unit 11 real estate contracts

Which of the following describes an executed contract? A) All obligations under the agreement have been performed B) Two parties have yet to perform an obligation under the agreement C) One party has yet to perform an obligation under the agreement D) A sales contract is signed, but ownership has not yet changed hands.

The answer is all obligations under the agreement have been performed. A contract is either executed or executory, depending on whether the agreement has been completed or some obligation under the agreement has yet to be performed. An executed contract is one in which all parties have fulfilled their promises; the contract has been performed. An executory contract exists when one or both parties still have an act to perform. A sales contract is an executory contract from the time it is signed until closing; ownership has not yet changed hands, and the seller has not received the sales price. At closing, when the contract terms have been met, the sales contract is executed.

Real estate can be purchased under a land contract, also called A) an installment deed. B) a contract for note. C) an installment contract or contract for deed. D) a contract for note or installment contract.

The answer is an installment contract or contract for deed. Real estate can be purchased under a land contract, also called an installment contract or contract for deed.

The transfer of rights or duties under a contract to a third party is called A) an assignment. B) a conveyance. C) a novation. D) a substitution

The answer is an assignment. The transfer of rights or duties under a contract to a third party is called an assignment.

The buyer has made an offer that the seller has accepted, and proper notice has been given to the buyer of the seller's acceptance. The offer is now considered A) an executory contract. B) a unilateral contract. C) an executed contract. D) an assignment.

The answer is an executory contract. The period between when the contract is agreed to and signed by both parties and the time it is executed (closed) is called the executory period.

Another term for the meeting of the minds that occurs in the formation of a contract when there is an offer and acceptance is A) mutual assent. B) counteroffer. C) consideration. D) performance.

The answer is mutual assent. There must be complete agreement between the parties about the purpose and terms of the contract.

Substitution of a new contract for an existing contract is called A) conveyance. B) assignment. C) novation. D) consideration.

The answer is novation. Substitution of a new contract for an existing contract is called novation.

Under a land contract, the buyer is called A) the vendee. B) the trustor. C) the vendor. D) the beneficiary.

The answer is the vendee. Under a land contract, the buyer is called the vendee.

A clause in a purchase agreement that would allow the buyer to cancel the contract if the buyer cannot secure financing from a lender is A) a due-on-sale clause. B) an acceleration clause. C) a contingency clause. D) a release clause.

The answer is a contingency clause. Contingency clauses are clauses that allow the contract to be canceled if an event happens or does not happen, such as the buyer being unable to secure financing.

The sales contract says the buyer will purchase only if an attorney approves the sale by the following Saturday. The attorney's approval is A) a warranty. B) a contingency. C) a consideration. D) a reservation.

The answer is a contingency. The contract is said to be contingent upon the attorney's approval. If the contingency is not satisfied—if the attorney doesn't approve—the contract is null and void.

The parties are returned to their original positions before the contract was created if there is A) a counteroffer. B) a novation. C) an assignment. D) a rescission.

The answer is a rescission. Any monies or property exchanged must be returned.

A seller accepted money from a buyer in exchange for the buyer's unrestricted right to cancel the purchase transaction (option to terminate) within 10 days of the executed date of the sales contract. This agreement is A) a covenant clause in the sales contract. B) a bilateral contract. C) a unilateral contract. D) an executory agreement .

The answer is a unilateral contract. This is a one-sided agreement with the seller's promise to sell enticing the buyer to buy his property. The buyer is not legally obligated to act, but the seller is obligated to keep his promise.

A real estate professional has found a buyer for a seller's home. The buyer has indicated in writing a willingness to buy the property for $1,000 less than the asking price and has provided an earnest money check for $5,000. The seller is out of town for the weekend, and the real estate professional has been unable to inform the seller of the signed document. At this point, there is A) an implied contract. B) a voidable contract. C) an offer. D) an executory agreement.

The answer is an offer. A written offer to buy property—an offer that has not been seen or acted upon by the property owner—is simply an offer. Even if the offer had been for full price, no contract would yet exist and the offeror would have no claim on the offeree.

