contract questions

Question 1

A real estate professional has an exclusive right to sell listing on a building. The owner is out of town when the real estate professional gets an offer from a buyer to purchase the building, providing the seller agrees to take back a mortgage. The buyer must have a commitment from the seller before the seller is scheduled to return to the city. Under these circumstances, the

a. real estate professional may enter into a binding agreement on behalf of the seller.
b. real estate professional may collect a commission even if the transaction falls through because of the seller’s absence from the city.
c. buyer is obligated to keep the offer open until the seller returns.
d. real estate professional must obtain the signature of the seller to affect a contract.

Answer 1

d. The answer is real estate professional must obtain the signature of the seller to affect a contract. A real estate professional is usually a special agent. If hired by the seller, the broker is limited to finding a ready, willing, and able buyer for the property. As a special agent, the broker may not bind the principal to any contract.

Question 2

To assign a contract for the sale of real estate means to

a. record the contract with the county recorder’s office.
b. permit another broker to act as agent for the principal.
c. transfer one’s rights under the contract.
d. allow the seller and the buyer to exchange positions.

Answer 2

c. The answer is transfer one’s rights under the contract. In an assignment, rights are assigned to a third party, but the original party remains primarily liable unless specifically released.

Question 3

Which of the following describes a contract that has not yet been fully performed?

a. Voidable
b. Unenforceable
c. Executed
d. Executory

Answer 3

d. The answer is executory. The phase from offer to a closed and executed/closed contract is called the executory period. Voidable contracts are binding on one party and not the other. An unenforceable contract is also void due to lack of an essential element.

Question 4

An applicant for a real estate license passes the Alabama license exam. What additional steps must be completed to obtain an original license?

a. Complete 30-hours of post-license education within 12 months.
b. Complete 30-hours of post-license education within 9 months.
c. Find a broker willing to assume responsibility for the licensee.
d. None of these must be done.

Answer 4

a. The answer is complete 30-hours of post-license education within 12 months. It is not necessary to find a broker, because the licensee can maintain the individual’s license on inactive status, without a broker.

Question 5

Bill hires Andrew as a buyer’s agent. Bill confides he filed for bankruptcy two years ago. Bill would like to find a seller who is willing to carry the loan. In this situation, a correct statement about Andrew’s responsibility regarding disclosure of the bankruptcy when presenting the offer to purchase is that Andrew is

a. required to disclose the bankruptcy under ECOA.
b. not required to disclose the bankruptcy because the seller might reject the offer.
c. not required to disclose the bankruptcy because the broker has no agency relationship with the seller.
d. required to disclose the bankruptcy because it is a material fact—information important to the seller’s evaluation of the offer.

Answer 5

d. The answer is required to disclose the bankruptcy because it is a material fact—information important to the seller’s evaluation of the offer. The broker is obligated to disclose any material fact—something that might make a party to the transaction change his or her mind, regardless of the agency or nonagency relationship the broker has with the seller. The ECOA is a federal law prohibiting discrimination in the granting of credit and does not regulate disclosures required in a real estate transaction.

Question 6

35. A broker learned that the personal assistant of one of the broker’s salespeople had changed the terms on a completed contract and signed the buyer’s initials. Because the deal was a big one and because the broker knew that the buyers would have approved, the broker took no further action. In this situation, the broker
    a. made a wise business decision.
    b. is being ethical by not telling on the agents.
    c. is not responsible because the affiliated licensee has primary responsibility for supervising the personal assistant.
    d. has guilty knowledge and may be disciplined by the Real Estate Commission.

Answer 6

35. d. The answer is has guilty knowledge and may be disciplined by the Real Estate Commission. The broker would not be held responsible if the broker had attempted to prevent or mitigate the damage.

Question 7

36. Before writing up an offer to purchase for a buyer, a licensee must fill out which of the fol¬lowing forms?
    a. Independent contractor agreement
    b. Advertising allowance
    c. Zoning regulations
    d. Estimated closing cost

Answer 7

36. d. The answer is estimated closing cost. Alabama law requires that an estimated closing cost be given to the purchaser before an offer to purchase is written.

Question 8

37. A real estate professional enters into a listing agreement with a seller under which the seller will receive $22,000 from the sale of a lot and the real estate professional will receive any sale proceeds over this amount. This type of listing is
    a. a gross listing.
    b. a legal and ethical way to ensure that the broker is compensated.
    c. a net listing.
    d. an exclusive agency.

Answer 8

37. c. The answer is a net listing. In a net listing, the seller receives a net amount of money from any sale. The excess goes to the listing real estate professional as commission. Net listings are illegal in most states.

Question 9

38. A seller signed a 90-day listing agreement with a professional. Two weeks later, before any offers could be presented, the seller was killed in an accident. What is the present status of the listing?
    a. The listing agreement was terminated automatically when the seller died.
    b. The listing agreement is binding on the seller’s estate for the remainder of the 90 days.
    c. Because the seller’s intention to sell was clearly defined, the listing agreement is still in effect, and the real estate professional may proceed to market the property on behalf of the seller’s estate.
    d. The listing agreement is binding on the seller’s estate only if the real estate professional can produce an offer to purchase the property within the remainder of the listing period.

Answer 9

38. a. The answer is the listing agreement was terminated automatically when the seller died. The listing terminated upon the death of the property owner.

Question 10

41. If Harold does not want to be obligated to purchase a property but would like to have the right to purchase a property within 60 days for $300,000, Harold should try to negotiate
    a. a contract for deed.
    b. an option.
    c. a purchase money mortgage.
    d. a purchase agreement.

Answer 10

41. b. The answer is an option. An option contract would allow Harold the time to determine if he wants to buy and has the advantage of locking the seller into selling at a price agreed to at the beginning of the process. Contract for deed and purchase money mortgages are forms of seller financing and would not give this type of flexibility. Both require a purchase agreement to create the terms of the financing.

