Contracts

Question 1

What is needed for a valid contract?

1. Offer + Counteroffer + Acceptance
2. Offer + Acceptance + Notification + Consideration
3. Offer + Acceptance + Notification
4. Offer + Acceptance + Notification + Delivery (with Signatures)

Answer 1

3. Offer + Acceptance + Notification

• Offer + Acceptance + Notification = Contract

• Offer is a promise made by one party, requesting something in exchange for that promise.
• Offeror makes proposal to offeree.
• Letter of intent not binding contract, but documents understanding between parties; basis for later contract. Commonly used in Commercial Real Estate Transactions.
• Licensees must disclose all offers to purchase to the seller, even verbal offers.
• Multiple offers must be presented simultaneously.
• If buyer making offers on multiple properties, that must be disclosed as a material fact.
• Acceptance: Offeree agrees to exact terms of offeror; called mirror image rule.
• Must be in writing and signed by offeree.
• Time is of the essence clause could result in breach.
• Notification: Communicating acceptance to offeror to create binding contract.

Question 2

For the “Notification” part of a contract:

1. The buyer notifies the seller
2. A verbal notification is binding
3. The broker is usually responsible to accept the contract
4. None of the above

Answer 2

3. The Broker is responsible

• Notification: Communicating acceptance to offeror to create binding contract.
• Broker is responsible for notification.
• Offeror may rescind verbally until notified of acceptance.
  * Imputed notice: Notice to agent is considered notice to the client.
• If one party dies after notification, offer is still binding on estate.

Question 3

All of these are essential elements of a valid real estate contract except:

1. Capacity
2. Consideration
3. Legal Description
4. Must be over 21 years old

Answer 3

4. Must be over 21 years old

Six Essential Elements
1. Capacity to contract
• Legal age (18), mental capacity, not under duress
• Natural person can represent legal entity
• Executor or administrator can represent individual
2. Mutual assent (signatures)
• Offer, acceptance, notification (meeting of the minds)
• Parties must fully understand terms and conditions
• Agreement freely given
• No misrepresentation, collusion, undue influence, duress, menace,
fraud
• E-Sign Act recognizes electronic signatures as legal
3. Legal consideration
• Consideration: Something of legal value as an inducement to perform or to
refrain from performing.
• Valuable consideration
• Good consideration - Note: Earnest money deposit is an inducement, not
contractual consideration.
4. Legal purpose - • Lawful object or legal purpose to be enforceable
5. In writing Real Estate Contract Requirement
• Statute of frauds: All real estate contracts must be in writing.
• Exception: Leases of one year or less.
• Uniform Commercial Code (UCC): Sale of personal property over $500 must be in writing.
• Parole evidence rule: Written contracts have precedence over oral agreements.
6. Legal description Real Estate Contract Requirement
• Identify parcel of land separate from any other and it’s boundaries Real Estate Legal Land Descriptions

Question 4

Contracts can be terminated by the following except:

1. Counteroffer
2. Death or insanity of buyer or seller
3. Death of the Broker
4. Expiration of a time limit

Answer 4

3. Death of the Broker

Termination of offers
• After expiration of a time limit
• By withdrawal of the offer before acceptance
• By counteroffer from the seller
• By acceptance of the offer (Now a Contract)
• By the offeree’s failure to accept in the manner specified
• By the death or insanity of buyer or seller (NOT the broker)
• Counteroffer rejects original offer and creates new one; must be in writing.

Question 5

Changes to the original contract is called?

1. Addendum
2. Amendment
3. Assignment
4. Unlawful

Answer 5

2. Amendment

• Amendment: Change or modification to a contract; must be initialed or signed by all parties.

• Addendum: Provision added to existing contract without altering original; new contract that refers to original.

• Assignment: Transfer of rights from one party to third party; does not require consent.
• Assignee can be a natural person or legal entity
• Assignee has same title, right, and interest as assignor
• Assignor is secondarily liable

Question 6

When a minor enters into a real estate contract, the contract becomes:

1. Void
2. Voidable
3. Valid
4. Unenforceable

Answer 6

2. Voidable

• Since she did not have the legal capacity to contract, the contract is voidable.
• She can choose to reject the contract and call it void at any time during her minority.
• She may also continue with the contract.
• The other party cannot void the contract; only the minor has that right.
• Unenforceable - Neither part can enforce it.
• Missing just one of the 6 elements in a Real Estate Contract to buy or sell.
• Statute of Limitations provides time limits for parties to bring legal suit.
• Doctrine of laches states that rights not enforced within the applicable time period are lost.

