chapter 4

Question 1

express contract

Answer 1

s written or stated. Examples: a written sales contract, a verbal lease agreement, a written listing, a verbal buyer representation agreement.

Question 2

implied contract

Answer 2

is by actions or evidence. This agreement is neither written nor discussed. It is simply performed. Examples: taking a taxi, ordering from a menu, filling your gas tank and paying at the pump with a credit card.

Question 3

unilateral contract

Answer 3

binds only one party. An “If… then…” contract is unilateral. An option is a unilateral contract.

Question 4

Bilateral (RECIPROCAL) Contract

Answer 4

contract formed by an exchange of promises. Performance of the contract takes place at a later time. The standard real estate sale’s agreement or lease is a bilateral contract. See also: Unilateral Contract.

Question 5

option contract

Answer 5

is the right to purchase property within a definite time period at a definite price. There is no obligation to the purchaser to buy, but the seller is obligated to sell. Only one party makes a promise - the seller. Only one party can be sued - the seller. The option fee goes directly to the seller. To extend an option, the buyer would need to pay an added fee. When an option is exercised the unilateral contract becomes bilateral.

Question 6

bilateral contract

Answer 6

is an exchange of promises, which binds both parties. A sales contract is a bilateral contract. Both parties make promises and either or both can be sued.

Question 7

To be valid and enforceable, the contract must have the following: (COLIC)

Answer 7

1. Competent parties — sane, sober, consenting adults
2. Offer and acceptance (mutual agreement, or meeting of the minds) without qualifications
3. Legal purpose — also called legality of object
4. In writing — (Statute of Frauds)
5. Consideration - (Not earnest money) — something of value (payment or a promise) in exchange for what is being offered.

Question 8

Executed vs. executory -

Answer 8

We use the word execute to describe signing the contract. When both parties have signed, the parties have executed the contract.

The term executed, or the phrase fully executed is also used when all the terms and conditions of the contract have been met and carried out. It is considered performed or discharged.

A contract that is signed, but not yet carried out is called an executory contract.

Question 9

Valid

Answer 9

A valid contract is a written or expressed agreement between two parties to provide a product or service. There are essentially five elements of a contract that make it a legal and binding document. To remember elements of a valid and enforceable real estate contract:
Remember: COLIC
C
Competent parties
O
Offer and acceptance (meeting of the minds)
L
Legal purpose
I
In writing and signed (statute of fraud)
C
Consideration (valuable or good)

Question 10

void or invalid contract

Answer 10

has no binding effect on the parties who made it – for example an agreement with someone who is documented as insane. A void contract is missing an element of a valid contract.

Question 11

voidable agreement

Answer 11

one party has the right to withdraw (a minor, someone who signed under duress, or under the influence of alcohol or drugs, etc.)

Question 12

unenforceable agreement

Answer 12

is one that violates the Statute of Frauds and will not be enforced by the courts – the verbal real estate agreement.

Question 13

Termination, rescission, and breach of contract

Answer 13

A contract may be terminated for any of several reasons including bankruptcy or foreclosure, new laws making it illegal, or destruction of the property. If one of the parties to a contract dies, the contract will be binding on the heirs.

If the parties to a contract agree to cancel (mutual rescission), the contract is terminated.

Question 14

Default is the non-performance

Answer 14

of a duty under a contract. When one of the parties to the contract is in default, the agreement has been breached.

Question 15

Liquidated, punitive, and compensatory damages

Answer 15

After a breach of contract, the injured party has several options. He can seek liquidated, punitive or compensatory damages. Liquidated damages are money damages set out in the contract. Punitive and compensatory damages must be pursued in court. Punitive damages punish the defaulting party and compensatory damages are set to cover the actual injury or economic loss.

Question 16

Statute of Frauds -

Answer 16

All contracts that relate to the transfer of any interest in real estate must be in writing to be enforceable. A verbal agreement is voluntary and will not be enforced by the courts. We always avoid verbal agreements in real estate. (In the case of two agreements, one written and one verbal, the written agreement will always take precedence.) A lease for one year or less is the exception to this law. It does not have to be in writing to be enforceable.

