Unit 11 Exam

Question 1

What is another reason a contract may be voidable?

A)
A party is suffering from a mental illness.
B)
The contract was made with intent to fraud.
C)
All of these may be reasons a contract is voidable.
D)
One party was threatened or coerced into signing against that party’s will.

Answer 1

Explanation
The answer is all of these may be voidable. A voidable contract appears on the surface to be valid, but it may be rescinded or disaffirmed by one or both parties based on some legal principle. Contracts with minors, mentally ill persons, or entered into under duress or intent to fraud or misrepresent are voidable.

Question 2

State whether each is Void, Voidable, or Valid

A)
Has no legal force or effect because it lacks some or all of the essential elements of a contract

B)
A deed executed by someone who is mentally impaired at the time

C)
A deed executed by a minor

D)
Meets all essential elements that make it legally sufficient, or enforceable, and is binding in a court of law

E)
Appears on the surface to be valid, but may be rescinded or disaffirmed by one or both parties based on some legal principle

F)
A forged name was used in the contract

Answer 2

Void = A, F
Voidable = B, C, E
Valid = D

Question 3

In a unilateral contract, both parties promise to do something—one promise is given in exchange for another.

Answer 3

False

Question 4

MOST real estate contracts are implied contracts.

Answer 4

False

Question 5

Match the following with the correct term. Novation, Specific Performance, Assignment

A)
Transfer of rights or duties under a contract

B)
The right of a buyer to sue a seller who breaches a real estate sales contract

C)
Substitution of a new contract for an existing contract

Answer 5

Novation = C

Specific Performance = B

Assignment = A

Question 6

Substitution of a new contract for an existing contract is called novation.

Answer 6

True

Question 7

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

Answer 7

True

Question 8

Match the following with either Amendment or Addendum:

1)
A change or modification to the existing content of a contract

2)
A provision added to an existing contract that may change or be an addition to the content of the original

3)
Used to change existing words or provisions in a preprinted contract form

4)
Includes the original contract’s provisions by reference

Answer 8

Amendment = 1, 3

Addendum = 2, 4

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

Amendment is a change or modification to the existing contents of a contract.

Question 9

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 9

True

Question 10

In some states, instead of preparing a complete sales contract, real estate professionals may prepare a shorter document known as a briefer.

Answer 10

False

Question 11

Under the statute of frauds, all contracts for the sale of real estate must be

A)
accompanied by earnest money deposits.

B)
on preprinted forms.

C)
in writing to be enforceable.

D)
originated by a real estate professional.

Answer 11

Explanation
The answer is in writing to be enforceable. A statute of frauds calls for real estate sales contracts to be in writing. Such statutes do not address who writes the agreements or on what forms they are written. Earnest money is not an essential feature of a contract of sale, although it is often mistakenly said to be.

Question 12

Earnest money

A)
is required as part of all purchase agreements.

B)
may become the seller’s if the buyer defaults.

C)
is considered to be consideration and is
required in a purchase offer.

D)
will be a credit to the seller and a debit to the buyer at closing.

Answer 12

Explanation
The answer is may become the seller’s if the buyer defaults. Earnest money is not consideration, so it is not an essential element of a contract nor is it required; it is a show of good faith on the part of the buyer and liquidated damages for the seller, if the buyer defaults.

Question 13

A buyer and a seller enter a contract for the sale of a three-bedroom residential property. Shortly after the contract is in place, the buyer has an inspection done. As a result of the inspection, the buyer wants the seller to fix the fence and replace the garage door opener. The seller agrees. How should the parties proceed?

A)
They have to proceed under the terms of the current contract; because the parties are already under contract, no further negotiations are allowed.

B)
The parties must document this agreement in the special provisions paragraph of the contract.

C)
The broker must contact an attorney to get advice.

D)
The parties should amend the contract.

Answer 13

Explanation
The answer is the parties should amend the contract. If a change to the terms of the contract is made after all parties have signed off, a separate amendment must be prepared requiring the signature of all parties.

