Real Estate National Test Ch 11

Question 1

D: Contract

Answer 1

Is a voluntary agreement or promise between legally competent parties, supported by legal consideration, to perform (or refrain from performing) some legal act.

Question 2

D; Express Contract

Answer 2

The parties state the terms and show their intentions in words, either oral or written.

Most real estate contracts are express contracts and are written.

Question 3

D: Implied Contract

Answer 3

The agreement of the parties is demonstrated by their acts and conduct.

Question 4

D: Statute Of Frauds

Answer 4

That part of state law requires certain instruments, such as deeds, real estate sales contracts, and certain leases, to be in writing to be legally enforceable.

Question 5

D: Bilateral Contract

Answer 5

Both parties promise to do something; one promise is given in exchange for another.

A real estate sales contract is a bilateral contract because the seller promises to sell a parcel of real estate and transfer title to the property to the buyer, who promises to pay a certain sum of money or other lawful consideration for the property.

An exclusive right-to-sell listing contract is a bilateral contract.

Question 6

D: Unilateral Contract

Answer 6

Is a one-sided agreement. One party makes a promise in order to entice a second party to do something.

The offer made in a unilateral contract is usually accepted by the performance of the party to whom the offer is made.

The second party is not legally obligated to act, but if the second party does comply, the first party is obligated to keep the promise.

Question 7

D: Executed Contract

Answer 7

Is a contract in which all parties have fulfilled their promises; the contract has been performed.

At closing, when the contract terms have been met, the sales contract is executed.

Question 8

D: Executory Contract

Answer 8

Exists when one or both parties still have an act to perform.
A sales contract is an executory contract from the time it is signed until closing; ownership has not yet changed hands, and the seller has not received the sales price.

Question 9

D: Offer & Acceptance

Answer 9

Two essential components of a valid contract; a “meeting of the minds.”

An offer is a promise made by the offeror, requesting something in exchange for that promise.

Acceptance is a promise by the offeree to be bound by the exact terms proposed by the offeror.

Question 10

D: Offeror

Answer 10

The person who makes an offer.

Question 11

D: Offeree

Answer 11

The person to whom an offer is made.

Question 12

D: Consideration

Answer 12

Is something of legal value offered by one party and accepted by another as an inducement to perform or to refrain from performing some act.

Consideration is some interest or benefit accruing to one party or some loss or responsibility by the other party.

There should be a statement of the promised consideration in a contract to show that something of value will be given in exchange for the promise of the transfer of the described property, even if the amount of the consideration is yet to be determined.

Question 13

What are the elements of a legal contract?

Answer 13

1. Offer & Acceptance
2. Consideration
3. Consent
4. Legal Purpose
5. Legally Competent Parties

Question 14

D: Unenforceable Contract

Answer 14

A contract that has all the elements of a valid contract, yet neither party can sue the other to force performance of it.

For example, an unsigned contract is generally unenforceable.

Question 15

D: Time of the Essence

Answer 15

This means that each of the elements of the contract must be performed within the specified time.

A party who fails to perform an obligation under the contract on time is liable for breach of contract.

Question 16

Ture or False:

Courts can declare a contract invalid because the contract did not contain a time or date for performance.

Answer 16

True

Question 17

D: Assignment

Answer 17

Refers to a transfer of rights or duties under a contract.

Generally, rights and obligations may be assigned to a third party as long as they do not involve a contract for personal services.

Obligations may be delegated, but the original party remains liable unless specifically released.

Many contracts have a clause that will either allow or forbid assignment.

Question 18

D: Novation

Answer 18

Substitution of a new contract for an existing contract.

The new agreement may be between the same parties, or a new party may be substituted for either in a novation of the parties.

The parties’ intent must be to discharge the old obligation.

When there are many changes to a real estate contract and it is faxed, scanned, or otherwise re-transmitted several times, it may become difficult to decipher.

Novation occurs when a new, clear contract with all the accepted changes is signed by all the parties.

Question 19

D: Liquidated Damages Clause

Answer 19

In a real estate purchase contract specifies the amount of money to which the seller is entitled if the buyer breaches the contract.

The liquidated damages in the event that the buyer defaults may be specified as the buyer’s earnest money deposit (down payment), although in some states, the amount of liquidated damages in a residential purchase contract is limited to a specific percentage of the purchase price—say, 3%—even if the buyer has made a down payment for a larger amount.