Question 17

Time is of the essence

Answer 17

A clause in a contract that allows each party to hold the other to a strict performance by the date specified is called time is of the essence. In a contract with a time is of the essence clause, if one party cannot perform exactly on time, the contract becomes voidable at the option of the other party. This clause is not a requirement of a valid contract. It is a choice.

Question 18

real estate transaction

Answer 18

begins with a listing or buyer representation agreement. It progresses to a sales contract and ends with closing and funding. Part of the process includes offers and counteroffers to meet the needs of all parties.

Question 19

offer

Answer 19

is a properly completed form with a price less than, equal to, or more than the seller’s asking price and signed by the buyer. The purpose is to open negotiations between the buyer and the seller. The offer may be called a purchase agreement.

An offer can be withdrawn at any time prior to acceptance.
All offers must be presented to the intended party.
An offer can be accepted, rejected, or countered.

Question 20

Earnest money

Answer 20

is not necessary in a sales contract; it is not the consideration. The amount of earnest money is determined by agreement of the parties. In the usual real estate sales contract the earnest money will be the liquidated damages if the buyer defaults.

Question 21

Equitable title

Answer 21

is an interest created by a legal document, such as that held by a buyer with a signed sales contract, who has not yet gone to closing. The buyer has an equitable estate, or equitable title.

Question 22

condition in a contract,

Answer 22

which has not yet been met, is a contingency. Common contingencies include financing, the sale of another property, and inspections. A seller can limit the length of time for a buyer’s contingency to be met with an escape clause.

Question 23

contingency

Answer 23

cannot be met, the contract is terminated. If the parties agree to cancel or a contingency cannot be met, the cancellation or mutual rescission should be done by written agreement.

If one of the parties to a sales contract defaults, the agreement has been breached and the injured party has options.

Question 24

SELLER OPTIONS IF THE BUYER DEFAULTS

Answer 24

Accept damages negotiated in the contract — liquidated damages i.e. seller keeps the buyer’s
deposit
Hold the other party to his duties through a suit for specific performance
Sue for money damages — money damages are both actual/compensatory and punitive
Decide on mutual rescission — release the buyer

Question 25

BUYER OPTIONS IF THE SELLER DEFAULTS

Answer 25

Decide on mutual rescission and recover the earnest money
Hold the other party to his duties through a suit for specific performance - ask the court to force the seller to sell the property
Sue for money damages

Question 26

depreciate

Answer 26

A major advantage to the owners of investment property is the ability to depreciate their investment on their income tax return. On income-producing property, land can never be depreciated. Only improvements can be depreciated.

Question 27

straight-line method

Answer 27

s used. The economic life is the period during which improvements contribute to value, or are being depreciated. When the improvements are fully depreciated, that is the end of the economic life.

Question 28

1031 tax-deferred exchanges.

Answer 28

Real estate investors can defer taxation of capital gains by making a property exchange. Additional capital or property included in a transaction to even out the exchange is called boot, which is taxed at the time of the exchange. The investor must hold the property for one year.

Question 29

tax-free capital gain

Answer 29

$250,000 for an individual
$500,000 for a couple
principal residence for at least 2 of the last 5 years.
A taxpayer can do this an unlimited number of times
A homeowner can deduct the property taxes and the interest on the mortgage, as well as deduct discount points and prepayment penalties on loans

The owner of a single-family home can depreciate the property if it is used as a rental property.

Question 30

installment sales contract

Answer 30

is one where the sales price is paid in installments and at least one of the payments is to be received after the close of the taxable year in which the sale occurs. Under certain circumstances, this can result in tax savings for the seller.

Question 31

Principal-Agent relationship is a fiduciary relationship

Answer 31

The relationship is based on trust. The COMMON LAW OF AGENCY governs the relationship between a broker and his principal. The principal is often referred to as the client.

Question 32

All states require the disclosure of information about agency,

Answer 32

usually at the time of the first meaningful contact with a party or prospect. With a seller, this is often at the listing presentation. With a buyer, this is often on his or her first visit to your office.

Question 33

A written agreement is the preferred method of creating agency

Answer 33

(a listing, a buyer’s representation agreement, a property management agreement). These agreements are employment contracts.

A Buyer’s Representation Agreement employs the broker to act as a fiduciary to the buyer.

A Listing Agreement employs the broker to act as a fiduciary to the seller.