Question 14

The main difference between an amendment and an addendum is that an amendment

A)
is a change to the existing content in the contract.

B)
does not require signatures from all parties.

C)
is the same as a contingency.

D)
is additional material to be added to a contract.

Answer 14

Explanation
The answer is a change to the existing content in the contract. The use of an amendment and an addendum are often confused. An amendment is a change to what is in the original contract; an addendum is material being added to the contract. In either case, both parties must sign off on the change or addition for the contract to remain in full force.

Question 15

A contract for the sale of real estate that does not state the consideration and provides no basis on which the consideration could be determined is considered

A)
enforceable.
B)
voidable.
C)
void.
D)
executory.

Answer 15

Explanation
The answer is void. A contract is void when a consideration is not stated because consideration is an essential element of a contract.

Question 16

A buyer under an executory contract has found numerous inspection issues the seller is unwilling to repair. The seller and the buyer agree to terminate the contract with all things of value returned to each party. This is known as

A)
specific performance.

B)
mutual performance.

C)
mutual rescission.

D)
liquidated damages.

Answer 16

Explanation
The answer is mutual rescission. When both parties to a contract are returned to their original position, it is known as mutual rescission.

Question 17

The buyer and the seller are negotiating an offer. During the final stages of negotiations, the buyer crosses out part of paragraph 19 that states the seller has the right to continue to show the property and receive, negotiate, and accept back up offers and the seller agrees. What are the implications?

A)
This is illegal; only a real estate attorney can do this.

B)
This can only take place on an amendment form.

C)
The change should be initialed in the margin by the buyer before presentation to the seller.

D)
The broker will need to have a separate written agreement drawn up for the parties.

Answer 17

Explanation
The answer is the change should be initialed in the margin by the buyer before presentation to the seller. All changes and additions to a preprinted contract are usually initialed in the margin or on the rider by both parties when a contract is signed.

Question 18

A buyer offers to buy a seller’s house for the full $215,000 asking price. The offer contains this clause: “Possession of the premises on August 1.” The seller is delighted to accept the buyer’s offer and signs the contract. First, however, the seller crosses out “August 1” and replaces it with “August 3,” because the seller will be out of town until then. The seller begins scheduling movers. What is the status of this agreement?

A)
While the seller technically rejected the buyer’s offer, the seller’s behavior in scheduling movers creates an implied contract between the parties.

B)
The seller has rejected the buyer’s offer and made a counteroffer, which the buyer is free to accept or reject.

C)
Because the seller changed the date of possession rather than the sales price, there is a valid contract.

D)
The seller has accepted the buyer’s offer. Because the reason for the change is out of the seller’s control, the change is of no legal effect once the seller signed the contract.

Answer 18

Explanation
The answer is the seller has rejected the buyer’s offer and made a counteroffer, which the buyer is free to accept or reject. Even changing the smallest of terms, for whatever reason, constitutes a rejection and counteroffer that the other party is not under obligation to accept.

Question 19

In a preprinted sales contract, several words were crossed out or inserted by the parties. To eliminate future controversy as to whether the changes were made before or after the contract was signed, the usual procedure is to

A)
have both parties initial or sign in the margin near each change.

B)
have each party write a letter to the other approving the changes.

C)
write a letter to each party listing the changes.

D)
redraw the entire contract.

Answer 19

Explanation
The answer is have both parties initial or sign in the margin near each change. All parties must initial or sign the changes. To draw a new contract would be to invite a new round of negotiation. Letters approving all changes might then be treated as part of the contract, but such a cumbersome procedure is seldom used.

Question 20

A promise for a promise is one way to describe

A)
a unilateral contract.

B)
a multiparty agreement.

C)
a bilateral contract.

D)
consent.

Answer 20

Explanation
The answer is a bilateral contract. In a bilateral contract, both parties promise to do something, but in a unilateral contract, one party makes a promise in order to entice a second party to do something.