A contract is said to be bilateral if A) only one party to the agreement is bound to act. B) the contract has yet to be fully performed. C) both parties to the contract exchange binding promises. D) one of the parties is a minor.

The answer is both parties to the contract exchange binding promises. When both parties to a contract are bound by it, the contract is said to be bilateral. A contract yet to be performed is executory. A contract that binds only one party to act is unilateral. A contract made with a minor is usually voidable by the minor.

Whose signature is necessary for a signed offer to purchase real estate to become a contract? A) Buyer only B) Buyer and seller C) Seller only D) Seller and seller's broker

The answer is buyer and seller. A signed offer already has the buyer's signature, but to be a ratified contract, both the buyer's and the seller's signatures are necessary.

A deposit provided when making an offer to purchase real estate is known as A) acceptance. B) equitable title. C) binder. D) earnest money.

The answer is earnest money. It is customary, although not essential, for a purchaser to provide a deposit when making an offer to purchase real estate. This deposit, usually in the form of a check, is called earnest money. The earnest money deposit is evidence of the buyer's intention to carry out the terms of the contract in good faith

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) have both parties initial or sign in the margin near each change. B) write a letter to each party listing the changes. C) have each party write a letter to the other approving the changes. D) redraw the entire contract.

The answer is have both parties initial or sign in the margin near each change. All parties must initial or sign the changes. To draw a new contract would be to invite a new round of negotiation. Letters approving all changes might then be treated as part of the contract, but such a cumbersome procedure is seldom used.

A buyer and a seller agree on a purchase price of $300,000 for a house. The contract contains a clause stating that "time is of the essence." Which statement is TRUE? A) The closing must take place within a reasonable period before the stated date. B) A "time is of the essence" clause is not binding on either party. C) If the closing date passes and no closing takes place, the contract may be rescinded by the party who was ready to settle on the scheduled date. 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."

The answer is if the closing date passes and no closing takes place, the contract may be rescinded by the party who was ready to settle on the scheduled date. "Time is of the essence" refers to the settlement date. If one party fails to go to settlement by that date, the other party may rescind (cancel) the contract.

The statute of limitations A) ensures rights can be enforced after the applicable time period has expired. B) does not apply to real estate contracts. C) is the same in every state. D) is the time during which parties to a contract may bring a legal action to enforce their rights.

The answer is is the time during which parties to a contract may bring a legal action to enforce their rights. Every state limits the time during which parties to a contract may bring a legal action, or lawsuit, to enforce their rights. The statute of limitations varies for different legal actions, and any rights not enforced within the applicable time period are lost.

The buyer has defaulted on a purchase contract, and the seller's only remedy is to keep the buyer's earnest money. In this case, the seller's remedy is known as A) liquidated damages. B) suit to quiet title. C) actual damages. D) specific performance.

The answer is liquidated damages. If the buyer defaults, the only remedy for the seller may be to keep the earnest money as liquidated damages, if permitted by state law.

A buyer and a seller sign a contract for the sale of real property. A few days later, they decide to change many 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) assemblage B) assignment. C) novation. D) rescission.

The answer is 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.

Under what circumstance may a real estate professional practice law? A) Only if the real estate professional is also a licensed attorney B) Only when drafting real estate contract forms C) Only when attending the closing D) Only when entering into an implied contract

The answer is only if the real estate professional is also a licensed attorney. Real estate professionals may be permitted by state law to use contract forms drafted by attorneys and provided by their trade associations or employing brokers. A real estate professional cannot practice law unless also licensed as an attorney.

A buyer makes an offer to purchase certain property listed with a real estate professional and leaves an escrow deposit with the real estate professional to show good faith. The real estate professional should A) give the deposit to the seller when the offer is presented. B) immediately apply the deposit to the listing expenses. C) put the deposit in the real estate professional's personal checking account. D) put the deposit in an account, as provided by state law.

The answer is put the deposit in an account, as provided by state law. Most states require real estate professionals to place earnest money and other funds held in trust in a specified account used only for such money. Real estate professionals who mix the company's money with deposits and trust funds are guilty of commingling funds.

