Chapter 11

Question 1

Which of these is an example of a unilateral contract?

a. Lease
b. Agreement of sale
c. Option
d. Listing agreement

Answer 1

c. Option

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In a unilateral contract, only one party is obligated to perform. The optionor/owner of the property must sell at the agreed-upon price only if the optionee decides to buy.

Question 2

A seller accepted all the terms that the buyer offered, making only one small change in the amount of the earnest money. At the moment, these agreements constitute

a. an offer.
b. a counteroffer.
c. an acceptance.
d. an executed contract.

Answer 2

b. a counteroffer.

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Proposing any deviation from the terms of the offer is considered a rejection of the original offer and is called a counteroffer.

Question 3

After making an offer but prior to receiving any response from the seller, a buyer decided against buying a particular lot. The buyer called the agent and said, “Withdraw my offer.” The buyer’s action is called a

a. counteroffer.
b. rejection.
c. breach of contract.
d. revocation.

Answer 3

d. revocation.

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The buyer may revoke the offer any time before being notified that the seller has accepted the offer.

Question 4

A real estate broker announces to the firm’s sales associates that the top-selling sales associate each quarter will receive a $1,000 bonus. This constitutes an

a. implied bilateral contract.
b. express unilateral contract.
c. implied unilateral contract.
d. express bilateral contract.

Answer 4

b. express unilateral contract.

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b. The offer of a bonus to the top-selling sales associate each quarter is an express contract because the broker clearly stated the offer to the sales associates. It is a unilateral contract because the broker is obligated to keep the promise, but the sales associates are not obligated to perform.

Question 5

A buyer makes an offer on a house, and the seller accepts in writing. What is the current status of this relationship?

a. The buyer and seller do not have a valid contract until the seller delivers title at closing.
b. The buyer and seller have an express, bilateral executed contract.
c. The buyer and seller have an express, bilateral executory contract.
d. The buyer and seller have an implied, unilateral executory contract.

Answer 5

c. The buyer and seller have an express, bilateral executory contract.

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Because the seller has promised to sell and the buyer has promised to buy, it is clearly a bilateral contract. It is express because they expressed their intentions in writing. The contract is executory because the sale has not yet closed.

Question 6

A buyer offers the full $215,000 asking price for a house. The offer contains this clause: “Possession of the premises on August 1.” The seller is delighted to accept the offer and signs the contract. First, however, the seller crosses out “August 1” and replaces it with “August 3,” because of a business trip scheduled for the first of the month. The seller immediately books a moving company.. What is the status of this agreement?

a. Because the seller changed the date of possession rather than the amount of the offer, the seller and buyer have a valid contract.
b. The seller has accepted the buyer’s offer. Because the reason for the change was out of the seller’s control, the change is of no legal effect once the seller signed the contract.
c. The seller has rejected the buyer’s offer and made a counteroffer, which the buyer is free to accept or reject.
d. While the seller technically rejected the buyer’s offer, the seller’s behavior in scheduling movers creates an implied contract between the parties.

Answer 6

c. The seller has rejected the buyer’s offer and made a counteroffer, which the buyer is free to accept or reject.

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c. Even changing the smallest of terms, for whatever reason, constitutes a rejection and counteroffer that the other party is not under obligation to accept.

Question 7

A contract that is entered into by a person who is under the age of contractual capacity is

a. unenforceable.
b. void.
c. voidable.
d. valid.

Answer 7

c. voidable.

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The underage party may void the contract, but the party who entered into the contract with the minor cannot.

Question 8

A buyer wants to take over the seller’s mortgage. The lender releases the seller from the obligation, substituting the buyer as the party liable for the debt. This new agreement is called

a. an assignment.
b. a novation.
c. a conversion.
d. a consideration.

Answer 8

b. a novation.

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b. Substituting a new contract where the intent is to discharge the old obligation is called a novation.

