Chapter 14 - Contracts for the sale of real estate

Question 1

Several buyers are competing for the last available home in a desirable new subdivision. One buyer calls the owner-developer directly on the phone and offers $10,000 over and above the listed price. The developer accepts the offer. At this point,

Answer 1

the parties have completed a verbal, executory contract

Question 2

A tenant exercises an option to buy a condominium. The landlord agrees, but raises the agreed price by $3,000, claiming financial distress. The landlord does, however, offer the tenant two months of free rent before closing as an offset.

Answer 2

The tenant can force the sale at the original terms.

Question 3

A sale contract contains an open-ended financing contingency: if the buyer cannot obtain financing, the deal is off. Six months later, the buyer still cannot secure financing

Answer 3

The seller may cancel the contract, since it can be ruled invalid.

Question 4

During the executory period of a sale contract, the buyer acquires an equitable title interest in the property. This means that

Answer 4

They give the optionee an equitable interest in the property.

Question 5

An important distinction between a contract for deed and a contract for sale is

Answer 5

the seller retains legal title in a contract for deed transaction until fully executed.

Question 6

Which of the following best characterizes a conventional sale contract?
Select one:
a. Voluntary, bilateral, and executory
b. Involuntary, bilateral, and contingent
c. Involuntary, unilateral, and executory
d. Voluntary, unilateral, and executory

Answer 6

a. Voluntary, bilateral, and executory

Question 7

In the event of a buyer’s default, a provision for liquidated damages in a sale contract enables a seller to

Answer 7

claim the deposit as relief for the buyer’s failure to perform.

Question 8

An important legal characteristic of an option-to-buy agreement is that

Answer 8

the optionor must perform if the optionee takes the option, but the optionee is under no obligation to do so

Question 9

A sale contract may specifically deal with tax withholding responsibility if the seller is a foreigner. What is this responsibility?

Answer 9

The buyer must withhold 15% of the purchase price at closing for the seller’s capital gain tax payment.

Question 10

The purpose of an escrow account is to

Answer 10

entrust deposit monies to an impartial fiduciary.

Question 11

A sale contract is

Answer 11

executory: the signatories have yet to perform their respective obligations and promises

Question 12

To be enforceable, a sale contract must

Answer 12

 be validly created (mutual consent, consideration, legal purpose, competent parties, voluntary act)
 be in writing
 identify the principal parties
 clearly identify the property, preferably by legal description
 contain a purchase price
 be signed by the principal parties

Question 13

A contingency

Answer 13

is a condition that must be met before the contract is enforceable.

Question 14

To avoid problems, the statement of a contingency should:

Answer 14

 be explicit and clear
 have an expiration date
 expressly require diligence in the effort to fulfill the requirement

Question 15

If a buyer fails to perform under the terms of a sale contract,

Answer 15

the breach entitles the seller to legal recourse for damages.

The usual remedy is forfeiture of the buyer’s deposit as liquidated damages, provided the deposit is not grossly in excess of the seller’s actual damages.

Question 16

If a seller defaults

Answer 16

buyer may sue for specific performance, damages, or cancellation.

Question 17

A financing contingency clause states

Answer 17

under what conditions the buyer can cancel the contract without default and receive a refund of the earnest money.

Question 18

An earnest money deposit clause specifies

Answer 18

how the buyer will pay the earnest money

Question 19

An escrow clause provides

Answer 19

for the custody and disbursement of the earnest money deposit, and releases the escrow agent from certain liabilities in the performance of escrow duties.

Question 20

The contract states when title will

Answer 20

transfer, as well as when the buyer will take physical possession.

Question 21

One or more provisions will state what type of deed the seller will use to

Answer 21

convey the property, and what conditions the deed will be subject to.

Question 22

Secondary provisions: Inspections

Answer 22

The parties agree to inspections and remedial action based on findings

Question 23

Secondary provisions: Owner’s association disclosure.

Answer 23

The seller discloses existence of an association and the obligations it imposes.

Question 24

Secondary provisions: Survey

Answer 24

The parties agree to a survey to satisfy financing requirements

Question 25

Secondary provisions: Environmental hazards.

Answer 25

The seller notifies the buyer that there may be hazards that could affect the use and value of the property.

Question 26

Secondary provisions: Compliance with laws.

Answer 26

The seller warrants that there are no undisclosed building code or zoning violations

Question 27

Secondary provisions: Due-on-sale clause.

Answer 27

The parties state their understanding that loans that survive the closing may be called due by the lender. Both parties agree to hold the other party harmless for the consequences of an acceleration

Question 28

Secondary provisions: Seller financing disclosure.

Answer 28

The parties agree to comply with applicable state and local disclosure laws concerning seller financing.

Question 29

Secondary provisions: Rental property; tenants rights.

Answer 29

The buyer acknowledges the rights of tenants following closing.

Question 30

Secondary provisions: FHA or VA financing condition.

Answer 30

A contingency allows the buyer to cancel the contract if the price exceeds FHA or VA estimates of the property’s value

Question 31

Secondary provisions: Flood plain; flood insurance.

Answer 31

Seller discloses that the property is in a flood plain and that it must carry flood insurance if the buyer uses certain lenders for financing.

Question 32

Secondary provisions: Condominium assessments.

Answer 32

Seller discloses assessments the owner must pay

Question 33

Secondary provisions: Foreign seller withholding.

Answer 33

The seller acknowledges that the buyer must withhold 15% of the purchase price at closing if the seller is a foreign person or entity and forward the withheld amount to the Internal Revenue Service.

Question 34

Secondary provisions: Tax deferred exchange.

Answer 34

For income properties only, buyer and seller disclose their intentions to participate in an exchange and agree to cooperate in completing necessary procedures.

Question 35

Secondary provisions: Merger of agreements.

Answer 35

Buyer and seller state that there are no other agreements
between the parties that are not expressed in the contract

Question 36

Secondary provisions: Notices

Answer 36

The parties agree on how they will give notice to each other and what they will consider to be delivery of notice.

Question 37

Secondary provisions: Time is of the essence.

Answer 37

The parties agree that they can amend dates and deadlines only if they both give written approval

Question 38

Secondary provisions: Fax transmission.

Answer 38

The parties agree to accept facsimile transmission of the offer, provided receipt is acknowledged and original copies of the contract are subsequently deliver

Question 39

Secondary provisions: Survival

Answer 39

The parties continue to be liable for the truthfulness of representations and warranties after the closing

Question 40

Secondary provisions: Dispute resolution.

Answer 40

The parties agree to resolve disputes through arbitration as opposed to court proceedings

Question 41

Secondary provisions: C.L.U.E. Report.

Answer 41

CLUE (Comprehensive Loss Underwriting Exchange) is a claims history database used by insurance companies in underwriting or rating insurance policies.

Question 42

Addenda

Answer 42

Addenda to the sale contract become binding components of the overall agreement. The most common addendum is the seller’s property condition disclosure. Examples of other addenda are:
agency disclosure asbestos / hazardous materials
liquidated damages radon disclosure flood plain disclosure tenant’s lease