Chapter 10 - Quiz - Part 2

What is an acceptable way to handle earnest money and due diligence fees paid with the sales contract?

Place the funds in trust or in an escrow account until closing.

Which of these is a true statement regarding Installment Land Contracts?

The agreement may provide for monthly installments for a period of years, followed by a balloon payment at the end. Installment Land Contracts may require monthly payments for a period of years followed by a balloon payment. Contract terms and conditions may be vague. Just as with traditional sales contracts, agents are prohibited from drafting Installment Land Contracts or provisions. Buyers should always evaluate all of their options before deciding which financing method makes the most sense for their situation.

Who is entitled to keep the interest earned on the earnest money while it's in an interest-bearing escrow account?

The escrow agent.

How is a right of first opportunity to purchase different from a right of first refusal?

With a right of first opportunity to purchase, the holder has the first right to make an offer when notified that the seller intends to sell their property. With a right of first refusal, the holder instead has the right to match a third party's offer.

Which of these documents would not be covered by the delivery of instruments rule?

inspection reports. The delivery of instruments rule requires brokers to give their clients copies of documents including agency agreements, contracts, leases, rental agreements, options or other related transactions within three days of the broker's receipt of the documents.

If unforeseen delays in settlement or closing occur and the delaying party notifies the other party in writing, how long is the automatic extension period as provided in the Offer to Purchase Vacant Lot/Land contract?

14 days. If unforeseen delays in settlement or closing occur, item 10 of this contract addresses them, stating that the delaying party must notify the other party. This notification begins an automatic 14-day extension. If the settlement is not completed by that point and the parties haven't extend the contract in some other manner, the delaying party will be in breach of the contract.

What do NC real estate commission rules say about a broker accepting a check payable to the seller?

A broker may accept checks made payable to the seller for due diligence fees but only for the limited purpose of delivering the checks to the seller.

The New Construction Addendum allows for a "building deposit." What is a building deposit?

A deposit for the construction of agreed-upon additional improvements. This is non-refundable if the buyer cancels the contract. If there was a building deposit specified in section 1(d) of the OPC, it is not an earnest money deposit. Item 5(b) of this Addendum clarifies that the seller may use such a deposit for the construction of any agreed-upon additional improvements. The building deposit is only refundable if the seller materially breaches this contract or if the contract is otherwise terminated under paragraph 12 of the OPC.

Which of these would NOT be an offer to purchase property that would trigger a right of first refusal?

A verbal offer made in a phone call.

What is one important difference between preemptive rights and options to purchase real estate?

An option to purchase real estate gives the holder an equitable interest in the property. Options to purchase real property give the holder equitable interest in the property and the right to essentially force the property owner to sell at any time during the term of the contract. In contrast, a preemptive right may only be exercised if the property owner decides to sell.

Which of these statements regarding foreclosure/eviction procedures under Installment Land Contracts is false?

Buyers have greater protections because sellers must pursue their remedies as a matter of contract law and not foreclosure law. Installment Land Contracts generally favor sellers when it comes to foreclosure or eviction for non-payment. Buyers are not afforded the foreclosure protections available under federal and state laws, so sellers pursue their rights as a matter of contract law rather than foreclosure law.

Which of these is a potential risk buyers should know about before signing an Installment Land Contract?

Buyers typically do not have the foreclosure protection available when the property is financed using a mortgage or deed of trust.

How would a client accept proposed contract modifications or counteroffers?

By initialing the changes on the contract form and signing and dating to indicate their acceptance. If a client decides to accept proposed modifications and a counteroffer, they must initial the changes on the contract form and sign and date to indicate their acceptance. Once this acceptance has been communicated to the other party there is a binding contract in place.

How does an option holder exercise their rights under an options contract?

By notifying the property owner of their intention to exercise their rights under the contract. To exercise the options contract, the optionee (option holder) notifies the optioner (property owner) of their intention to buy the property on the previously agreed-upon terms. Property owners sometimes enter into leaseback agreements with the new owner after the options holder exercises their rights, but that is a separate transaction and agreement.

Which of these is not a right included with the buyer's equitable title during the term of the Installment Land Contract?

Convey the property.

Which of these remedies is not something that's contractually available to a buyer if the seller breaches the contract?

Damages of three times the amount of the earnest money and due diligence fees paid.

Which of these is not a required element to form a legally-binding contract?

Earnest money. To form a legally-binding contract, several elements are required - including that there be a valid "offer", and that there be an acceptance of that offer. Both the offeror and offeree must be legally capable of entering into a contract in the state of North Carolina for the agreement to be valid. While earnest money is commonly paid with real estate offers, it is not a legal requirement.