Question 11

43. The agent requests that a second contract be drawn up between the buyer and the seller in order to help the buyer get a larger loan. In this circum¬stance, the parties are
    a. performing a good business practice.
    b. guilty of a fraudulent practice.
    c. guilty of a misdemeanor.
    d. guilty of a felony.

Answer 11

43. b. The answer is guilty of a fraudulent practice. In Alabama, a licensee misrepresenting or failing to disclose to any lender, guaranteeing agency, or any other interested party the true terms of a sale of real estate is guilty of a violation of Alabama license law and may also be sued for civil fraud.

Question 12

54. A lease agreement is signed by a lessee who is 16 years of age. Which of the following is TRUE?
    a. A 16-year-old person cannot sign a lease.
    b. The lease agreement is valid provided the security deposit is increased.
    c. The lease agreement is voidable.
    d. The lease agreement is void.

Answer 12

54. c. The answer is the lease agreement is voidable. A 16-year-old person can sign a contract, but because the lessee is a minor, the lease is voidable.

Question 13

56. In which of the following does the listing agent earns a commission even if the owner sells the property to his cousin, who never met the listing agent and never saw any advertising by the agent?
    a. Exclusive right to sell agency
    b. Exclusive right to list agency
    c. Protection clause
    d. None of these

Answer 13

56. a. The answer is exclusive right to sell agency. In this type of agency arrangement, the agent receives a commission regardless of who sells the property. Contrast this with exclusive right to list agency, in which the agent is the only one given listing and advertising privileges but earns a commission only if the agent procures a buyer.

Question 14

58. An amount that is stipulated in the contract that serves to compensate a seller in the event of a buyer default is called
    a. actual damages.
    b. escrow funds.
    c. earnest money.
    d. liquidated damages.

Answer 14

58. d. The answer is liquidated damages. When parties agree that a certain amount of money will compensate the nonbreaching party, that money is called liquidated damages. Earnest money may serve as liquidated damages in case the buyer defaults.

Question 15

60. The listing agent presents an offer to the seller. The seller wants to think it over until the next day. That evening, the listing agent receives two more offers from other brokerages. When should the second and third offers be presented?
    a. Immediately
    b. Only after the seller rejects the first offer
    c. In the order that the offers were received
    d. Never, if the seller accepts the first offer

Answer 15

60. a. The answer is immediately. Alabama law requires that the agent promptly present all offers. The seller has the right to see all offers in order to consider the best one to accept.

Question 16

61. Which of the following describes an offer that the seller has accepted and proper notice has been given to the buyer of the seller’s acceptance?
    a. Executed contract
    b. Unilateral contract
    c. Executory contract
    d. Assignment

Answer 16

61. c. The answer is executory contract. The period from when the contract is agreed to and signed by both parties until it is executed (closed) is called the executory period. Executed contracts have been closed. Unilateral contracts bind only one party such as an option. Assignments transfer the contract duties but not liabilities.

Question 17

66. An owner of a ranch enters into a sale-and-leaseback agreement with a buyer. Which statement is TRUE of this arrangement?
    a. The buyer is the lessor.
    b. The owner retains title to the ranch.
    c. The buyer receives possession of the property.
    d. The owner is the lessor.

Answer 17

66. a. The answer is the buyer is the lessor. The owner sells the ranch to the buyer and then leases it back from the buyer. In this transaction, the owner starts out as a grantor and ends up as lessee. The buyer starts out as a grantee and ends up being a lessor.

Question 18

69. Stephen, a listing agent, is frustrated that a property has been on the market for over two months, and he wants to sell the home quickly. Stephen shares with a nonrepresented buyer that the home has been on the market for a long time, so the seller would welcome any offer on the home. The buyer makes an offer at a price lower than he had expected to offer. Has Stephen violated any duties to the seller?
    a. Yes, Stephen has violated his fiduciary duty because license law prohibits any discussion of how long a property has been on the market.
    b. Yes, Stephen has violated his fiduciary duty by disclosing a fact that could benefit the buyer.
    c. No, because Stephen has served the seller’s interest by producing a ready, willing, and able buyer.
    d. No, because Stephen is not required to disclose that information to any party in the transaction.

Answer 18

69. b. The answer is yes, Stephen has violated his fiduciary duty by disclosing a fact that could benefit the buyer. The agent has duties of care and loyalty to the seller, and although he must disclose any material fact to a buyer, disclosing this information directly benefits the buyer. The license law does not prohibit or require disclosing information about how long a property has been on the market. The license laws of most states do require agents to disclose any material facts to clients and customers.

Question 19

73. In a purchase agreement, the buyer and seller agreed to liquidated damages as a remedy for default. If the buyer does default, the seller
    a. sues the buyer to buy the property.
    b. sues the buyer and keeps the earnest money.
    c. needs to notify the buyer of the intent to sue for liquidated damages.
    d. keeps only the buyer’s earnest money.

Answer 19

73. d. The answer is keeps only the buyer’s earnest money. Liquidated damages as a remedy allows the seller to keep the earnest money and nothing more. Specific performance is a lawsuit to have the buyer perform the terms of the contract.

Question 20

80. A woman found a buyer for her neighbor’s house. The neighbor does not want to pay the woman a fee. If the woman goes to court, she will have to prove that
    a. she was of sound mind when she brought the buyer and seller together.
    b. the seller had approached her first.
    c. she only did this as a favor, not as a regular activity.
    d. she held a real estate license at the time she found the buyer for the neighbor’s house.

Answer 20

80. d. The answer is she held a real estate license at the time she found the buyer for the neighbor’s house. An unlicensed person may not claim a fee for a real estate transaction.