Question 21

A buyer makes an offer on a seller’s house. Pursuant to this offer, the buyer is obligated to perform only if the buyer is first able to sell a condominium. This is an example of

A)
an option contingency.

B)
a mortgage contingency.

C)
a time-is-of-the-essence contingency.

D)
a property sale contingency.

Answer 21

Explanation
The answer is a property sale contingency. A property sale contingency protects a buyer who has to sell a property in order to buy the seller’s property.

Question 22

Mutual agreement to the terms of a real estate contract is indicated by

A)
acknowledgment.

B)
signatures.

C)
default remedies.

D)
offer and acceptance.

Answer 22

Explanation
The answer is offer and acceptance. An offer and acceptance would show that both parties mutually agree to a contract.

Question 23

The document that can be used to begin negotiations between the parties is

A)
the letter of intent.

B)
the preliminary title report.

C)
the land contract.

D)
the addendum.

Answer 23

Explanation
The answer is the letter of intent. A letter of intent can be used to begin negotiations in a complex transaction. A preliminary title report is made during preparation for the closing of a transaction. An addendum is used to provide additional information to the contract and a land contract is used when the property seller finances a transaction.

Question 24

If a seller allows a buyer to back out of a contract, returns the earnest money, and both are back to the positions they held before the contract, the contract has been

A)
rescinded.

B)
cancelled.

C)
executed.

D)
assigned.

Answer 24

Explanation
The answer is rescinded. Rescission allows both parties to return to their original positions before the contract, so any monies exchanged must be returned.

Question 25

If, upon the receipt of an offer to purchase a property, the seller makes a counteroffer, the prospective buyer is A) bound by the original offer. B) bound by whichever offer is lower. C) relieved of the original offer. D) not able to counter the counteroffer.

Answer 25

Explanation The answer is relieved of the original offer. When the original offer is rejected by the seller, it ceases to exist. The buyer may accept or reject the seller's counteroffer, or make a counter to the counteroffer.

Question 26

Which of these is NOT typically a factor in determining the amount of the earnest money deposit? A) Whether it is an amount sufficient to cover the broker fees B) Whether it is an amount sufficient to compensate the seller for taking the property off the market C) Whether it is an amount sufficient to discourage the buyer from defaulting D) Whether it is an amount sufficient to cover any expenses the seller might incur if the buyer defaults

Answer 26

Explanation The answer is whether it is an amount sufficient to cover the broker fees. Broker fees are not the focus when the parties are working out an agreement concerning the earnest money deposit.

Question 27

Which of these is NOT typically a factor in determining the amount of the earnest money deposit? A) Whether it is an amount sufficient to cover the broker fees B) Whether it is an amount sufficient to compensate the seller for taking the property off the market C) Whether it is an amount sufficient to discourage the buyer from defaulting D) Whether it is an amount sufficient to cover any expenses the seller might incur if the buyer defaults

Answer 27

Explanation The answer is whether it is an amount sufficient to cover the broker fees. Broker fees are not the focus when the parties are working out an agreement concerning the earnest money deposit.

Question 28

A contract is said to be executed when it includes A) the competent parties. B) the offer and acceptance. C) the consideration. D) the signatures of the parties.

Answer 28

Explanation The answer is the signatures of the parties. A contract is said to be executed when it is signed, even though the parties have not fully executed the contract by fulfilling all of the promises that it contains.

Question 29

A clause in a purchase agreement that would allow the buyer to cancel the contract if the buyer cannot secure financing from a lender is A) an acceleration clause. B) a due-on-sale clause. C) a release clause. D) a contingency clause.