Question 20

D: Rescission

Answer 20

Returns the parties to their original positions before the contract, so any monies or property exchanged must be returned.

Rescission is normally a contractual remedy for a breach, but a contract may also be rescinded by the mutual agreement of the parties.

Question 21

True or False:

Rescission returns the parties in a contract to their original position, whereas cancellation terminates a contract without a return to the original position.

Answer 21

True

Question 22

In addition to the essential elements of a contract, a real estate sales contract will include:

Answer 22

1. The sales price and terms.
2. An adequate description of the property and improvements
3. A statement of the kind and condition of the title and the form of deed to be delivered by the seller
4. The kind of title evidence required, who will provide it, and how many defects in the title will be eliminated
5. A statement of all the terms of the agreement between the parties, including any contingencies.

Question 23

When does a offer turn into a sales contract?

Answer 23

If the buyer’s offer is accepted by the seller.

Question 24

D: Counteroffer

Answer 24

Any change by the seller to the terms proposed by the buyer.

The original offer ceases to exist because the seller has rejected it.

The buyer may accept or reject the seller’s counteroffer. If the buyer desires, the process may continue by making another counteroffer.

Any change in the last offer results in a new counteroffer until either the parties reach an agreement or one party walks away.

An offer or counteroffer may be withdrawn at any time before it has been accepted, even if the person making the offer or counteroffer agreed to keep the offer open for a set period.

Question 25

When is a offer is considered accepted?

Answer 25

When the person making the offer has been notified of the other party’s acceptance.

Question 26

Most sales contracts include what information?

Answer 26

1. Purchaser’s name and a statement of the purchaser’s obligation to purchase the property, sometimes including how the purchaser intends to take title.
2. Adequate description of the property, such as the street address; while a street address is adequate to describe most residential properties in a sales contract, it is not adequate for the legal description that will be included in the deed.
3. Seller’s name and a statement of the type of deed the seller agrees to provide, including any covenants, conditions, and restrictions.
4. Purchase price and how the purchaser intends to pay for the property, including earnest money deposits, additional cash from the purchaser, and the conditions of any anticipated mortgage financing.
5. Identification of the closing or settlement agent and closing or settlement instructions.
6. Date for the closing of the transaction and the transfer of possession of the property to the purchaser.
7. Title evidence that will be satisfactory to the buyer
8. A method by which real estate taxes, rents, fuel costs, and other expenses are to be prorated.
9. The outcome of the contract should the property be damaged or destroyed between the time of signing and the closing date
10. Liquidated damages, specific performance, or other statements of remedies available in the event of default.
11. Contingencies or conditions of the sale.
12. Personal property to be left with the premises for the purchaser (such as major appliances or lawn and garden equipment).
13. Fixtures or other items that could be considered part of the real property that is to be removed by the seller before the closing (such as a chandelier or fireplace screen).
14. Transfer of any applicable warranties on items such as heating and cooling systems or built-in appliances.
15. Identification of any leased equipment that must be transferred to the purchaser or returned to the lessor (such as cable television boxes or a water softener).
16. Transfer or payment of any outstanding special assessments.
17. Purchaser’s right to inspect the property shortly before the closing or settlement (often called the final walk-through).
18. Documents to be provided by each party and when and where they will be delivered.
19. Dated signatures of all parties. In some states, the seller’s non-owning spouse may be required to release potential marital or homestead rights. In most states, there must be an agency disclosure statement that indicates the form of representation provided by the real estate professional(s). Documents can be transmitted and signed electronically using one of a variety of software programs, in compliance with the Uniform Electronic Transactions Act (www.uniformlaws.org), which has been adopted by all states except Illinois, New York, and Washington. Those states have their own laws governing electronic transactions.

Question 27

D: Contingencies

Answer 27

Provisions in a contract that require a certain act to be done or a certain event to occur before the contract becomes binding.

Question 28

What 3 elements make up the contingencies clause.

Answer 28

1. The action necessary to satisfy the contingency.
2. The time frame within which the action must be performed.
3. The party who is responsible for paying any costs involved.

Question 29

D: Escape Clause

Answer 29

Permits the seller to continue to market the property until all the buyer’s contingencies have been satisfied or removed.