Question 7

A salesperson takes a listing on a property. During the course of the listing, but before any offers are received, the seller dies.

The listing:

1. Is binding on the seller’s heirs and assigns
2. Continues until the contractual expiration date
3. Continues with the approval of probate court
4. Is terminated by the seller’s death

Answer 7

4. Is terminated by the seller’s death

By operation of law, if either the seller or the self-employed broker dies, the listing (employment agreement) contract is void

Question 8

A salesperson takes an exclusive right to sell listing on a residential property. After the property is under contract, but before closing, the owner of the property dies.

The purchase contract:
1. Is terminated by the seller’s death
2. Is binding on the seller’s heirs
3. Will be reviewed and its status determined by an
ancillary trustee
4. Remains in effect only against the buyer

Answer 8

2. Is binding on the seller’s heirs

• While a listing is void if either the seller or the self-employed broker dies, a sales contract survives the death of the parties
• The executor of the seller’s estate and the seller’s heirs are bound by the contract
• An ancillary trustee finishes up the business of a deceased broker, not a buyer or seller

Question 9

A property owner lists a property with a salesperson under a 90-day exclusive right to sell listing agreement. The next day, the owner discovers a family member wants to buy the property and sells it to the family member without the assistance of the broker.

The broker:

1. Is entitled to a commission
2. Is not entitled to a commission
3. May be entitled to a commission based on the carryover clause
4. May bring an action with the local Board of Realtors® to collect a commission

Answer 9

1. Is entitled to a commission

• The broker is entitled to the commission no matter who finds the buyer under an exclusive right to sell listing
• Exclusive right to sell listing and CAR Exclusive Authorization and right-to-sell listing are the same type of listing

Question 10

A property owner lists a property with a salesperson under an exclusive agency listing. The next day, the owner discovers a family member wants to buy the property and the owner sells it to the family member without the assistance of the broker.

The broker:

1. Is entitled to a commission
2. Is not entitled to a commission
3. Is entitled to a fee based on the carryover clause
4. Can file a commission complaint with the local board

Answer 10

2. Is not entitled to a commission

• Under an exclusive agency listing, the broker is only entitled to a commission if the broker or an agent finds the buyer
• If the seller finds their own buyer, then the owner keeps the commission

Exclusive Right to Sell versus Exclusive Agency Listing

Question 11

Which of the following is true regarding an open listing and an exclusive agency listing?

1. Under both, the seller avoids paying the broker commission if the seller sells it himself
2. Both deny a commission to any broker who procures a buyer for the seller’s property
3. Under both, the broker earns a commission regardless of who sells a property, as long as it is sold within the listing period
4. Both grant the exclusive right to sell to whichever broker procures a buyer for the seller’s property

Answer 11

1. Under both, the seller avoids paying the broker commission if the seller sells it himself

• Know the 4 types of listings!
– Exclusive right to sell
– Exclusive agency
– Open
– Net

Question 12

An offer which includes no earnest money is typically:

1. Void
2. Unenforceable
3. Valid if accepted by the seller
4. Void because it lacks consideration

Answer 12

3. Valid if accepted by the seller

• A sales contract does not need earnest money
• If the seller does not want earnest money, then good for the buyer!

• Valid - Contains all essential elements; legal and binding on all parties.
• Void - Missing one or more essential element; no contract exists.
• Voidable - Appears to be valid and enforceable, but one party may void it; valid until rescinded or accepted by ratification.
• Unenforceable – by a court of law
• Earnest money is not the same as consideration

Question 13

A buyer makes a written offer on a home that is accepted by the seller, creating a contract. Later, the parties agree to change the closing date from the original agreement.

To accomplish this, the licensee should:

1. Prepare a new contract
2. Have the parties complete an amendment and have the parties sign the changes
3. Initial the change for the buyer/seller
4. Prepare an assignment or novation of contract

Answer 13

2. Have the parties complete an amendment and have the parties sign the changes

• Sales contracts are bilateral, thus neither party can change the contract unilaterally
• Buyer and Seller must agree in writing to change the terms to the contract
• While in Escrow, change must be made by written amendment, signed by both parties.

Question 14

Which of the following would be an appropriate item to negotiate in a purchase agreement?

