Unit 9: Real Estate Contracts

equitable title

after a buyer and seller have signed a sales contract, the buyer acquires an interest in the land known as the Equitable Title. Legal Title of the home transfers to the Equitable Title owner after escrow closes

statute of limitations

allows a specific time limit during which parties to a contract may bring legal suit to enforce their rights (must be begun within 2 years and commence within 4 years).

consideration

an act or promise that is offered by one party to induce another to enter into a contract. Given in exchange for something from another

A contract is void if it involves A) duress. B) an illegal purpose. C) misrepresentation of the purchaser's intentions. D) undue influence.

an illegal purpose.

A promulgated contract form is drawn up, signed by the prospective buyer, and presented by the broker to the seller. This is A) a counteroffer. B) an offer. C) an encumbrance. D) an acceptance.

an offer.

Texas Real Estate Broker-Lawyer Committee

established by TRELA. The purpose of this committee is the drafting and revising of standard contract forms to be used by real estate license holders

executory contract

exists when something remains to be done by one or both parties; that is, the agreement is partially performed (when a real estate sales contract is negotiated and signed by both parties, it is executory, as payment of the purchase price and delivery of the deed are still required).

unenforceable contract

has all the elements of a valid contract, however neither party can sue the other to force performance (ex. An oral listing agreement is unenforceable).

void contract

has no effect because it does not have the essential elements of a contract

voidable contract

may be disaffirmed by one or both parties because one party was taken advantage of by being forced into a contract under duress, fraud or misrepresentation

valid contract

meets all legal requirements; contains all four essential elements (COCA-COLA): - Consent - Capacity - Consideration - Lawful Objective

unilateral contract

one-sided agreement whereby one party makes a promise in order to induce a second party to do something (reward for missing animal)

assignment

refers to the transfer of rights, duties, or both under a contract. The purchase of a home on assumption or subject to an existing loan in an assignment.

The right reason for a homebuyer to hire a home inspector is to A) review the home to determine its overall condition. B) find problems. C) escape from the deal. D) renegotiate the contract.

review the home to determine its overall condition.

escrow agreement

states the obligations of each party to a transaction and the duties of the escrow agent, who is a disinterested third party and will not benefit from the contract

If one of the parties defaults on a real estate contract, the nondefaulting party may A) continue with the contract. B) accept the offer. C) sue for specific performance. D) default on the contract.

sue for specific performance.

Forms that are promulgated by the Texas Real Estate Commission are drafted by A) the Texas Department of Business and Professional Licensing. B) the Texas Bar Association. C) the Texas Association of REALTORS®. D) the Texas Real Estate Broker-Lawyer Committee.

the Texas Real Estate Broker-Lawyer Committee.

Standard contract forms used by real estate license holders in Texas are drafted and revised by A) individual brokerage firms. B) the Texas Real Estate Commission. C) the Real Estate License Act. D) the Texas Real Estate Broker-Lawyer Committee.

the Texas Real Estate Broker-Lawyer Committee.

agreement in writing and signed

the Texas statute of frauds requires that contracts for the sale of real estate and leases for more than one year be in writing to be enforceable. The following are required to prevent fraudulent proof of a fictious oral agreement: - The signature of the party to be charged is required. - A spouse's signature must be included when necessary to release marital rights, such as community property and homestead rights. - An agent may sign for a principal if the agent has proper written authority, such as a power of attorney. - When sellers are co-owners, all co-owners must sign.

competent parties

the buyer and seller must be of legal age and free from mental handicap that would make them incompetent

The statute of frauds requires which element? A) A spouse's signature when necessary to release marital rights in community or homestead property B) All of these C) The signatures of each seller when sellers are co-owners of property D) The signature of the party to be charged

All of these

Under what circumstances might a person buy a lease-purchase option? A) If the buyer believes the value of the property will go up in the future B) If the buyer believes the option would be cheaper than renting the property C) If the buyer is uncertain about his future (such as whether he may be relocated) D) All of these

All of these

Why might an investor offer an option to purchase a property? A) Because he can risk a comparatively small amount of money to hold a property for a specific period without committing to buy it. B) Because once he has the option, all other potential buyers are locked out at least until the contract expires. C) All of these. D) Because he believes the value of the property may go up in the near future and the option allows him to lock in a lower price.