Question 9

A buyer and a seller enter into a sales contract for the sale of a home. The seller backs out of the deal at the last minute, and the buyer suffers a financial loss of $1,500 as a result and must rent a home in which to live. Unless the contract provides otherwise, all of these are legal actions that are likely to succeed EXCEPT

a. the buyer may sue the seller for specific performance, forcing the sale of the home to the buyer.
b. the buyer may sue the seller for damages to recover the $1,500 loss.
c. the seller is not liable because the buyer should not have incurred the $1,500 cost before the sale.
d. the buyer may sue the seller for the rent paid.

Answer 9

c. the seller is not liable because the buyer should not have incurred the $1,500 cost before the sale.

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c. In this case, the seller breached the contract without legal excuse. The buyer is likely to be successful in suing the seller for specific performance, for the $1,500 loss, and for the cost of rent as a hardship; however, many contracts limit the remedies available to the parties.

Question 10

On March 7, a buyer and a seller execute a contract for the purchase of the seller’s property. Closing is set for June 10. On April 15, the property is struck by lightning and destroyed by the resulting fire. If the Uniform Vendor and Purchaser Risk Act has been adopted by the state in which the property is located, which party bears liability for the loss?

a. Under the act, the buyer and the seller share the loss equally.
b. Under the act, the seller bears the loss alone.
c. The act does not apply. The buyer bears the loss alone, as the holder of equitable title.
d. Under the act, neither the buyer nor the seller bears the loss. A state fund covers the loss.

Answer 10

b. Under the act, the seller bears the loss alone.

Feedback
In states that have adopted the Uniform Vendor and Purchaser Act, the seller remains responsible for the property until the day of closing.

Question 11

A buyer makes an offer to buy a seller’s house. Pursuant to this offer, the buyer is obligated to perform only if the buyer is first able to sell a condominium. This is an example of

a. a mortgage contingency.
b. an option contingency.
c. a time-is-of-the-essence contingency.
d. a property sale contingency.

Answer 11

d. a property sale contingency.

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A property sale contingency protects a buyer who has to sell a property in order to buy the seller’s property.

Question 12

All of these are essential to a valid real estate sales contract EXCEPT

a. offer and acceptance.
b. consideration.
c. an earnest money deposit, held in an escrow account.
d. legally competent parties.

Answer 12

c. an earnest money deposit, held in an escrow account.

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Earnest money is an optional term in a contract, not a requirement. The essential elements of a contract are offer and acceptance, consideration, and legally competent parties.

Question 13

A 14-year-old comes into a brokerage office and says, “I want to make an offer on this property. Here is a certified check for 10% of the asking price. Please help me with the paperwork.” Why should the broker be concerned?

a. Because one of the parties is a minor, the contract is illegal.
b. The earnest money deposit must be at least 20% of the asking price when a minor is involved in the transaction.
c. The sales contract may be disaffirmed by the minor.
d. The sales contract will be void because the minor’s age is a matter of public record.

Answer 13

c. The sales contract may be disaffirmed by the minor.

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A minor may void the contract by saying, “I am underage.” A minor’s guardian may purchase for the minor.

Question 14

In case the buyer decides not to buy for no legal reason, the contract may provide that the earnest money is there as

a. actual damages.
b. nominal damages.
c. punitive damages.
d. liquidated damages.

Answer 14

d. liquidated damages.

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d. Liquidated damages limit the compensation available to the injured party should a breach of contract occur.

Question 15

The buyer and seller agreed to a closing date of September 7 and that time is of the essence. Which of these is the closest meaning of the phrase?

a. The date of closing may only be delayed by one day at a time.
b. If closing is not held on September 7, there is an automatic extension built in.
c. Closing must be on or before September 7.
d. If either party gives notice, the date can be moved back.

Answer 15

c. Closing must be on or before September 7.

Feedback
Time is of the essence requires that the contract be completed during that time frame; otherwise, the party who fails to perform on time is liable for breach of contract.

