violent crime, gang-related activity, illness, or personal tragedy.

Option

An agreement to keep open for a set period an offer to sell or purchase property

puffing

Exaggeration of a property's benefits

Material Fact

Information that is significant to a person and that person's ability to make an informed decision.

Earnest Money

Money deposited by a buyer under the terms of a contract, to be forfeited if the buyer defaults but applied to the purchase price if the sale is closed; also known as hand money.

Contingency

Provisions in a contract that require a certain act to be done or a certain event to occur before the contract becomes binding.

A contingency includes the following three elements:

The actions necessary to satisfy the contingency The time frame within which the actions must be performed Who is responsible for paying any costs involved

Which of the following BEST describes a land contract or installment contract? A) A method of selling real estate whereby the purchaser pays in regular installments while the seller retains title B) A mortgage on land C) A means of conveying title immediately whereby the purchaser pays for the property in installments D) A contract to buy land only

The answer is a method of selling real estate whereby the purchaser pays in regular installments while the seller retains title. An installment contract combines elements of both a sale and a finance document into one legal instrument. The seller (vendor) retains legal title, while the purchaser (vendee) takes possession, acquires equitable title, and agrees to make principal and interest payments to the seller for a stated period of time, after which point, the seller will transfer legal title.

The purchaser of real estate under an installment contract A) receives legal title immediately. B) acquires equitable title. C) is not required to pay property taxes for the duration of the contract. D) generally pays no interest charge.

The answer is acquires equitable title. The seller is the vendor in an installment contract; the purchaser is known as the vendee.

The buyer and the seller entered into a contract contingent on a satisfactory home inspection. The inspection turned up a serious roof problem, which will cost about $5,000 to repair. What type of document should the two parties execute when they agree to split the cost of the repair? A) An amendment B) An addendum C) An option D) A contingency

The answer is an amendment. An amendment changes a provision in the original agreement; in this situation, the parties are changing the financial terms they had previously agreed upon.

Who is BEST suited to assist a buyer and a seller to enter into an installment contract? A) The broker of record B) A real estate salesperson C) An attorney D) An accountant

The answer is an attorney. A seller and a buyer contemplating an installment sale should first consult an attorney to ensure that the agreement meets all legal requirements and addresses the individual concerns of the parties.

Before buyers and sellers enter into a written contract to purchase, real estate licensees are required to provide A) a confirmation that the buyers and sellers approve of paying a commission to the brokers involved. B) a statement from the buyers as to why they will use the property. C) an estimated statement of closing costs. D) verification that the property is properly insured.

The answer is an estimated statement of closing costs. The Real Estate Commission's Rules and Regulations require that real estate licensees provide the buyer and the seller with written estimated statements of closing costs before the parties sign an agreement of sale; the statement must include the broker's commission, mortgage payments and financing costs, taxes and assessments, and settlement expenses.

The buyers made a very low offer to the sellers, expecting to negotiate to a higher price. While the seller was considering the very low offer, another higher offer materialized. The seller A) may not accept the second offer until the first buyers are sure that they do not want the property. B) must tell the first buyers about the second offer to ask if they want to match or exceed it. C) is obligated to continue with a counteroffer to the first buyers. D) can accept the second, higher offer.

The answer is can accept the second, higher offer. An offer or counteroffer may be withdrawn (revoked) at any time before it has been accepted, even if the person making the offer or counteroffer agreed to keep the offer open for a set period. The property remains on the market during negotiations. If another buyer materializes with a better offer, the seller does not owe the first buyer any special courtesy. The seller may revoke the counteroffer and accept the new offer.

A licensee tells a prospective buyer, "This property has the most beautiful river view." In fact, the view includes the river and the back of a shopping center. The licensee A) is merely puffing. B) is guilty of intentional misrepresentation. C) has committed fraud. D) is guilty of negligent misrepresentation.

The answer is is merely puffing. Puffing is the legal exaggeration of the benefits of a property. Licensees walk a fine line between opinion and fact.

A buyer offers in writing to purchase a house for $220,000, including its draperies, with the offer to expire on Saturday at noon. The sellers reply in writing on Thursday, accepting the $220,000 offer but excluding the draperies. On Friday, while the buyer considers this counteroffer, the sellers decide to accept the original offer, draperies included, and state that in writing. At this point, the buyer A) must buy the house and can deduct the value of the draperies from the $220,000. B) must buy the house but is not entitled to the draperies. C) is not bound to buy. D) must buy the house and have the right to insist on the draperies.