Answer 29

Explanation The answer is a contingency clause. Contingency clauses are clauses that allow the contract to be canceled if an event happens or does not happen, such as the buyer being unable to secure financing. A Contingency by definition is a problem that arises in an unforeseen event

Question 30

A buyer would like to place an offer on a property but doesn't have good credit. Which of the following is a logical next step? A) The broker could find out whether the seller is willing to provide financing for the buyer; if the seller agrees, the parties can address the financing through the special provisions paragraph of the contract. B) The broker needs to refer the buyer to the real estate broker down the street, because the buyer probably won’t be able to get a loan. C) The buyer needs to forget about purchasing a property until the market and lending improve. D) The broker could find out whether the seller is willing to provide financing for the buyer; if the seller agrees, they could fill out a seller financing addendum.

Answer 30

Explanation The answer is the broker could find out whether the seller is willing to provide financing for the buyer; if the seller agrees, they could fill out a seller financing addendum. In the case where the seller has agreed to provide the financing for the sale, an addendum needs to be prepared outlining credit terms, taxes, assessments, payment information, all disclosures, title insurance, and any other pertinent information under local jurisdiction regulations.

Question 31

A legally enforceable agreement in which two parties promise to do something for each other is classified as A) a bilateral contract. B) an escrow agreement. C) an option agreement. D) a legal pledge.

Answer 31

Explanation The answer is a bilateral contract. A contract is bilateral if each party to the agreement promises to do something in exchange for the other's promise to do something.

Question 32

To make a change to a contract A) the parties must request the change in writing to their broker. B) the parties must state the change in the special provisions paragraph. C) the parties may agree to change orally. D) an amendment must be used.

Answer 32

Explanation The answer is an amendment must be used. In order to make any changes to the contract, a separate written amendment must be incorporated into the original contract and signed by all the parties.

Question 33

A buyer and a seller enter a contract for the sale of a three-bedroom residential property. Shortly after the contract is in place, the buyer has an inspection done. As a result of the inspection, the buyer wants the seller to fix the fence and replace the garage door opener. The seller refuses. How should the parties proceed? A) The buyer can terminate the contract. B) The brokers need to encourage the parties to seek legal counsel. C) The contract should provide the buyer's remedy if the seller refused to make indicated repairs. D) The seller can terminate the contract. The answer is the contract should provide the buyer's remedy if the seller refused to make indicated repairs.

Answer 33

Explanation There may be a dollar limit to repairs indicated by the property inspection that the buyer requests the seller to perform. Buyer and seller also may come to an accommodation on the work to be performed, such as the seller giving the buyer a credit for an agreed amount, but the buyer arranging for the work only after taking possession of the property.

Question 34

A contract that has no legal force or effect is A) voidable. B) enforceable if no one objects. C) void. D) valid if the parties agree to its terms.

Answer 34

Explanation The answer is void. A contract that is void was never a legal contract because it lacked some or all of the essential elements of a contract.

Question 35

An example of specific performance for breaching a real property purchase contract would be A) a court action to force compliance with the contract. B) damages for the taking of private land for public use. C) the forfeiture of the earnest money deposit. D) recovery of money lost as a result of the breach.

Answer 35

Explanation The answer is a court action to force compliance with the contract. Specific performance means that if one breaks the promise, the other party has the legal right to sue in court to make the defaulting party perform. Specific performance is a more likely remedy if the seller defaults, because every piece of real property is considered unique. If the buyer defaults, the seller may need to sell the property to a different buyer and sue the first buyer for any loss suffered if the purchase price is reduced.

Question 36

A special feature of a residential lease option is that it may provide for A) the optionor to terminate the option without notice. B) conditions to be met to make the property suitable for the optionee. C) a portion of lease payments to be applied to the purchase price if the option is exercised. D) a change of zoning.

Answer 36

Explanation The answer is a portion of lease payments to be applied to the purchase price if the option is exercised. Commercial lease options often provide for specific conditions to be met, such as a change in zoning, before the option is exercised.

Question 37

A real estate licensee may assist consumers with contract preparation using preprinted forms as long as A) an attorney reviews the forms after signing. B) an attorney is present when the forms are completed. C) the fee for completing the forms is kept separate from the sales commission. D) no separate fee is charged for completing the forms.