Question 21

81. The licensee represents the buyer. The buyer wants to make a written offer that is 50% below the asking price. How should the agent respond?
    a. Tell the buyer that this is insulting to the seller
    b. Try to get the buyer to come up in price
    c. Refuse to work with a client who is obviously not interested in buying
    d. Promptly write up the offer

Answer 21

81. d. The answer is promptly write up the offer. Even though such an offer may backfire and insult the seller, the agent who represents the buyer must follow the buyer’s instructions (unless they are unlawful).

Question 22

82. Which of the following describes a contract where a buyer enters into a buyer agency agreement that also gives him the right to enter into agency contracts with other agents?
    a. Exclusive-right-to-buy buyer agency contract
    b. Open buyer agency contract
    c. Designated buyer agency contract
    d. Exclusive-agency buyer agency contract

Answer 22

82. d. The answer is exclusive-agency buyer agency contract. Exclusive buyer or seller agency contracts allow the buyer to find a property and buy it without owing the buyer’s agent a commission. A seller under these agreements is allowed to sell the property on her own without paying a commission.

Question 23

92. Susan, a listing broker, presents an offer to her client, a seller, with a selling price much lower than what the seller is asking for the property. The offer allows the seller 24 hours to accept. Susan recommends the seller counter the offer and leaves a blank counter with the seller. The seller emails Susan in the morning saying that based on the wishes of her children, who are not on the title, she has accepted the offer. It this case the offer
    a. gives the buyer possession until closing.
    b. is void due to undue influence by the children.
    c. may be a voidable contract due to duress.
    d. is a valid contract which may be voidable due to fraud.

Answer 23

92. c. The answer is may be a voidable contract due to duress. The seller would have to claim her children forced her to accept the buyer’s offer under duress in order to terminate the contract or make it voidable. Void contracts lack one or all of the essential elements of a contract. A contract must be entered into freely and voluntarily by each party, without undue influence. Duress, undue influence, misrepresentation, fraud, or a minor party entering into a contract are all circumstances that may create a contract that is voidable by the injured party.

Question 24

103. The broker receives an earnest money deposit with a written offer to purchase that includes a 10-day acceptance clause. On the fifth day, before the offer is accepted, the buyer notifies the broker that she is withdrawing the offer and demands the return of her earnest money deposit. In this situation, the
     a. buyer cannot withdraw the offer because it must be held open for the full 10 days.
     b. seller and the broker have the right to each retain one-half of the deposit.
     c. buyer has the right to revoke the offer at any time until it is accepted and recover the earnest money.
     d. broker declares the deposit forfeited and retains it for his services.

Answer 24

103. c. The answer is buyer has the right to revoke the offer at any time until it is accepted and recover the earnest money. The offeror (the buyer) may revoke the offer at any time before the offer is accepted, even if the person making the offer agreed to keep the offer open for a set period of time. At that point, the earnest money deposit should be refunded to the buyer.

Question 25

108. At the time a buyer was negotiating the purchase of a lot on which to build a new home, the seller represented that the soil was firm enough to support the construction of a building when, in fact, he knew it was not. This contract is
     a. void.
     b. voidable by the seller because of the mistake.
     c. voidable by the buyer because of fraud.
     d. voidable by neither party because no harm was done yet.

Answer 25

108. c. The answer is voidable by the buyer because of fraud. The contract is voidable because it contains all the essential elements of a contract but could be rescinded due to a fraud.

Question 26

122. The legal age of competence to enter into a contract in Alabama is
     a. 17.
     b. 19.
     c. 20.
     d. 21.

Answer 26

122. b. The answer is 19. In Alabama, with no exceptions, a person must be of sound mind and age 19, or married and age 18, to enter into a contract.

Question 27

133. Which type of listing contract provides for payment of a commission to the broker even though the owner makes the sale without the broker’s aid?
     a. Exclusive-right-to-sell listing
     b. Open listing
     c. Exclusive-agency listing
     d. Option listing

Answer 27

133. a. The answer is an exclusive-right-to-sell listing. In an exclusive-right-to-sell listing, if the property is sold while the listing is in effect, the seller must pay the broker a commission regardless of who sells the property. An open listing clause states that any number of brokers may work simultaneously to sell the property, with the commission going to the broker who secures a buyer able to purchase the property. An exclusive-agency listing provides the brokerage firm or a co-op broker will receive a commission if the property sells, but the owner reserves the right to sell the property without owing a commission if the owner sells the property on their own. An option listing permits the broker to retain an option to purchase the property for the broker’s own account.

Question 28

135. The licensee is planning to buy a listed property for the licensee’s own personal portfolio. In this situation, the licensee must
     a. say or do nothing to indicate license status.
     b. notify the Real Estate Commission to obtain permission.
     c. inform the licensee’s broker.
     d. make written disclosure of license status to all parties in the transaction.

Answer 28

135. d. The answer is make written disclosure of license status to all parties in the transaction. The licensee must also inform, in writing, all parties to the real estate transaction if the licensee is acting as principal, representing a family member, or representing a business entity in which the licensee has an ownership interest. The licensee is not required to notify the Real Estate Commission.

Question 29

1. Which of the following listing agreements permit owners of a listed property to sell the property on their own without having to pay the listing broker a commission?
   a. Exclusive-agency listing only
   b. Open listing and exclusive-agency listing
   c. Open listing only
   d. Exclusive-right-to-sell listing and exclusive-agency listing

Answer 29

1. b. The answer is open listing and exclusive-agency listing. In an exclusive-agency listing, one brokerage is authorized to act as the exclusive agent of the principal. However, the seller retains the right to sell the property without obligation to the brokerage. In an open listing, the seller retains the right to employ any number of brokers to sell the property. In an open listing, the seller is obligated to pay the listing broker a commission only if the listing broker is the procuring cause of the sale. In an exclusive- right-to-sell listing, if the property is sold while the listing is in effect, the seller must pay the broker a commission regardless of who sells the property.