A Management Agreement employs the broker/property manager to act as a fiduciary to the owner.

Question 34

agency relationships,

Answer 34

we must treat all parties with honesty and fairness, but we have two levels of responsibility:

Question 35

Public responsibility:

Answer 35

honesty, integrity, fairness, disclosure of material facts, and accounting of funds held. (These are your duties to customers or third parties in a transaction.) An agent does not support or defend a customer’s interes

Question 36

Fiduciary responsibility

Answer 36

put the interests of your client first, give full disclosure to your client (advice and opinions in addition to disclosing all pertinent facts - both material and other,) be loyal to your principal, and be competent. (These are your duties to your client.) An agent supports and defends his client’s interests.

Question 37

Ratification

Answer 37

occurs when a principal accepts actions that he did not authorize. Listings and Buyer Representation Agreements are employment contracts hiring a broker to represent a seller or buyer, landlord or tenant. These agreements should be created in writing and terminated in writing or by automatic termination on the agreed-upon termination date.

Question 38

Universal agency

Answer 38

gives the agent the authority to represent his client in all matters, both business and personal. It is the equivalent of having unlimited power of attorney and is very rare in real estate.

Question 39

2. General agency

Answer 39

gives the agent the power to bind his principal in a particular trade or business. Power to bind a principal is the power to sign a legally binding agreement in the name of your principal. The general agent’s signature binds or commits the client to the agreement. Limited Power of Attorney can be used to create a general agency (Owner - Property Manager or Broker - Sales agent).

Question 40

Special or limited agency

Answer 40

gives the agent the power to perform only specific acts and no others. This agent does NOT have the power to bind his client/principal. (Seller - Broker)

Question 41

transactional broker/facilitator

Answer 41

is a licensee who assists a buyer and seller in reaching an agreement in a real estate transaction but doesn’t have an agency relationship with either party. This agent can also be called a transaction coordinator, a finder, or a middleman.

Question 42

Dual agency

Answer 42

s practiced in many states under the Common Law of Agency. The broker represents both parties with their written permission. A broker acting as a dual agent may appoint a designated agent to represent the buyer and another designated agent to represent the seller.

Question 43

Intermediary.

Answer 43

n Texas, a broker who agrees to represent both parties in a single transaction must do so as an Intermediary. The broker may appoint associates to work with the parties - one licensee to work with the seller and one licensee to work with the buyer

Question 44

Dual Agency or Intermediary

Answer 44

may only be permitted if both the buyer and seller agree in writing. Information about your role as an Intermediary or a dual agent should be given before a party reveals any confidential information. The easiest duty of a dual agent is accounting. For all other duties, the buyer and seller can have opposing interests. A dual agent will have confidential information about both parties to the transaction. He can never reveal any information to one party that might harm the interests of the other party.

Question 45

DUTIES OF THE PARTIES

Answer 45

In an agency relationship, specific duties exist. A principal’s duties to an agent are:

Remember: “CRIP”
C
Compensation
pay the commission when earned
R
Reimbursement
repay approved expenses
I
Indemnification
defend the agent when acting on the client’s instruction
P
Performance
comply with the written agreement

Question 46

Fiduciary Duties of a Real Estate Agent

Answer 46

The relationship between a real estate agent and a client is called a fiduciary relationship. Fiduciary means a faithful servant, and an agent is a fiduciary of the client. In real estate, a broker or a salesperson can be the agent of a seller or a buyer.
Remember: “OLD CAR”
O
Obedience
The agent must obey all lawful instructions of the client
L
Loyalty
The agent owes undivided loyalty to the client
D
Disclosure
Reveal all known facts, give advice and opinions
C
Confidentiality
Protect the private information of the client
A
Accounting
Handle funds with care. No commingling or conversion
R
Reasonable care
Agents must use all their skills on behalf of clients.

Question 47

Sub-agency (subagent

Answer 47

is a type of brokerage relationship where the listing firm, with permission of the seller, has extended its agency relationship outside the firm’s own agents and authorized other cooperating brokerage firms to represent the seller in a transaction. When this happens, the other cooperating broker becomes a “sub-agent” of the listing broker. A sub-agent is a real estate licensee who provides real estate services to a buyer while actually representing the seller.