The buyer may retain the right to eliminate the contingencies if the seller receives a more favorable offer.

Question 30

D: Amendment

Answer 30

Is a change or modification to the existing content of a contract.

An amendment can also be a change to the existing words or provisions in a preprinted contract form.

Amendments to the contract form must be separately initialed or signed by all parties prior to or at the time that the contract is signed.

Even after there is agreement on the contract terms and the contract has been signed by both parties, there may be a need to change one of the contract provisions.

If that happens, a separate agreement stipulating the changed provision can be executed by the parties.

Question 31

D: Addendum

Answer 31

Is any provision added to an existing contract that may change or be an addition to the content of the original.

An addendum includes the original contract’s provisions by reference and must be signed by all parties.

Question 32

D: Option

Answer 32

Is a contract by which an optionor (generally an owner) gives an optionee (a prospective purchaser or tenant) the right to buy or lease the owner’s property at a fixed price within a certain period of time.

The optionee pays a fee as a consideration for the option right.

The optionee must then decide whether to exercise the option right or allow the option to expire.

An option is enforceable by the optionee only (a unilateral contract).

Options must contain all the elements of a valid contract.

Question 33

D: Land Contract

Answer 33

AKA:

1. Contract for Deed
2. Contract of Sale
3. Bond for Title
4. Installment contract
5. Land sales contract,
6. Articles of agreement for a warranty deed

Is a contract by which an optionor (generally an owner) gives an optionee (a prospective purchaser or tenant) the right to buy or lease the owner’s property at a fixed price within a certain period of time.

The optionee pays a fee as a consideration for the option right.

The optionee must then decide whether to exercise the option right or allow the option to expire.

An option is enforceable by the optionee only (a unilateral contract).

Options must contain all the elements of a valid contract.

Question 34

D: Purchase Money Mortgage

Answer 34

Is a contract by which an optionor (generally an owner) gives an optionee (a prospective purchaser or tenant) the right to buy or lease the owner’s property at a fixed price within a certain period of time.

The optionee pays a fee as a consideration for the option right.

The optionee must then decide whether to exercise the option right or allow the option to expire.

An option is enforceable by the optionee only (a unilateral contract).

Options must contain all the elements of a valid contract.

Question 35

True or False:

After both a buyer and a seller have executed a sales contract, the buyer acquires an interest in the land. This interest is called equitable title.

Answer 35

True

Question 36

True or False & Why?

Under a land contract, the buyer obtains both possession and legal title to the property by agreeing to make regular monthly payments to the seller over a number of years.

Answer 36

False

Under a land contract, the buyer obtains possession, but the seller retains legal title until the terms of the contract have been satisfied.

Question 37

True or False & Why?

The interest held by a buyer during the time between the signing of a sales contract and the transfer of title is called equitable title.

Answer 37

True

After both buyer and seller have executed a sales contract, the buyer acquires an interest in the property, called equitable title.

Question 38

True or False & Why?

A real estate contract entered into by a minor is void.

Answer 38

False

An avoidable contract is considered by the courts to be valid if the party who has the option to disaffirm the agreement does not do so within a period of time. A contract entered into by a minor is voidable.

Question 39

The sales associates in a realty office are told by their broker that a $1,000 bonus will be paid to the top-selling sales associate each quarter. This contract is?

A) an implied unilateral contract.

B) an express bilateral contract.

C) an implied bilateral contract.

D) an express unilateral contract.

Answer 39

D. An express unilateral contract

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

Question 40

The buyer has defaulted on a purchase contract, and the seller’s only remedy is to keep the buyer’s earnest money. In this case, the seller’s remedy is known as?

A) liquidated damages.

B) actual damages.

C) specific performance.

D) suit to quiet title.

Answer 40

A. Liquidated Damages

The answer is liquidated damages. If the buyer defaults, the only remedy for the seller may be to keep the earnest money as liquidated damages, if permitted by state law.

Question 41

Another term for the meeting of the minds that occurs in the formation of a contract when there is an offer and acceptance is?

A) counteroffer.

B) mutual assent.

C) consideration.

D) performance.

Answer 41

B. Mutual Assent

The answer is mutual assent. There must be a complete agreement between the parties about the purpose and terms of the contract.