Question 30

2. Copies of signed contracts must be provide to clients and customers
   a. within 48 hours.
   b. at the time they are signed.
   c. as soon as convenient.
   d. within five business days.

Answer 30

2. b. The answer is at the time they are signed. There is no specific deadline, but the agent cannot wait until it is convenient.

Question 31

31. A buyer saw a house on March 10. She makes a written offer on the property on March 15. The offer was presented on March 16 and accepted by the seller on March 18. When should the agent give the buyer a signed copy of the contract?
    a. March 10
    b. March 15
    c. March 16
    d. March 18

Answer 31

31. d. The answer is March 18. The buyer should be given a copy of the signed contract as soon as possible after acceptance by the seller on March 18. In Alabama, upon execution of any instrument in connection with a real estate transaction, licensees must deliver legible copies of the original document to each party at the time the contract is signed, as well as any other document signed at that time. The licensee should give the buyer a copy of the offer on March 15 and the accepted offer (contract) on March 18.

Question 32

32. The licensee represents the seller. The licensee receives a written offer that is 50% below the asking price. How should the agent respond?
    a. Send the offer back to the other agent telling the buyer to offer more
    b. Promptly present the offer to the seller
    c. Call the seller and advise the seller to ignore the offer
    d. Refuse to present such an insulting offer

Answer 32

32. b. The answer is promptly present the offer to the seller. The seller must make the decision to accept or reject the offer.

Question 33

47. Laura makes an offer on a house, and the seller accepts the offer. At this point, Laura has what type of title to the property?
    a. Voidable
    b. Legal
    c. Possessionary
    d. Equitable

Answer 33

47. d. The answer is equitable. On formation of the contract between both parties, the contract is now an executory contract with the buyer having equitable title. Voidable is a term used to describe a contract that is able to be voided because of duress, fraud, misrepresentation, or because one party to the contract is a minor, In the executory stage the seller holds legal title and possession until closing, unless a different time of possession is negotiated.

Question 34

69. Which element is necessary for a legally enforceable contract for the sale of real estate?
    a. Parties at least 19 years old, or 18 years old and married
    b. Contract prepared by an Alabama-licensed attorney
    c. Legal description of property being sold
    d. Signed and notarized property condition addendum

Answer 34

69. a. The answer is parties at least 19 years old, or 18 years old and married. This is the age of legal capacity in Alabama. Under current law, contracts do not have to be prepared by an attorney. A street address of the property is sufficient for a sales contract, but not for a deed. Alabama does not require any type of property condition or disclosure addendum

Question 35

70. A buyer’s agent is aware that a murder was committed in a home and that home is reputed to have paranormal activity. Must this information be disclosed to a client?
    a. Yes, known stigmas must be disclosed by all Alabama licensees.
    b. No, this does not affect health or safety, so there is no need to disclose.
    c. No, there is no scientific proof supporting the existence of ghosts.
    d. Yes, known stigmas must be disclosed by a buyer’s agent to a client.

Answer 35

70. d. The answer is yes, known stigmas must be disclosed by a buyer’s agent to a client. That is because the buyer’s agent has a fiduciary responsibility to the client and must disclose all information that could affect the buyer’s purchase decision.

Question 36

71. A seller wishes to list his property for $100,000 with a 6% commission. The listing agent believes the market value is $130,000, but the seller wants a quick sale. They agree to wait 48 hours before placing the property on MLS at $100,000. During that time, if the agent can put the property under contract with a qualified buyer for a sum in excess of $100,000, then the agent’s commission will be the excess over $110,000 rather than 6% of the sales price. Is this a reasonable solution to the situation?
    a. No, the agent might make less money under this arrangement.
    b. Yes, because it motivates the agent to find a buyer very quickly.
    c. No, because listings cannot be intentionally withheld from MLS.
    d. No, this arrangement is illegal.

Answer 36

71. d. The answer is no, this arrangement is illegal. This is a net listing, which are illegal.

Question 37

103. If an owner takes his property off the market for a definite period in exchange for some consideration but grants an individual the right to purchase the property within that period for a stated price, this is called
     a. an option.
     b. a contract of sale.
     c. a right of first refusal.
     d. an installment agreement.

Answer 37

103. a. The answer is an option. An option is granted when an owner (optionor) gives the potential purchaser (optionee) the right to purchase the property at a fixed price within a certain period of time.

Question 38

113. Breach of contract is refusal or failure to comply with the terms of a contract. If the seller breaches the purchase contract, the buyer may do all of the following EXCEPT
     a. sue the seller for specific performance.
     b. rescind the contract and recover the earnest money.
     c. sue the seller for damages.
     d. sue the broker for nonperformance.

Answer 38

113. d. The answer is sue the broker for nonperformance. The broker is not a party to a real estate sales contract and could not be sued for nonperformance in the event of a seller’s breach.

Question 39

121. A broker does not have to prove that she was the procuring cause in order to collect a commission if her seller sells the property without her help because she has an
     a. option listing.
     b. open listing.
     c. exclusive right to sell listing.
     d. exclusive agency listing.

Answer 39

121. c. The answer is exclusive right to sell listing. In an exclusive right to sell listing, the listing broker receives a commission no matter who sells the listed property during the term of the listing. Brokers may have to prove they were the procuring cause in some open listing and exclusive agency listing situations, but procuring cause is of no significance in exclusive right to sell listing situations.

Question 40

124. Which of the following is NOT a type of listing contract?
     a. Open
     b. Exclusive agency
     c. Exclusive right to sell
     d. MLS

Answer 40

124. d. The answer is MLS. A clause permitting the property to be entered in the multiple listing system (MLS) may be included in an exclusive listing agreement with the seller’s consent.