1. The possession date
2. The amount of the brokerage commission
3. The extension of the lease of the tenant in possession
4. The commission split between broker and salesperson

Answer 14

1. The possession date

• You address the commission in the listing contract
between the broker and seller, not in the sales contract
• An extension of a lease would be negotiated in the lease contract between the landlord and tenant, not the sales contract

Question 15

A prospective purchaser makes an offer on a property. The owners do not accept the offer but instead issue a written counteroffer.

What is the status of the original offer?

1. Still binding on the buyer at the seller’s option
2. No longer exists due to the seller’s counteroffer
3. Subject to the three day right of rescission
4. May be reinstated by the salesperson

Answer 15

2. No longer exists due to the seller’s counteroffer

• An offer must be accepted completely or not at all
• Any change from an original constitutes a rejection and a counteroffer.
• Once rejected, an offer cannot be resurrected by the party who rejected it

Remember: a counteroffer is a “change” of terms!

Question 16

Consideration in a purchase offer would best be defined as:

1. The amount of earnest money
2. The good faith deposit
3. The purchase price
4. The cash down payment

Answer 16

3. The good faith deposit

• The essential elements to a contract
   – Offer + Acceptance + Delivery
   – Valuable consideration
       • Earnest money is not consideration! It’s an 
          inducement!
– Competent parties
– Lawful objective or objective
– Real estate contracts
   • Must also be in writing under the Statute of Frauds!
   • Legal Description

Question 17

A contract to purchase real estate calls for a closing date of August 1 and notes “time is of the essence.” The buyer cannot close until August 5.

Which of the following best describes the situation?

1. The seller must give the buyer reasonable time to perform
2. The buyer is entitled to a three day carry over by statute
3. The contract is void after August 1
4. The contract is valid unless the seller objects in writing

Answer 17

3. The contract is void after August 1

• “Time is of the essence”
– All time limits stated in the contract are to be strictly met.
• If contract is not performed on time, it is void

Question 18

A salesperson receives an offer on a listing. The sellers elect to issue a counteroffer. Before the prospective purchaser responds to the counteroffer, another offer is received from a different perspective purchaser.

The second offer:

1. Must wait for disposal of the counteroffer
2. Has equal status with the counteroffer
3. Must be handled before a decision is made on the counter
4. Must stand in time sequence

Answer 18

2. Has equal status with the counteroffer

Note superlative words (“Must”) are often wrong answers

• All offers must be submitted regardless of when they were received
• Submit all offers to the seller and let them decide to withdraw the counter or accept the other offer

Question 19

A salesperson receives an offer on a listing. The sellers accept the offer and the buyer proceeds to arrange financing. The day before a scheduled closing, the sellers indicated they have had a change of heart and will not close.

1. The brokerage can bring an action against the buyer for a commission
2. The sellers are within their rights under the three day cooling off period dictated by Regulation Z
3. The buyers could bring a legal action against the sellers
4. The brokerage can bring action for specific performance

Answer 19

3. The buyers could bring a legal action against the sellers

• Regulation Z only applies to the buyer and their right to rescind a loan application or a refinance mortgage
• Know who the parties to a contract are
• The broker can only sue the seller under the listing for a commission because they found a ready, willing and able buyer
• The buyers can sue the seller under the sales contract
• Only the buyer can sue for specific performance

Question 20

Jan has not yet closed on her new building. There still needs to be an inspection and other points of concern need to be addressed before she can close.

This contract is said to be:

1. An executed contract
2. A unilateral contract
3. An executory contract
4. Voidable contract

Answer 20

3. An executory contract

• A contract that is still in process and has not yet been closed on is considered to be in an executory position
• Unilateral is binding only on one party to the agreement
• Voidable has something in the contract that could make it void
• A contract closed = executed

Question 21

The day after a contract is entered into, the seller gives the buyers the property disclosure form which indicates that the basement leaks.

The buyers’ remedies are:

1. To close the transaction and ask that the seller fix the condition after closing
2. To back out anytime before the closing
3. To back out within 3 business days of receiving the property disclosure form
4. To force the seller to make the repairs before closing

Answer 21

3. To back out within 3 business days of receiving the property disclosure form

• You cannot force a seller to make repairs

Question 22

Lynn a buyer, tells seller Sam, “I will pay you $50,000 for your property Palo Alto.” Sam replies, “Okay,” and they shake hands. What does this agreement lack in order to be enforceable in a court of law?

1. Earnest money
2. A firm closing date
3. Writing
4. Consideration

Answer 22

3. Writing

• A closing date, earnest money, and consideration are components to a contract
• Earnest money is not required in California and is NOT consideration
• The “ Statute of Frauds” says in order to be enforceable in a court of law contracts must be in writing

Question 23

Most real estate contracts are?