All of these.

liquidated damages

An amount predetermined by the parties to an agreement as the total amount of compensation an injured party should receive if the other party breaches a contract; usually the earnest money in a residential sales transaction.

Which is an act or a promise that is offered by one party to induce another to enter into a contract? A) Legality of object B) Competent parties C) Offer and acceptance D) Consideration

Consideration

Who benefits most from the use of TREC-promulgated and/or approved forms? A) Real estate professionals B) Texas courts and real estate attorneys C) The Texas Real Estate Commission D) Consumers

Consumers

In real estate sales contracts, which term is used to establish the effective date of the contract? A) Date of final acceptance B) Contract date C) Date of transfer D) Date of possession

Date of final acceptance

Under Texas law, any action for the specific performance of a written contract for the conveyance of real property must be commenced within how many years from the date of the breach? A) Four B) Five C) Two D) Three

Four

A broker took a listing for an office building. When it went under contract, the purchaser requested a property condition inspection. The broker hired an inspector who did not find three serious defects in the property. After the purchaser sued the broker, who was an agent of the seller, the courts determined that the broker was also acting as an agent of the purchaser under which kind of contract? A) Implied B) Bilateral C) Executory D) Voidable

Implied

The Texas Real Estate Commission regulates licensed real estate brokers and sales agents in the state. May only licensees use form promulgated by the Commission? A) Yes, only licensees may use TREC forms. B) No, only licensees who are not members of the Texas Association of REALTORS® may use TREC forms. C) No, anyone can use the forms. D) No, only licensees and licensed lenders may use TREC forms.

No, anyone can use the forms.

Must licensed real estate sales agents ALWAYS use promulgated forms? A) Yes, licensees are required to use promulgated forms. B) No, only licensed brokers must always use promulgated forms. C) Promulgated forms must be used when two licenses (representing buyer and seller) are engaged. D) No, licensees acting on their own behalf do not have to use promulgated forms.

No, licensees acting on their own behalf do not have to use promulgated forms.

Because some property owners prefer to use contracts they draw up themselves, are real estate licensees allowed to help draw up those contracts? A) Yes, licensees may take existing TREC forms and help property owners modify them according to their preferences. B) Yes, but licensees are only allowed to rewrite purchase agreements and are obligated to advise buyers that the form is non-TREC approved. C) Yes, as a fiduciary of the seller, licensees are obligated to assist their principal (though encouraged to use TREC-promulgated or approved forms). D) No, licensees are barred from assisting in the creation of forms.

No, licensees are barred from assisting in the creation of forms.

If the value of a property decreases dramatically after a buyer has taken out an option, is the buyer still obligated to purchase the property at the higher price? A) No, the buyer need only let the option contract expire without making a purchase. B) Yes, the buyer must buy—but the gap between the option price and the eventual price is taken by the real estate sales agents as their commission. C) Yes, the option contract is a legal contract that must be adhered to. D) Yes, the buyer must buy the property but is permitted to renegotiate the actual price.

No, the buyer need only let the option contract expire without making a purchase.

What is the difference between a "TREC-approved" form and a "TREC-promulgated" form? A) Promulgated forms are created specifically by the Texas Legislature, while approved forms are created by the Commission. B) Approved forms must be used, while promulgated forms may be used. C) None, the words are synonymous. D) Promulgated forms must be used, while approved forms may be used.

Promulgated forms must be used, while approved forms may be used.

May a real estate broker or sales agent receive a referral fee from a cable service provider? A) Referral fees are an unacceptable part of the business. B) Referral fees are an acceptable part of the business. C) Referral fees may be accepted if they are disclosed to the client ahead of time. D) Referral fees may be accepted by the real estate brokerage but not the individual agent.

Referral fees may be accepted if they are disclosed to the client ahead of time.

In real estate sales contracts, which term is used to clarify any business aspects of the sale NOT covered by any provisions of the printed earnest money contract form? A) Addendum B) Title policy and survey C) Special provisions D) Settlement and other expenses

Special provisions

If, under a TREC promulgated contract, a seller fails to deliver according to the requirements of a contract (such as refusing to provide the deed), what remedies does the buyer have, short of suing for specific performance? A) The seller may discharge the agreement by providing a property similar to the one the buyer wanted. B) The (nondefaulting) buyer may ask that the seller submit to mediation. C) The buyer may take the contract to the county sheriff and seek immediate eviction of the seller. D) None. Either the seller complies with the contract or he has breached the contract and may be forced to deliver the property.