Question 41

131. A real estate professional is selling a home to a buyer and told her that the foundation was “solid as a rock” when he knew for a fact that it was slowly sinking into the landfill on which it was built. Now that the sale is completed, which of the following is LEAST likely to happen to the real estate professional?
     a. Revocation of his license for failure to disclose a material fact
     b. Being charged with intentional misrepresentation
     c. Suit to recover money damages experienced by the buyer due to basement leakage
     d. Successful defense against all charges based on loyalty to his client-seller

Answer 41

131. d. The answer is successful defense against all charges based on loyalty to his client-seller. The duty of disclosure includes relevant information or material facts that the real estate professional knows or should have known, regardless of whether those facts are favorable or unfavorable to the principal’s position.

Question 42

133. An associate broker lists her brother’s home for sale. Approximately twice a year, the rainfall is sufficient to overload the gutters. Water sheets off the roof, saturates the ground, and pools in the basement to a depth of approximately two inches. When a buyer asks about water problems, the broker responds that there are none. The parties sign a purchase contract, which contains language saying the property is sold “as-is.” What liability does the associate broker have?
     a. Civil or criminal fraud
     b. No liability, because Alabama is a caveat emptor state for used properties
     c. Disciplinary action by AREC for misrepresentation when selling for self or for family members
     d. No liability, because the broker owed her brother the duty of confidentiality

Answer 42

133. c. The answer is disciplinary action by AREC for misrepresentation when selling for self or family members. If the same question involved a non-family member as the seller, there would be no liability because of the “as-is” clause. Because it was a family member, there is liability.

Question 43

135. Penelope has made an offer to the seller who has countered and given Penelope 24 hours to accept the counter. In this case the original offer is considered to be
     a. terminated.
     b. executory.
     c. voidable.
     d. void.

Answer 43

135. a. The answer is terminated. A counter offer terminates the original offer and creates a new offer. Since there is not a contract the terms are executory. An offer is not a contract and cannot be considered voidable or void.

Question 44

1. Dual contracts could result in
   a. civil and criminal liability.
   b. a higher sales price for the property.
   c. more advantageous seller financing terms.
   d. deferral of income taxes through Section 1031 of the Internal Revenue Code.

Answer 44

1. a. The answer is civil and criminal liability. A dual contract is the situation in which one contract—usually at a higher purchase price—is disclosed to the title company and the purchaser’s lender. The real contract—at a lower price—is the second contract. Typically, the seller “agrees” to hold a second mortgage for the difference between the two contracts, and then cancels the mortgage shortly after closing. It is a method for buyers to borrow more money than would be supportable under the real purchase contract and constitutes bank fraud.

Question 45

8. The phrases caveat emptor, property sold as-is, and time is of the essence are all contract clauses and concepts that favor the
   a. buyer and should be disclosed to seller, but are not required to be separately identified and disclosed.
   b. seller and must be separately identified and initialed by the buyer.
   c. seller but are not required to be separately identified and disclosed to the buyer.
   d. buyer and must be separately identified and initialed by the seller.

Answer 45

8. c. The answer is seller but are not required to be separately identified and disclosed to the buyer. Caveat emptor stands for the proposition there are no warranties in the sale of used residential properties. Use of the phrase as-is means the buyer is not entitled to rely on any verbal representations, even if known to be false by the person making the statement. Time is of the essence means all deadlines are firm, with no grace periods of a “reasonable time.” For example, under a time is of the essence contract, if closing must be completed by 4 pm on a certain date and the buyer does not arrive at the lawyer’s office until 4:05 pm, the seller can cancel the sale.

Question 46

9. A broker took a listing and later discovered that the client had been declared legally incompetent before signing the listing. The listing is now
   a. of no value to the broker because it is void.
   b. binding because the broker was acting as the owner’s agent in good faith.
   c. the basis for the recovery of a commission if the broker produces a buyer.
   d. renegotiable.

Answer 46

9. a. The answer is of no value to the broker because it is void. A contract made by a person who has been adjudicated insane is void on the theory that the judgment that this is not a competent party is a matter of public record.

Question 47

29. When a prospective buyer makes a written purchase offer that the seller accepts, then the
    a. buyer may take possession of the real estate.
    b. buyer receives equitable title to the property.
    c. seller grants the buyer possessory rights.
    d. buyer receives legal title to the property.

Answer 47

29. b. The answer is buyer receives equitable title to the property. Equitable title occurs when the buyer and the seller have executed a sales contract and the buyer acquires an interest in the land. Legal title will not pass until the transaction is closed.

Question 48

39. Which of the following terms describes a legally enforceable contract in which two parties exchange promises to do something for each other?
    a. Unilateral contract
    b. Void contract
    c. Option contract
    d. Bilateral contract

Answer 48

39. d. The answer is bilateral contract. A bilateral contract is one in which both parties make a promise to the other. A unilateral contract is a one-sided contract in which one party makes a promise to induce a second party to do something. A void contract lacks one or all of the essential elements of a contract. An option contract is a unilateral contract in which only one party makes a promise to perform, in this case to hold open the right for a buyer to purchase a property in the future.

Question 49

42. The parties enter into a signed contract to buy/sell the property for $250,000. The earnest money is $10,000. Two days later, someone submits a backup offer for $275,000. One day after that, the listing agent receives notice the earnest money check bounced. In this situation, the
    a. listing agent should send the 24-hour notice of contract failure to the buyer, and a contract should be signed with the backup buyer.
    b. agent should try to get replacement funds for the earnest money, but the contract is still fully enforceable.
    c. listing agent’s broker should send the 24-hour notice of contract failure to the buyer, and a contract should be signed with the backup buyer.
    d. listing agent’s broker should contact the buyer’s broker and advise of contract failure due to the bounced check and that a contract will be executed with the buyer.