Question 16

Which of these is NOT typically a factor in determining the amount of the earnest money deposit?

a. Whether it is an amount sufficient to cover the broker fees
b. Whether it is an amount sufficient to discourage the buyer from defaulting
c. Whether it is an amount sufficient to compensate the seller for taking the property off the market
d. Whether it is an amount sufficient to cover any expenses the seller might incur if the buyer defaults

Answer 16

a. Whether it is an amount sufficient to cover the broker fees

Feedback
Broker fees are not the focus when the parties are working out an agreement concerning the earnest money deposit.

Question 17

If a property owner is threatened with violence to force a sale of the property for a low price, the contract is voidable because there is lack of

a. consent.
b. discharge.
c. consideration.
d. offer and acceptance.

Answer 17

a. consent.

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Because a contract must be entered into by consent as a free and voluntary act of each party, a contract made under duress deprives a person of that ability. The contract is voidable by the injured party.

Question 18

If a contract seems to be valid, but neither party can sue the other to force performance, the contract is said to be

a. voided.
b. breached.
c. rescinded.
d. unenforceable.

Answer 18

d. unenforceable.

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An unenforceable contract may appear to be valid; however, neither party can sue the other to enforce performance.

Question 19

What is minimum consideration in a valid contract?

a. One dollar
b. Any item that can be appraised with a market value
c. Specified goods or services
d. Anything the parties agree is good and valuable

Answer 19

d. Anything the parties agree is good and valuable

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The parties must agree that the consideration is good and valuable. The courts do not consider whether the consideration is adequate.

Question 20

If a contract does NOT contain a time or date for performance, it should be executed within

a. a reasonable time.
b. one week.
c. two weeks.
d. one month.

Answer 20

a. a reasonable time.

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Interpretation of what is a reasonable time depends on the situation; however, courts have sometimes declared contracts invalid if they did not contain a time or date for performance.

Question 21

If a seller allows a buyer to back out of a contract, returns the earnest money to the buyer, and both are back to the positions they held before the contract, the contract has been

a. cancelled.
b. rescinded.
c. assigned.
d. executed.

Answer 21

b. rescinded.

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Rescission allows both parties to return to their original positions before the contract, so any monies exchanged must be returned.

Question 22

When is an offer considered to be accepted?

a. When the broker notifies the buyer that the seller has accepted the offer
b. When the buyer gives a signed receipt to the broker to show the buyer has received the acceptance
c. The moment the seller accepts the buyer’s offer
d. One business day after the offer is accepted and signed by the seller

Answer 22

a. When the broker notifies the buyer that the seller has accepted the offer

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a. Buyer notification is the key. It is not an accepted offer until the buyer is notified, and there is no lag time after that point.

Question 23

Additional conditions that must be satisfied before a sales contract is fully enforceable are called

a. binders.
b. amendments.
c. addenda.
d. contingencies.

Answer 23

d. contingencies.

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d. A contingency is any additional condition that must be satisfied before a sales contract is fully enforceable. A binder is a short version of a sales contract that is used until a more complete version is prepared. Amendments are changes to the existing content of a contract.

Question 24

The amount of the earnest money in a sales contract should

a. cover any expenses the buyer might incur if the seller defaults.
b. discourage the buyer from walking away from the agreement.
c. pay the broker’s commission.
d. pay for any required inspections.

Answer 24

b. discourage the buyer from walking away from the agreement.

Feedback
The amount of earnest money should be sufficient that the seller feels reassured that the buyer is committed to the purchase. Earnest money is not used to pay for inspections or the broker’s commission.

Question 25

The term “statute of limitations” is BEST described as the limitation on the
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a. time period in which parties to a contract may bring a lawsuit to enforce their rights.

b. parties’ ability to demand a “time is of the essence” clause in a sales contract.
c. amount of damages that can be claimed in the event of breach.
d. broker’s right to a commission.

Answer 25

a. time period in which parties to a contract may bring a lawsuit to enforce their rights.

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Every state limits the time during which parties to a contract may bring a legal action to enforce their rights. Rights not enforced within the applicable time period are lost.