The (nondefaulting) buyer may ask that the seller submit to mediation.

A buyer hired a Texas Real Estate Commission (TREC)-licensed property inspector and has received the property condition inspection report in which deficiencies were noted. The buyer's options for dealing with the reported deficiencies do NOT include which of the following? A) The buyer may request that the TREC-licensed property inspector complete the necessary repairs at the buyer's expense. B) The buyer may terminate the contract under the termination option paragraph, if within the time frame. C) The buyer may make the necessary repairs. D) The buyer may request that the seller make all or some of the necessary repairs at the seller's expense.

The buyer may request that the TREC-licensed property inspector complete the necessary repairs at the buyer's expense.

In the course of purchasing a farm, the buyer mentions that he intends to grow marijuana. What is the status of the contract? A) The contract is valid unless the agreement specifically bars growing marijuana. B) As long as the buyer's intentions are known and all parties agree, the contract is valid. C) The contract is void because it contemplates a purpose that is illegal or against public policy. D) The contract is not voidable because an oral statement could not void it.

The contract is void because it contemplates a purpose that is illegal or against public policy.

In a contract for deed, what are some potential problems a purchaser might run into? A) Few licensees understand how contract for deed actually works. B) Regulations could change to outlaw the practice, meaning payment in full would be due. C) Contract for deed is such a paper-intensive, complicated process that it rarely secures the buyer under the homestead shield. D) The seller might default on a previous mortgage, which could result in a lien on the property.

The seller might default on a previous mortgage, which could result in a lien on the property.

Which is NOT typical of a contract for deed? A) The seller retains legal title. B) The seller pays real estate taxes and insurance premiums. C) The buyer gives the seller a down payment and pays monthly installments of principal and interest over a number of years. D) The buyer takes possession and gets equitable title to the property.

The seller pays real estate taxes and insurance premiums.

Which does NOT describe the process involved in a buyer's getting a property condition report? A) A TREC-licensed inspector is required to use a standard report form: The Property Inspection Report. B) A TREC-licensed inspector must provide a written opinion of the condition of improvements, including structural items, electrical items, heating and air-conditioning systems, plumbing systems, appliances, and other equipment. C) The seller selects the inspectors and pays for inspections and any required repairs. D) A buyer is permitted to have the property inspected by a TREC-licensed inspector or other licensed contractor, such as a plumber.

The seller selects the inspectors and pays for inspections and any required repairs.

An oral listing agreement is which of the following? A) Void B) Voidable C) Unenforceable D) Valid

Unenforceable

If a seller decides to take an expensive chandelier that the contract states will convey with the property, is that considered a breach of contract? A) No, under Texas law a nonconveying item does not injure the "complete performance" of a contract. B) Yes, a breach of contract is anything that falls short of the four corners of the agreement. C) No, taking a small item that a buyer thought would convey is sufficiently minor that it would not be considered a breach. D) No, items such as chandeliers should not be written into real estate contracts in the first place because they are not enforceable

Yes, a breach of contract is anything that falls short of the four corners of the agreement.

If a homeowner wants to sell his property to an adult child for $1, may a sales agent be involved in that transaction? A) No, the transaction would have to be arranged by a real estate attorney because of the number of addenda that would be required. B) No, real estate agents may not be involved in property sales below market rate. C) Yes, assuming all the agent needs to do is fill out blanks in the contract. D) No, the transaction would be considered illegal under Texas law because it is an attempt to avoid taxation.

Yes, assuming all the agent needs to do is fill out blanks in the contract.

If a builder substantially completes construction on the deck of a home but fails to provide waterproofing or staining as per the contract, must the homeowner pay the builder? A) No, if the letter of the contract includes waterproofing and staining, the builder is in noncompliance and is owed nothing until the job is completed. B) Waterproofing and staining always are considered homeowner responsibilities, not builder duties. C) Yes, but the contract may be discharged through an agreement to pay the builder less the cost of waterproofing and staining. D) Yes, waterproofing and staining are sufficiently minor that the builder could be considered in full compliance with the contract and should be paid in full.

Yes, but the contract may be discharged through an agreement to pay the builder less the cost of waterproofing and staining.