Answer 49

42. b. The answer is agent should try to get replacement funds for the earnest money, but the contract is still fully enforceable. Many sales contracts contain a specific clause stating that if the earnest money check bounces, the contract is immediately cancelled. Without such a clause, the contract is still enforceable, because the earnest money is not consideration. There is no failure of consideration if the earnest money check bounces. The promise to sell, and the promise to buy, are the consideration that supports the contract.

Question 50

43. Which of the following would be the BEST description of a listing contract?
    a. Property management contract
    b. Escrow contract
    c. Sales contract
    d. Personal service contract

Answer 50

43. d. The answer is personal service contract. A listing is a personal employment contract between a broker and his or her client setting forth the broker’s responsibilities in finding for the seller a ready, willing, and able buyer. A property management contract establishes the responsibilities of a broker in managing a principal’s property. A sales contract is a contract between a buyer and seller for purchase of a property. An escrow contract is an agreement between a buyer, seller, and escrow holder (such as a broker) defining the responsibilities of each.

Question 51

45. You are the listing agent for a property under contract. After expiration of the inspection contingency period, the buyer sends you notice of contract cancellation and demands a full refund of the earnest money because you failed to disclose the known presence of asbestos floor tiles under the vinyl flooring in the game room. You should advise your client,
    a. “You had no duty to disclose this. You can agree to cancellation or not, but are under no obligation to do so.”
    b. “You had a duty to disclose. I recommend allowing cancellation.”
    c. “You had a duty to disclose. I recommend allowing cancellation but requiring a full release before we refund the earnest money.”
    d. “You had a duty to disclose and should allow contract cancellation, but you will still owe me the full commission for presenting a ready, willing, and able buyer.”

Answer 51

45. a. The answer is “You had no duty to disclose this. You can agree to cancellation or not, but you are under no obligation to do so.” In this situation, the seller had no duty to disclose the presence of the asbestos tiles.

Question 52

56. Even if the seller refuses to agree, earnest money can be disbursed
    a. if the seller files for bankruptcy.
    b. when the buyer provides timely notice that the property has failed an inspection contingency.
    c. if the buyer signs a notarized indemnity agreement.
    d. by payment into court with an interpleader lawsuit.

Answer 52

56. d. The answer is by payment into court with an interpleader lawsuit. The only way earnest money can be disbursed is by interpleader, by agreement of all parties, or if the property has been foreclosed and the contract is impossible to perform. Whether or not a contingency has been broken is a question for the courts, not the agent. If the seller files for bankruptcy, the property can still be sold—it simply requires bankruptcy court approval.

Question 53

62. The law that requires real estate contracts to be in writing to be enforceable is the
    a. law of descent and distribution.
    b. parol evidence rule.
    c. statute of limitations.
    d. statute of frauds.

Answer 53

62. d. The answer is statute of frauds. The statute of frauds requires real estate contracts to be in writing to be enforceable. An oral contract, although unenforceable, can still be valid between the parties if they fulfill its terms.

Question 54

68. Lawrence does not want to be obligated to purchase a property but would like to have the right to purchase a property within 60 days for $300,000. Lawrence should try to negotiate
    a. a contract for deed.
    b. a purchase money mortgage.
    c. a purchase agreement.
    d. an option.

Answer 54

68. d. The answer is an option. An option contract would allow the investor the time to determine if she wants to buy and has the advantage of locking the seller into selling at a price agreed to at the beginning of the process. Contract for deed and purchase money mortgages are forms of seller financing and would not give this type of flexibility. Both require a purchase agreement to create the terms of the financing.

Question 55

72. An injured party can sue if a fraudulent statement was
    a. intentional only.
    b. intentional, reckless, or negligent.
    c. not a negligent mistake.
    d. made with the intention of providing an advantage or profit to the person who made the statement.

Answer 55

72. b. The answer is intentional, reckless or negligent. It is irrelevant whether the person being sued profited from the fraud. The injured party’s damage is the proper important focus.

Question 56

83. Which of the following is FALSE about contingencies?
    a. They must specify what is required to satisfy the contingency.
    b. They must identify who will pay for any costs involved.
    c. Common contingencies include mortgage and inspection contingencies.
    d. They create a contract that is unenforceable.

Answer 56

83. d. The answer is they create a contract that is unenforceable. A contingency creates a voidable contract but not an unenforceable one; if the contingency is not satisfied, the contract is voidable by the party for whose benefit the contingency was created. For example, a home purchase may have a financing contingency stating the loan terms that the buyer will accept; if the only loan available to the buyer is on stricter terms (higher interest rate; longer loan term), the buyer may still decide to proceed with the loan and close the sale.

Question 57

101. A bilateral contract is one in which
     a. the promise of one party is given in exchange for the promise of the other party.
     b. only one of the parties is obligated to act.
     c. something is to be done by one party only.
     d. a restriction is placed in the contract by one party to limit the performance by the other.

Answer 57

101. a. The answer is the promise of one party is given in exchange for the promise of the other party. In a bilateral contract, both parties agree to do something and promises are exchanged. A unilateral contract is a one-sided agreement that does not obligate a second party.

Question 58

129. On Monday, the seller offers to sell his vacant lot to the buyer for $42,000. On Tuesday, the buyer counteroffers to buy for $40,500. On Friday, the buyer learns that several other prospects may be making offers on the property, so he withdraws the counteroffer and agrees to the original asking price of $42,000. Under these conditions, there is
     a. a valid agreement because the buyer accepted the seller’s offer exactly as it was made.
     b. not a valid agreement because the buyer’s counteroffer was a rejection of the seller’s offer, and once rejected, an offer cannot be accepted later.
     c. a valid agreement because the buyer accepted before the seller advised the buyer that the offer is withdrawn.
     d. not a valid agreement because the seller’s offer was not accepted within 72 hours.

Answer 58

129. b. The answer is not a valid agreement because the buyer’s counteroffer was a rejection of the seller’s offer, and once rejected, an offer cannot be accepted later. A counteroffer is a new offer; it voids the original offer.