The answer is is not bound to buy. Any change a seller makes to the terms proposed by a buyer in an offer constitutes a rejection of the buyer's offer and the buyer has no obligation to purchase the property. Those changes, known as a counteroffer, now constitute a new offer being made by the seller to the buyer. The buyer can accept or reject that offer, or make another counteroffer.

An option A) gives the optionee an easement on the property. B) requires the optionee to complete the purchase. C) makes the seller liable for a commission. D) keeps the offer open for a specified time.

The answer is keeps the offer open for a specified time. An option is a unilateral contract by which an optionor (generally an owner) gives an optionee (a prospective purchaser or lessee) the right to buy or lease the owner's property at a fixed price within a stated period of time.

Water leaks into the basement only in the spring when the snow melts; the basement is dry during the summer. This is an example of A) an example of caveat emptor. B) a latent defect that must be disclosed to prospective buyers. C) a problem that must be dealt with only if it surfaces while the property is on the market. D) a latent defect that does not need to be discussed with prospective buyers.

The answer is latent defect that must be disclosed to prospective buyers. A latent defect is one that cannot easily be discovered by an ordinary person and sometimes even by a home inspector. However, if it affects the structure and/or the health and safety of the occupants, sellers must disclose its existence.

A buyer wants to make an offer to purchase a house that she suspects has a wet basement. The buyer is afraid that the house may be sold to someone else before she has a chance to get information about the structure. How should she proceed? A) Make an offer to purchase that is contingent on a structural inspection. B) Ask the seller to repair the basement before she makes an offer. C) Ask the real estate salesperson to guarantee that the basement is dry. D) Hire a contractor to give an estimate for repair before making an offer.

The answer is make an offer to purchase that is contingent on a structural inspection. A buyer can make an offer that is subject to a structural inspection to address concerns such as a wet basement. The contract would then be subject to an inspection contingency.

After a buyer makes an offer to purchase, the broker cannot locate the seller to present the offer. In the meantime, the broker receives an offer for a higher price from another buyer. How should the broker proceed? A) Present the offer for the higher price B) Inform the first buyer that the broker cannot present the offer because it is too low C) Present both offers to the seller D) Decide which offer is best to present to the seller

The answer is present both offers to the seller. Licensees are required to present all offers in a timely manner. In the case of multiple offers, the broker should present all offers to the sellers for their consideration.

In Pennsylvania, at what time should an estimated statement of closing costs be provided to the buyer and the seller? A) After acceptance of an offer B) Within 24 hours of communication of acceptance of an offer C) Prior to settlement D) Prior to signature of the agreement of sale

The answer is prior to signature of the agreement of sale. According to the Real Estate Commission's Rules and Regulations (Section 35.334), the seller and the buyer must be provided with statements of estimated cost and return before entering into an agreement of sale.

A house is rumored to be haunted. Additionally, the air conditioner is not working properly. Under Pennsylvania law, what must be disclosed? A) The broken air conditioner B) Both the rumored haunting and the broken air conditioner C) The rumored haunting D) Neither the rumored haunting or the broken air conditioner

The answer is the broken air conditioner. Pennsylvania requires the disclosure of a material defect, such as a broken air conditioner. State and federal law are silent regarding stigmatized properties, such as a rumored haunting.

Under an installment contract, who is obligated to pay the real estate taxes? A) The seller B) Split equally between the buyer and the seller C) The buyer D) The trustee who holds naked title

The answer is the buyer. In an installment contract, the buyer acquires equitable title and thus is obligated to pay real estate taxes, insurance premiums, and repairs and upkeep on the property.

Which of the following is an example of a material defect? A) The listing agent notes that the subject property is within three blocks of an elementary school. B) The seller instructs the listing agent not to disclose that her grandmother died in her sleep in the house. C) The listing agent declares that the floor plan is the best in the neighborhood. D) The house was built over a ditch filled with decaying timber.

The answer is the house was built over a ditch filled with decaying timber. Sellers must disclose a material defect, one that affects that structure and/or the health and safety of the occupants and that negatively would influence the buyers. A stigmatized property is one that is psychologically affected (someone died in the home), but this fact, while important to some, does not affect health and safety.