Jerry and Mark agree that Jerry will buy Mark's farm for $400,000 cash. This is an example of A) an executed contract. B) an implied contract. C) a bilateral contract. D) a unilateral contract.

a bilateral contract.

option

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 (the right to buy the property within a period of time if desired)

breach

a violation of any of the terms or conditions of a contract without legal excuse, as when a seller breaches a sales contract by not delivering title to the buyer under the conditions agreed upon

contract

a voluntary agreement between legally competent parties to perform or refrain from performing some legal act, support by legal consideration. A contract is an enforceable promise that must be performed

counteroffer

any attempt by the seller to change the terms proposed by the buyer creates a counteroffer

bilateral contract

both parties promise to do something; one promise is given in exchange for another

earnest money deposit

cash deposit put down when making an offer to purchase real estate. It gives evidence of the purchaser's intent to carry out the terms of the contract, but is not required.

contract for deed

contract for the sale of real estate wherein 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 final payment.

Using force to obtain an agreement is A) fraud. B) misrepresentation. C) undue influence. D) duress.

duress.

implied contract

the agreement of the parties is demonstrated by their actions and conduct

The difference between forms "promulgated" and forms "approved" by the commission is that A) promulgated forms must be used for commercial property, whereas approved forms must be used for residential property. B) there is no significant difference between the two. C) the license holder may use the promulgated forms, whereas the license holder must use the approved forms. D) the license holder must use the promulgated forms, whereas the license holder may use the approved forms.

the license holder must use the promulgated forms, whereas the license holder may use the approved forms.

specific performance

the nondefaulting party may sue for specific performance to force the defaulting party to carry out the terms of the contract and/or seek such other relief as may be provided by law

express contract

the parties state the terms and show their intentions in words; may be written or oral

novation

the substitution of a new contract for an existing agreement with the intent of extinguishing the old contract. For example, a lender's modifying note terms for a buyer who fell behind on payments

offer and acceptance

this requirement, also called mutual assent, means that "meeting of the minds" must occur. Meant to enter into binding agreement on agreed terms

legality of object

to be valid, a contract must not contemplate a purpose that is illegal

executed contract

when all parties have fulfilled all promises in the agreement (the purchase price is paid, the deed is delivered and the purchaser has possession of the property).

If a home is offered "as is," is it worth the trouble of hiring a home inspector? A) "As is" means the seller won't change anything, so hiring an inspector is a waste of money. B) "As is" means the buyer has no legal recourse against a seller for a deficient property. C) "As is" means the seller will not allow a home inspector. D) Hiring a home inspector helps a buyer identify home flaws and decide whether to pursue the transaction.

Hiring a home inspector helps a buyer identify home flaws and decide whether to pursue the transaction.

After both parties have initialed all changes to a contract and have signed it, which is NOT acceptable notification of contract acceptance? A) In a transaction involving subagency, notification of contract acceptance must be given directly to the buyer after seller acceptance. B) In a buyer brokerage transaction, notification of acceptance must be given directly to the buyer. C) Notification of acceptance to a seller can be given to the seller's broker or the sales agent working for the seller. D) Notification of acceptance to a buyer can be given to the buyer's broker or the sales agent working for the buyer in a buyer brokerage transaction.

In a buyer brokerage transaction, notification of acceptance must be given directly to the buyer.

There are four exceptions to the requirement for a license holder to use a contract that has been promulgated for a particular contract situation. Which is NOT an exception? A) Transactions in which a relocation company requires a different form to be used B) Transactions in which an agency of the U.S. government requires a different form to be used C) Transactions for which a contract form has been prepared by the property owner or prepared by an attorney and required by the property owner D) Transactions in which the license holder is functioning solely as a principal, not as an agent

Transactions in which a relocation company requires a different form to be used

While forbidden from practicing general law or business law, agents are allowed to practice real estate law if A) they have been Texas real estate license holders for more than 12 years. B) Under no circumstances are real estate licensees allowed to practice any form of law unless they also are licensed attorneys. C) they have taken 36 hours of real estate law continuing education and been license holders continuously for at least 5 years. D) they have taken 12 hours of real estate continuing education courses on contract law.

Under no circumstances are real estate licensees allowed to practice any form of law unless they also are licensed attorneys.