Question 59

132. Bo signed a purchase agreement, but then the seller decided not to sell. Bo sued the seller successfully and was able to purchase the house. What was the contract remedy if the seller was in default?
     a. Mutual agreement
     b. Unilateral rescission
     c. Liquidated damages
     d. Specific performance

Answer 59

132. d. The answer is specific performance. The buyer does not have the option of liquidated damages since the seller has not brought any earnest money to the contract. Mutual agreement is when the parties terminate and return all items of value to each party as if the contract did not exist. Unilateral rescission is one party terminating.

Question 60

136. If a broker took a listing and later discovered that the client had been declared legally incompetent before signing the listing, the listing is now considered
     a. voidable by the broker.
     b. void.
     c. valid.
     d. voidable by the incompetent client.

Answer 60

136. b. The answer is void. A contract made by a person who has been adjudicated incompetent is void because the judgment of sanity is a matter of public record. The contract is neither valid nor voidable as it is missing the essential element of a contract, that the contract be made by legally competent parties.

Question 61

138. A sales contract requires that the seller re-sod the front lawn before closing. At final walkthrough on the morning of closing, the purchaser sees that only half the lawn has been re-sod. On your advice, he refuses to proceed with closing unless $1,000 is withheld from the seller’s funds in order to pay for completing the job. Your advice
     a. is good, assuming the $1,000 figure is a reasonable amount.
     b. is a conflict of interest.
     c. could result in the purchaser being sued for breach of contract.
     d. was legally required because of your obligations to your client.

Answer 61

138. c. The answer is could result in the purchaser being sued for breach of contract. Agents may not instruct the withholding of funds at closing.

Question 62

22. Which of the following defines a contract between two parties that legally binds one party to perform but allows the other party to disaffirm it?
    a. Voidable
    b. Void
    c. Executed
    d. Bilateral

Answer 62

22. a. The answer is voidable. Voidable contracts have one side obligated but the other party able to rescind the contract if they wish. A contract with a minor is always voidable; for example, if an adult agrees to buy a property a minor owns, the contract is voidable by the minor. Executed contracts are closed and completed. Void contracts lack an essential element and bilateral contracts exchange promises.

Question 63

29. When a prospective buyer makes a written purchase offer that the seller accepts, then the
    a. buyer may take possession of the real estate.
    b. buyer receives equitable title to the property.
    c. seller grants the buyer possessory rights.
    d. buyer receives legal title to the property.

Answer 63

29. b. The answer is buyer receives equitable title to the property. Equitable title occurs when the buyer and the seller have executed a sales contract and the buyer acquires an interest in the land. Legal title will not pass until the transaction is closed.

Question 64

39. Which of the following terms describes a legally enforceable contract in which two parties exchange promises to do something for each other?
    a. Unilateral contract
    b. Void contract
    c. Option contract
    d. Bilateral contract

Answer 64

39. d. The answer is bilateral contract. A bilateral contract is one in which both parties make a promise to the other. A unilateral contract is a one-sided contract in which one party makes a promise to induce a second party to do something. A void contract lacks one or all of the essential elements of a contract. An option contract is a unilateral contract in which only one party makes a promise to perform, in this case to hold open the right for a buyer to purchase a property in the future.

Question 65

42. The parties enter into a signed contract to buy/sell the property for $250,000. The earnest money is $10,000. Two days later, someone submits a backup offer for $275,000. One day after that, the listing agent receives notice the earnest money check bounced. In this situation, the
    a. listing agent should send the 24-hour notice of contract failure to the buyer, and a contract should be signed with the backup buyer.
    b. agent should try to get replacement funds for the earnest money, but the contract is still fully enforceable.
    c. listing agent’s broker should send the 24-hour notice of contract failure to the buyer, and a contract should be signed with the backup buyer.
    d. listing agent’s broker should contact the buyer’s broker and advise of contract failure due to the bounced check and that a contract will be executed with the buyer.

Answer 65

42. b. The answer is agent should try to get replacement funds for the earnest money, but the contract is still fully enforceable. Many sales contracts contain a specific clause stating that if the earnest money check bounces, the contract is immediately cancelled. Without such a clause, the contract is still enforceable, because the earnest money is not consideration. There is no failure of consideration if the earnest money check bounces. The promise to sell, and the promise to buy, are the consideration that supports the contract.

Question 66

43. Which of the following would be the BEST description of a listing contract?
    a. Property management contract
    b. Escrow contract
    c. Sales contract
    d. Personal service contract

Answer 66

43. d. The answer is personal service contract. A listing is a personal employment contract between a broker and his or her client setting forth the broker’s responsibilities in finding for the seller a ready, willing, and able buyer. A property management contract establishes the responsibilities of a broker in managing a principal’s property. A sales contract is a contract between a buyer and seller for purchase of a property. An escrow contract is an agreement between a buyer, seller, and escrow holder (such as a broker) defining the responsibilities of each.

Question 67

45. You are the listing agent for a property under contract. After expiration of the inspection contingency period, the buyer sends you notice of contract cancellation and demands a full refund of the earnest money because you failed to disclose the known presence of asbestos floor tiles under the vinyl flooring in the game room. You should advise your client,
    a. “You had no duty to disclose this. You can agree to cancellation or not, but are under no obligation to do so.”
    b. “You had a duty to disclose. I recommend allowing cancellation.”
    c. “You had a duty to disclose. I recommend allowing cancellation but requiring a full release before we refund the earnest money.”
    d. “You had a duty to disclose and should allow contract cancellation, but you will still owe me the full commission for presenting a ready, willing, and able buyer.”