What action returns a contract's parties to their positions before the contract, including return of any deposit? A) Subordination B) Cancellation C) Substitution D) Rescission

The answer is rescission. A rescission occurs when the parties agree to terminate the contract as though it had never been made. Cancellation terminates the contract without a return to the original position.

An option to purchase binds which of the following parties? A) Both buyer and seller B) Buyer only C) Neither buyer nor seller D) Seller only

The answer is seller only. The potential buyer (optionee) who purchases an option to purchase is not bound to purchase the property. Should the optionee decide to exercise the option, the optionor (seller) is bound to proceed with the sale in keeping with all the details contained in the option.

The courts usually do NOT inquire into A) the legal competence of the parties to a contract. B) the adequacy of the consideration provided in a contract. C) the legality of the objective of a contract. D) the validity of a contract.

The answer is the adequacy of the consideration provided in a contract. The only requirements are that the parties agree and that no undue influence or fraud has occurred.

A land contract provides for A) the immediate transfer of reversionary rights. B) the sale of real property under an option agreement. C) the conveyance of legal title at a future date. D) the sale of unimproved land only.

The answer is the conveyance of legal title at a future date. In a land contract, the seller, or vendor, retains legal title to the property during the contract term and the buyer is granted equitable title and possession. At the end of the loan term, the seller delivers a clear title.

Mutual rescission is BEST defined as A) the agreement that the party in default will make payment to the non-defaulting party. B) the ability of one party to sue a defaulting party. C) the dissolution of a contract with the return of all funds or things of value to both sides. D) the agreement of both sides to allow one party to prevail and keep any funds. Explanation

The answer is the dissolution of a contract with the return of all funds or things of value to both sides. Mutual rescission occurs when both parties agree to terminate any agreement and return all funds, property, or things of value to the respective parties.

A broker accepted a listing and later discovered that the client had been declared incompetent by a court. What is the current status of the listing? A) The listing entitles the broker to collect a commission from the client's guardian or trustee if the broker produces a buyer. B) The listing is unaffected because the broker acted in good faith as the owner's agent. C) The listing must be renegotiated between the broker and the client, based on the new information. D) The listing is of no value to the broker because the contract is void.

The answer is the listing is of no value to the broker because the contract is void. If the seller has been declared legally incompetent, the listing is void.

If a buyer defaulted some time ago on a written contract to purchase a seller's real estate, the seller can still sue for damages if he is not prohibited from doing so by A) the law of agency. B) the statute of limitations. C) the statute of frauds. D) the broker-attorney accord.

The answer is the statute of limitations. The statute of limitations in every state limits the time within which parties to a contract may bring legal suit to enforce their rights.

A contract that has no legal force or effect is A) enforceable if no one objects. B) valid if the parties agree to its terms. C) voidable. D) void.

The answer is void. A contract that is void was never a legal contract because it lacked some or all of the essential elements of a contract.

A minor signed a sales contract to purchase a home. Which of the following describes this contract? A) Voidable by the minor B) Voidable by the seller C) Void D) Valid and binding

The answer is voidable by the minor. Minors who are parties to a contract always make the contract voidable. It is incumbent upon the seller to not allow a minor to enter into a contract. The seller will have to wait for the minor to cancel or move forward.

Earnest money checks should be deposited A) upon receipt of the offer. B) as soon as the broker receives it. C) before closing. D) when an accepted offer becomes a contract.

The answer is when an accepted offer becomes a contract. Each state has deposit requirements once the offer becomes a contract. The earnest money is typically deposited in the listing brokerage firm's escrow or trust account or a title company account.

When is a contract considered discharged? A) When the agreement is signed by all parties B) When the agent is hired C) When the agreement is filed with the county D) When the agreement is terminated

The answer is when the agreement is terminated. A contract is discharged when the agreement is terminated. A contract terminates when it has been completely performed, with all its terms fulfilled, but a contract may be terminated for another reason, such as a party's breach or default.