IV. REAL ESTATE CONTRACTS AND AGENCY

Question 1

Contracts can be EXPRESSED or IMPLIED

Answer 1

An express contract is written or stated.

*Examples: a written sales contract, a verbal lease agreement, a written listing, a verbal buyer representation agreement.

An implied contract 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 2

Contracts can be unilateral or bilateral.

Answer 2

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

An option is a unilateral contract.

An option contract 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.

A bilateral contract 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 3

In real estate, the contract is a written promise to pay by the buyer and a written promise to deliver a deed by the seller.

A properly prepared contract commits both parties to its terms.

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

Answer 3

1. Competent parties – sane, sober, consenting adults
2. Offer and acceptance (mutual agreement, or mutual consent) 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.

**Without #4 above, the contract would be valid but not enforceable.

Question 4

Executed vs. Executory Contracts

Answer 4

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

*Executory contract - A contract that is signed but not yet carried out

Question 5

Valid vs. Void Contracts

Answer 5

The Valid contract meets the requirements of a contract 1,2,3, and 5.

The Void or Invalid contract has no binding effect on the parties who made it

Example, an agreement with someone who is documented as insane.

Question 6

Voidable vs. Unenforceable Agreements

Answer 6

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

*Absence of legal ability, competence, or qualifications can be described as incapacity.

The contract can be said to be “voidable due to incapacity.”

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

Question 7

Termination, rescission, and breach of contract

Answer 7

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 cancellation (mutual rescission), the contract is
terminated.

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

Question 8

Liquidated, punitive and compensatory damages

Answer 8

Liquidated damages are money damages set out in the contract.

Punitive damages punish the defaulting party.

Compensatory damages are set to cover the actual injury or economic loss.

*Punitive and compensatory damages must be pursued in court.

Question 9

Statute of Frauds

Answer 9

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.

**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 10

A clause in a contract that allows each party to hold the
other to strict performance by the date specified is called:

Answer 10

Time is of the essence Clause

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 11

A properly completed form with a price less than, equal to, or more than the seller’s asking price and signed by the buyer.

Answer 11

An Offer - The offer may be called a purchase agreement.

The purpose is to open negotiations between the buyer and the seller.

• 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 12

Any change to the original offer by the party receiving that offer terminates that offer. If a party receiving an offer changes even one small item in the offer before signing.

This is a:

Answer 12

Counteroffer

Therefore, a counteroffer is actually a rejection of the offer and the presentation of a new offer.

The purpose of a counteroffer is to continue negotiations and work towards agreement.

A counteroffer usually accepts some of the terms of the original offer and changes others.

*The Offer becomes a contract when it is accepted, and acceptance is communicated.

Question 13

Monies not necessary in a sales contract; it is not the consideration.

Answer 13

Earnest money

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 14

A condition in a contract, which has not yet been met, is a:

Answer 14

Contingency

Common contingencies include financing, the sale of another property, and inspections.

A seller can choose to limit the length of time for a buyer’s contingency to be met with an escape clause.

If a seller wants to modify or limit a contingency, they should speak with an attorney.

If a contingency 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.

Question 15

SELLER OPTIONS IF THE BUYER DEFAULTS:

Answer 15

• 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- ask the court
  to force the buyer to buy the property
• Sue for money damages – money damages are both actual/compensatory and punitive
• Decide on mutual rescission – release the buyer

Question 16

BUYER OPTIONS IF THE SELLER DEFAULTS:

Answer 16

• 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 17

The Law that Governs the relationship between a broker and his principal.

The principal is often referred to as the client.

Answer 17

COMMON LAW OF AGENCY

The Principal-Agent relationship is a fiduciary relationship. The relationship is based on trust.

All states require the disclosure of information about agency, 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 18

As licensees in agency relationships, we must treat all parties with honesty and fairness, but we have two levels of responsibility:

Answer 18

1. Public responsibility: 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 interest.

2. Fiduciary responsibility: 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.

Agency should be created by written agreement. However, agency can be created orally or by ratification.

Ratification occurs when a principal accepts actions that were not authorized by the agency
agreement.

Implied agency occurs as a result of actions. With implied agency, there is no written
or oral agreement.

Question 19

There are three Levels of Agency:

Answer 19

1. Universal agency 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.
2. General agency 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 general agency.
   (Owner - Property Manager) (Broker - Sales agent)
3. Special or limited agency 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)

Both employment contracts/agreements and Power of Attorney (P.O.A.) can be used to create the
fiduciary or agency relationship.

A person with power of attorney is called an attorney-in-fact.

Question 20

A written agreement is the preferred method of creating agency

These agreements are:

Answer 20

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.

Buyer Representation Agreements and Listing Agreements create special agency relationships,

but a Management Agreement creates a general agency relationship.

Question 21

One who does not act as a dual agent when one of the broker’s buyer clients wants to purchase an in-house listing is a:

Answer 21

Single Agency broker

Instead, the broker recommends that one of the parties (usually the buyer) either find another broker or continue in the transaction unrepresented.

Therefore, single agency is the practice of representing either the buyer or the seller but never both in the same transaction.

*An Apartment locator is an example of a single agency broker. The apartment locator
typically only represents tenants

Question 22

A licensee who assists a buyer and seller in reaching an agreement
in a real estate transaction but does not have an agency relationship with either party is a:

Answer 22

Transactional broker/facilitator

This agent can also be called a transaction coordinator, a finder, or a middleman.

Question 23

Practicing under the (Common Law of Agency) and agrees to represent
both parties with their written permission is a:

Answer 23

Dual agency broker

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 24

In Texas, a broker who agrees to represent both parties in a single transaction must do so as an:

Answer 24

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.

Dual Agency or Intermediary may only be permitted if both the buyer and seller agree in writing.

(IABS) Information about your role as an Intermediary or a dual agent should be given before a party reveals any confidential information.

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 25

In an agency relationship, specific duties exist.

A PRINCIPAL’S duties to an agent are: (CRIP)

Answer 25

• Compensation – pay the commission when earned
• Reimbursement – repay approved expenses
• Indemnification – defend the agent when the agent acts on the client’s instruction
• Performance – comply with the written agreement

Question 26

In an agency relationship, specific duties exist.

An AGENT’S duties to his principal are: (OLD CAR)

Answer 26

• Obedience – adhere to given instructions
• Loyalty – (considered the agent’s primary or most important duty) place your client’s best
  interests first
• Disclosure – reveal all known facts, give non-legal advice and opinions
• Confidentiality – protect the private information of your client
• Accounting – handle funds with care (This is the easiest duty of a dual agent. For all other
  duties, the buyer and seller can have opposing interests). A broker handling client funds
  must never mix them with his/her own (commingling) or spend client or commingled funds
  (conversion).
• Reasonable care – protect the property and legal interest of your client.
  Failure of an agent to carry out his prescribed duties is negligence. Negligence is defined as failure
  to use ordinary or reasonable care. Negligence is carelessness.

**An agent is liable for all the professional acts he performs for his principal, and a principal is liable
for all the acts of his agent.

Question 27

When an agent is also the seller or the buyer, this is called

Answer 27

Agency Coupled with an Interest

*This dual role must ALWAYS be disclosed.