Answer 67

45. a. The answer is “You had no duty to disclose this. You can agree to cancellation or not, but you are under no obligation to do so.” In this situation, the seller had no duty to disclose the presence of the asbestos tiles

Question 68

56. Even if the seller refuses to agree, earnest money can be disbursed
    a. if the seller files for bankruptcy.
    b. when the buyer provides timely notice that the property has failed an inspection contingency.
    c. if the buyer signs a notarized indemnity agreement.
    d. by payment into court with an interpleader lawsuit.

Answer 68

56. d. The answer is by payment into court with an interpleader lawsuit. The only way earnest money can be disbursed is by interpleader, by agreement of all parties, or if the property has been foreclosed and the contract is impossible to perform. Whether or not a contingency has been broken is a question for the courts, not the agent. If the seller files for bankruptcy, the property can still be sold—it simply requires bankruptcy court approval.

Question 69

62. The law that requires real estate contracts to be in writing to be enforceable is the
    a. law of descent and distribution.
    b. parol evidence rule.
    c. statute of limitations.
    d. statute of frauds.

Answer 69

62. d. The answer is statute of frauds. The statute of frauds requires real estate contracts to be in writing to be enforceable. An oral contract, although unenforceable, can still be valid between the parties if they fulfill its terms.

Question 70

68. Lawrence does not want to be obligated to purchase a property but would like to have the right to purchase a property within 60 days for $300,000. Lawrence should try to negotiate
    a. a contract for deed.
    b. a purchase money mortgage.
    c. a purchase agreement.
    d. an option.

Answer 70

68. d. The answer is an option. An option contract would allow the investor the time to determine if she wants to buy and has the advantage of locking the seller into selling at a price agreed to at the beginning of the process. Contract for deed and purchase money mortgages are forms of seller financing and would not give this type of flexibility. Both require a purchase agreement to create the terms of the financing.

Question 71

72. An injured party can sue if a fraudulent statement was
    a. intentional only.
    b. intentional, reckless, or negligent.
    c. not a negligent mistake.
    d. made with the intention of providing an advantage or profit to the person who made the statement.

Answer 71

72. b. The answer is intentional, reckless or negligent. It is irrelevant whether the person being sued profited from the fraud. The injured party’s damage is the proper important focus.

Question 72

83. Which of the following is FALSE about contingencies?
    a. They must specify what is required to satisfy the contingency.
    b. They must identify who will pay for any costs involved.
    c. Common contingencies include mortgage and inspection contingencies.
    d. They create a contract that is unenforceable.

Answer 72

83. d. The answer is they create a contract that is unenforceable. A contingency creates a voidable contract but not an unenforceable one; if the contingency is not satisfied, the contract is voidable by the party for whose benefit the contingency was created. For example, a home purchase may have a financing contingency stating the loan terms that the buyer will accept; if the only loan available to the buyer is on stricter terms (higher interest rate; longer loan term), the buyer may still decide to proceed with the loan and close the sale.

Question 73

101. A bilateral contract is one in which
     a. the promise of one party is given in exchange for the promise of the other party.
     b. only one of the parties is obligated to act.
     c. something is to be done by one party only.
     d. a restriction is placed in the contract by one party to limit the performance by the other.

Answer 73

101. a. The answer is the promise of one party is given in exchange for the promise of the other party. In a bilateral contract, both parties agree to do something and promises are exchanged. A unilateral contract is a one-sided agreement that does not obligate a second party.

Question 74

129. On Monday, the seller offers to sell his vacant lot to the buyer for $42,000. On Tuesday, the buyer counteroffers to buy for $40,500. On Friday, the buyer learns that several other prospects may be making offers on the property, so he withdraws the counteroffer and agrees to the original asking price of $42,000. Under these conditions, there is
     a. a valid agreement because the buyer accepted the seller’s offer exactly as it was made.
     b. not a valid agreement because the buyer’s counteroffer was a rejection of the seller’s offer, and once rejected, an offer cannot be accepted later.
     c. a valid agreement because the buyer accepted before the seller advised the buyer that the offer is withdrawn.
     d. not a valid agreement because the seller’s offer was not accepted within 72 hours.

Answer 74

129. b. The answer is not a valid agreement because the buyer’s counteroffer was a rejection of the seller’s offer, and once rejected, an offer cannot be accepted later. A counteroffer is a new offer; it voids the original offer.

Question 75

132. Bo signed a purchase agreement, but then the seller decided not to sell. Bo sued the seller successfully and was able to purchase the house. What was the contract remedy if the seller was in default?
     a. Mutual agreement
     b. Unilateral rescission
     c. Liquidated damages
     d. Specific performance

Answer 75

132. d. The answer is specific performance. The buyer does not have the option of liquidated damages since the seller has not brought any earnest money to the contract. Mutual agreement is when the parties terminate and return all items of value to each party as if the contract did not exist. Unilateral rescission is one party terminating.

Question 76

136. If a broker took a listing and later discovered that the client had been declared legally incompetent before signing the listing, the listing is now considered
     a. voidable by the broker.
     b. void.
     c. valid.
     d. voidable by the incompetent client.

Answer 76

136. b. The answer is void. A contract made by a person who has been adjudicated incompetent is void because the judgment of sanity is a matter of public record. The contract is neither valid nor voidable as it is missing the essential element of a contract, that the contract be made by legally competent parties.

Question 77

138. A sales contract requires that the seller re-sod the front lawn before closing. At final walkthrough on the morning of closing, the purchaser sees that only half the lawn has been re-sod. On your advice, he refuses to proceed with closing unless $1,000 is withheld from the seller’s funds in order to pay for completing the job. Your advice
     a. is good, assuming the $1,000 figure is a reasonable amount.
     b. is a conflict of interest.
     c. could result in the purchaser being sued for breach of contract.
     d. was legally required because of your obligations to your client.

Answer 77

138. c. The answer is could result in the purchaser being sued for breach of contract. Agents may not instruct the withholding of funds at closing.