A real estate purchaser is said to have equitable title when A) a contract for deed is paid off. B) escrow is opened. C) the transaction is closed. D) the sales contract is signed by both buyer and seller.

The answer is the sales contract is signed by both buyer and seller. Full legal title to property passes to a buyer when the agreement of sale is executed at closing or settlement. However, the buyer obtains an interest in the property, known as equitable title, when both the buyer and the seller have signed the agreement of sale.

An option to purchase binds A) neither buyer nor seller. B) the buyer only. C) both buyer and seller. D) the seller only.

The answer is the seller only. An option is a unilateral contract in which the optionor agrees that the optionee (usually the buyer) has the right to purchase the property at an agreed-upon price within an agreed-upon period. While the optionee is not obligated to purchase the property, the optionor is obligated to sell if the optionee exercises this right.

An offer may be withdrawn at any time before it has been accepted, unless the person making the offer or counteroffer has agreed to keep the offer open for a set period of time. True or False?

The statement is false. An offer or counteroffer may be withdrawn at any time before it has been accepted, even if the person making the offer or counteroffer has agreed to keep the offer open for a set period.

Earnest money or hand money deposits are also known as down payments. True or False?

The statement is false. It is important to understand the difference between an earnest money or hand money deposit and the down payment. Earnest money or hand money is given in good faith to demonstrate the seriousness of the buyer's intent to perform on the contract. A down payment relates to the buyer's financing, being the difference between the purchase price and the amount of the mortgage loan the buyer will obtain.

Under an option agreement, the buyer is obligated to buy the property if the seller still desires to sell at the end of the option term. True or False?

The statement is false. The optionee (buyer) is not obligated to buy at the end of the option term, but if the optionee wants to buy, the owner (optionor) is obligated to sell.

Information that is significant to a person and that person's ability to make an informed decision is material. True or False?

The statement is true. A material fact is the information that is significant to a person and that person's ability to make an informed decision. The rule of thumb is whether the fact is important enough that had it been known, the person would have made a different decision.

The installment contract requires that the seller convey title upon full payment by the buyer. True or False?

The statement is true. Although the buyer obtains possession under the contract, the seller is not obligated to execute and deliver a deed until all the terms of the contract have been satisfied, generally when the buyer has made enough payments to obtain a mortgage loan and pay off the balance due on the contract.

The licensee is still responsible for ensuring that all required disclosures are provided even if the first time the buyer and licensee work together is the time the buyer decides to make an offer. True or False?

The statement is true. It's possible that the first time the buyer and licensee work together is the time the buyer decides to make an offer, in which case the licensee is still responsible for ensuring that all required disclosures are provided. These are written forms, often signed by the parties, that the broker retains as evidence of disclosure.

In Pennsylvania

a mortgage contingency must state the type and amount of the loan, the maximum interest rate and minimum term, the deadline by which the buyer shall obtain the loan, and the nature and extent of assistance that the broker will provide in helping the buyer obtain the loan.

An inspection contingency

a sales contract may be contingent on the buyer's obtaining certain inspections of the property. Inspections may include those for wood-boring insects, lead-based paint, structural and mechanical systems, sewage facilities, and radon or other toxic materials.

A common application of an option

is a lease that includes an option for the tenant to purchase the property.

Misrepresentation

is an unintentional misstatement or omission. The misrepresentation or omission does not have to be intentional to result in licensee liability.

An addendum

is any provision added to an existing contract without altering the content of the original. An addendum is essentially a new contract between parties that includes the original contract's provisions by reference, meaning the addendum mentions the original contract.

Fraud

is the intentional misrepresentation of a material fact in such a way as to harm or take advantage of another person. This includes making false statements about a property and intentionally concealing or failing to disclose important facts.

In some states

licensees may prepare a shorter document known as a binder instead of a complete sales contract. The binder states the essential terms of the offer and acknowledges that the licensee has received the purchaser's deposit. A more formal and complete contract of sale is drawn up by an attorney once the seller accepts and signs the binder.

An offer is not considered accepted until

the person making the offer has been notified of the other party's acceptance.

An insurance contingency,

whereby buyers may make the agreement of sale contingent on obtaining affordable homeowner's insurance.

A property sale contingency

whereby buyers may make the sales contract contingent on the sale of their current home. This protects the buyers from owning two homes at the same time and also helps ensure the availability of cash for the purchase.

A mortgage contingency

which protects the buyer's earnest money until a lender commits the mortgage loan funds