Potential benefits to buyers of using Installment Land Contracts include all of the following EXCEPT:

Higher interest rates. In addition to making home ownership more attainable for buyers with poor credit histories and offering fast closings, Installment Land Contracts can also allow buyers to qualify for "more house" than they could otherwise afford by starting with an installment contract with monthly payments and then later refinancing what they still owe the seller into an affordable traditional mortgage. However, buyers often end up paying higher interest rates with this type of financing than they would were they able to obtain mortgage loans.

Which of the following is not a true statement about due diligence fees paid by the buyer?

If the buyer cancels the contract during the due diligence period they are entitled to a return of their due diligence fees. Due diligence fees are funds payable to the seller as consideration, giving the buyer the right to conduct due diligence and inspections during the due diligence period. This time period is specified in the underlying contract. If the buyer decides to cancel the purchase agreement at any point during the due diligence period they can do so. While they can receive a return of their earnest money under that scenario they are not entitled to a return of the due diligence fees paid.

When a seller signs this agreement, what type of deed do they promise to deliver to the buyer by the settlement date?

In item 6(g) of this contract, the seller agrees to deliver a General Warranty Deed to the buyer no later than the settlement date.

What kind of down payment requirement might a borrower expect when purchasing property under an Installment Land Contract?

Lower compared to traditional financing. Buyers considering Installment Land Contracts can generally expect a lower down payment requirement than what they would pay if using traditional financing channels. In fact, some sellers are willing to completely eliminate any down payment requirements.

Which of the following is NOT likely to be a reason a buyer would consider using an Installment Land Contract

More protection if the loan goes to foreclosure. This type of seller financing is an option parties might consider when a buyer is not able to qualify for traditional financing due to poor credit, or wants to buy property traditional mortgage lenders do not want to finance. Installment Land Contracts can be an attractive choice to reduce closing costs. However, Installment Land Contracts usually have fewer borrower protections in the event of foreclosure.

Can the "Offer to Purchase Vacant Lot/Land" contract be made contingent on the buyer's ability to obtain financing?

No, purchases using this form are not contingent on loan approval. If the buyer intends to pursue financing, item 2(a) explains that the purchase is not contingent on the approval of the loan. Before signing the contract, buyers should consult with their lenders to ensure the due diligence period provides enough time to complete the appraisal and any other lender requirements. Purchases under this form don't need to be made in cash, but the contract cannot be cancelled because the buyer cannot get loan approval.

When a seller makes a counteroffer, is there automatically a valid agreement between the parties?

No. A counteroffer is, in effect, a rejection and a new offer. The buyer can choose to accept the counteroffer or make a counteroffer of their own.

May a broker who receives an offer "sit on" the offer and wait five days to give it to their client so they can deliver all offers at the same time?

No. Agents must present offers as soon as possible but under no circumstances later than three days from receipt

May brokers make independent decisions about whether to accept or reject contract modifications or counteroffers?

No. Brokers must present their clients with contract modifications and counteroffers. No. Just like with initial offers, agents must promptly present their clients with proposed contract modifications and counter offers. Agents may not withhold offers or modifications they perceive to be unfavorable, nor may they delay sending the counteroffers to their clients.

Which of these is not an element of an option to purchase real estate?

Non-binding contract. Real estate options are legally-binding, and they give the option holder the exclusive right to purchase real estate property for a specified time period at a pre-defined price.

Rich has a right of first refusal and Oscar has a right of first opportunity. Whose right gives them more control?

Oscar. When notified that the property owner wants to sell, he can be the first to make an offer. Rich cannot make an offer until a third-party has already done so and then, he can only offer to match that third party offer.

Which has a longer duration, a right of first refusal or a right of first opportunity?

Preemptive rights are negotiated between the parties. The durations and time periods for exercising preemptive rights will differ from one contract to another

Which of these is a true statement?

Real estate agents may not review offers for their clients and make decisions about which offers to present to their clients. Real estate agents do not get to review offers for their clients and make decisions about which offers they are going to present to their clients. Even if the agent is certain their client will want to dismiss an offer out of hand because it is too low or its terms are unfavorable or unreasonable, the agent must still deliver the offer promptly.

What is another common name for the right of first opportunity to purchase?

Right of first offer.

What right does a right of first refusal provide to the holder?

Right of first offer.

What is the term for the contractual right to match another offer received by a property owner who has decided to sell their property?

Right of first refusal. When someone holds a right of first refusal, it means they have the right to match the terms of another party's offer. This right does not actually spring into being until the owner of the property in question has an offer in hand, and the owner would like to accept that offer.