1. Unilateral
2. Voidable
3. Bilateral
4. Unenforceable

Answer 23

3. Bilateral

• Bilateral is a two-sided contract; each party promises to perform.
• Most real estate contracts are bilateral.

• Unilateral is a one-sided contract; one party makes a promise to induce second party to perform.
• A Wanted Poster for a Missing Pet is a unilateral contract

• Contract is a legally enforceable agreement between competent parties who promise to do something.

• Expressed contract means parties express terms and intentions in writing or orally
• Implied means parties express their intentions by acts and conduct

• Forbearance calls for someone not to do something.

Question 24

A purchase contract has been offered, accepted, delivered and is in escrow. The contract is?

1. Executed
2. Executory
3. Execute
4. Created

Answer 24

2. Executory - It is executory until the closing. On the day of closing, the deed is delivered to the buyer and the buyer delivers payment to the seller. The contract becomes an executed contract.

• Execute = to sign
• Executory = unperformed; incomplete.
• Executed = all terms completed
Remember, “execute” is the signing of a contract.

Question 25

Contract contingencies include all of these except: 1. Loan 2. Appraisal 3. Inspection 4. Multiple offers

Answer 25

4. Multiple offers • Contingencies: Additional conditions that must be satisfied before sales contract is fully enforceable. • Loan contingency (3.J.2) protects earnest money deposit until lender commits loan funds. • Appraisal Contingency (3.J.1) Optional. Property must appraise for at least the contact price. • Inspection contingency protects buyer until certain inspections are performed. • Property sale contingency (4)holds sale until sale of buyer’s other property.

Question 26

A contract Breach occurs when one party fails to perform with no legal cause and allows the injured party to : 1. File suit for damages 2. Suit for specific performance 3. Keep the earnest money if passed the contingency period 4. All of the above

Answer 26

4. All of the above * Breach of contract occurs when one party fails to perform with no legal cause. * Injured party has right to legal action using only written contract * Suit for damages * Suit for specific performance (not possible for personal service contract) * A state’s Statute of Limitations provides specific time limit to enforce rights under a contract. • **Liquidated damages** are the amount parties agree in advance to pay upon breach. • Buyer defaults on purchase contract, and seller keeps earnest money deposit as liquidated damages. • **Compensatory damages** award to compensate plaintiff for harm caused by defendant. • *Actual damages* reflect actual loss. • *Punitive damages* recover additional amount for damages.

Question 27

The release of liability of the original party to an agreement and the substitution of a subsequent borrower (or tenant) with the approval of the lender (or landlord). 1. Assignment 2. Novation 3. Forbearance 4. Laches

Answer 27

2. **Novation**—The release of liability of the original party to an agreement, for example, a borrower on a note (or a tenant on a lease), and the substitution of a subsequent borrower (or tenant) with the approval of the lender (or landlord). **Assignment**—The transfer of one person’s interests under a contract to another. Assignment does not release the assignor from the obligations stated in the contract. • Assignee can be a natural person or legal entity • Assignee has same title, right, and interest as assignor • Assignor is secondarily liable **Forbearance**—A legally binding promise to refrain from doing a particular act **Laches** — A concept preventing the assertion of a right or claim because of an undue delay. **Doctrine of Laches** If rights are not acted on the within the specified Statue of Limitation time, the right is lost

Question 28

What are the time limits for filing Civil Actions on a written contract? 1. 1 year 2. 2 years 3. 4 years 4. 10 years

Answer 28

3. 4 years **4 Years** Action on any written contract; includes most real estate contracts. **2 Years** Action on a contract, not in writing; action based on a policy of title insurance.

Question 29

The Earnest money is an inducement to buy but not: 1. Shows intent to fulfill the contract terms 2. Buyer receives equitable interest 3. Usually in the for of cash/check 4. Non-refundable

Answer 29

- 4. Non-refundable - the earnest money is refundable through the majority of the escrow period. • **Earnest money** is a cash deposit buyer pays broker to show intent to fulfill contract terms. It is an Inducement to Buy. • Salesperson must forward earnest money to broker promptly. • Broker must deposit funds immediately or next banking day unless contract states otherwise. • Buyer receives *equitable interest* in property. • Seller receives funds at close of escrow as part of purchase price. • Amount is negotiable. • **Interpleader action:** In a dispute, escrow company holds funds until settled.