How could a tenant benefit from having a right of first opportunity?

Rights of first opportunity can protect tenants who are leasing space from changes in ownership that could impact their tenancy.

Which of these is NOT a characteristic of rights of first refusal?

Springing right, triggered when the property owner decides to sell. Both the right of first refusal and the right of first opportunity to purchase are springing rights, but the right of first refusal is not triggered until the owner receives an offer from a third party. .

Which of these are characteristic of rights of first refusal?

Springing right, triggered when the property owner receives another offer. When triggered, the right is exercisable for a limited duration. No equitable interest in the underlying property

Which of the following statements about equitable and legal title under an Installment Land Contract is true?

The buyer's equitable title serves to protect them, prohibiting the seller from turning around and selling the property to someone else during the term of the contract.

Item 14 of this contract addresses tax-free exchanges. Who does the contract state is responsible for additional costs related to a tax-free exchange?

The exchanging party.

What happens if a right of first refusal is triggered by the owner receiving another offer, but the holder does not exercise the right before the time period to do so expires?

The holder of the right loses the opportunity to exercise the right and the property owner can accept any offer they want to accept.

Why might an investor want to enter into an option to purchase real estate?

The investor thinks the market will go up, and they can lock in a lower price. An investor who buys an option to purchase a piece of real estate likely thinks the market will go up, and they will be able to lock in the right to buy the property at a lower price. Someone who is certain they want to buy the property, and quickly, would not be likely to use an option contract.

Which of the following is NOT a true statement about the limited warranty of construction described in the New Construction Addendum?

The limited warranty of construction is good for two years from the date of closing or from the date the buyer occupies the property, whichever comes first. TRUE: This limited warranty covers all necessary repairs and corrections to either the interior or exterior of the home, structural or nonstructural, if they become necessary due to faulty construction, labor, materials, or non-conformity of construction to the plans and specifications. -The limited warranty is provided to the named buyer only and cannot be assigned to someone else. -If there are other warranties in place, this warranty is in addition to those and not in replacement of them.

Which of these is not a potential downside for a property owner who enters into an options contract?

The property owner gets to keep the amount paid for the options contract, whether the option holder exercises their rights or not. Property owners are locked into options contracts for the term of the agreement, and they may not be able to sell their property at all during that period. If the option holder decides to exercise their rights, the property owner must sell at the agreed-upon price in the options contract. The owner does get to keep the amount paid for the contract, whether they ever exercise it or not.

Which type of preemptive right would you have if the owner of the burdened real estate must notify you if they intend to sell their property, before they accept offers from other potential buyers?

The right of first opportunity.

Which of these is NOT a statement or certification the seller makes on the New Construction Addendum?

The seller or their General Contractor will begin construction after closing. The seller certifies in item 1 that construction has been completed, that they or their General Contractor was appropriately licensed, and that they will provide the Buyer with a Certificate of Occupancy no later than at Settlement for the transaction.

If the parties agree that the seller will make additional improvements to the property before settlement, who is responsible for paying for such improvements?

The seller. The parties may agree that the seller will make additional minor improvements to the property. The costs of construction are addressed in section 2(d), with the seller committing to provide and pay for all labor, materials, equipment, tools, clean-up, utilities, transportation, facilities, permits, fees, licenses, and other expenses related to the construction of minor additional improvements.

Which of these is not a reason licensees should understand preemptive rights?

To draft preemptive rights agreements and tailor provisions to meet clients' needs. Agents should understand preemptive rights so they can recognize them, differentiate between them, and help clients understand them. However, agents may not draft preemptive rights contracts or provisions, only licensed attorneys may do so.

How is an option to purchase real estate different from preemptive rights?

With preemptive rights, the holder cannot exercise their rights until and unless the property owner decides to sell. An option to purchase is more powerful than preemptive rights like a right of first refusal or a right of first offer. With those types of rights, the holder cannot exercise the rights until and unless the property owner decides to sell the property. With an option to purchase, the option holder can decide to exercise the option at any point during the contractually-specified time period, effectively forcing a sale - even if the seller does not want to sell at that moment in time. While the option holder has the right to purchase, they are not legally obligated to do so.

Must a broker notify their client about a new offer when there is already a pending offer?

Yes. Brokers must present clients with all offers received even if there is already a pending offer.

How many days do brokers have to deposit a client's earnest money into a trust or escrow account?

no later than three days after acceptance of the offer to purchase or lease property

How long do brokers have to present their clients with required documents under the delivery of instruments rule, North Carolina real estate commission rule A.0106(a)?

three days