Answer 37

Explanation The answer is no separate fee is charged for completing the forms. The parties to a real estate transaction always should be advised to have sales contracts and other legal documents examined by their lawyers before signing them to ensure their accuracy.

Question 38

The informal document that may be used to begin negotiations between the parties in a complex transaction is A) the offer. B) the binder. C) the contingency. D) the letter of intent.

Answer 38

Explanation The answer is the letter of intent. A letter of intent can be used to indicate the interest of a prospective buyer or lessee and, if the intent is reciprocated by the property owner, to begin negotiations. A contingency is any additional condition that must be satisfied before a sales contract is fully enforceable. A binder is a short version of a sales contract that is used until a more complete version is drafted.

Question 39

A contract that has been signed by all parties is A) completed. B) implied. C) executed. D) enforceable.

Answer 39

Explanation The answer is executed. An executed contract also is one in which all parties have fulfilled their promises; that is, the contract has been performed. An executed (signed) contract may or may not be enforceable depending on its terms.

Question 40

Substitution of a new contract for an existing contract is called A) assignment. B) novation. C) consideration. D) conveyance.

Answer 40

Explanation The answer is novation. Substitution of a new contract for an existing contract is called novation.

Question 41

A property buyer wants to take over the seller's mortgage. The lender releases the seller from the obligation, substituting the buyer as the party liable for the debt. This new agreement is called A) a conversion. B) a novation. C) an assignment. D) a consideration.

Answer 41

Explanation The answer is a novation. Creating a new contract to discharge the old obligation is called novation.

Question 42

On March 7, a buyer and a seller execute a contract for the purchase of the seller's property. Closing is set for June 10. On April 15, the property is struck by lightning and destroyed by the resulting fire. If the Uniform Vendor and Purchaser Risk Act has been adopted by the state in which the property is located, which party bears liability for the loss? A) Under the act, neither the buyer nor the seller bears the loss. A state fund covers the loss. B) Under the act, the buyer and the seller share the loss equally. C) Under the act, the seller bears the loss alone. D) The act does not apply. The buyer bears the loss alone, by virtue of his equitable title.

Answer 42

Explanation The answer is under the act, the seller bears the loss alone. In states that have adopted the Uniform Vendor and Purchaser Act, the seller remains responsible for the property until the day of closing.

Question 43

In case the buyer decides not to buy for no legal reason, the contract may provide that the earnest money be used as A) nominal damages. B) liquidated damages. C) punitive damages. D) actual damages.

Answer 43

Explanation The answer is liquidated damages. Liquidated damages limit the compensation available to the injured party should a breach of contract occur.

Question 44

A buyer has given rights under a sales contract to a third party but has not been released of the liability under the contract. This is called A) transference. B) assignment. C) fraud. D) novation.

Answer 44

Explanation The answer is assignment. Assignment refers to a transfer of rights or duties under a contract. The obligations may be delegated to a third party but the original party remains primarily liable unless specifically released.

Question 45

Which of the following describes an executed contract? A) Two parties have yet to perform an obligation under the agreement B) A sales contract is signed, but ownership has not yet changed hands. C) One party has yet to perform an obligation under the agreement D) All obligations under the agreement have been performed

Answer 45

Explanation The answer is all obligations under the agreement have been performed. A contract is either executed or executory, depending on whether the agreement has been completed or some obligation under the agreement has yet to be performed. An executed contract is one in which all parties have fulfilled their promises; the contract has been performed. An executory contract 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. At closing, when the contract terms have been met, the sales contract is executed.

Question 46

A contract that exchanges a promise for a promise is said to be A) omnilateral. B) bilateral. C) relateral. D) unilateral.

Answer 46

Explanation The answer is bilateral. When all parties to the contract make promises to give something, the contract is said to be bilateral.

Question 47

A buyer makes an offer on a house, and the seller accepts in writing. What is the current status of this relationship? A) The buyer and seller have an express, bilateral executed contract. B) The buyer and seller have an express, bilateral executory contract. C) The buyer and seller have an implied, unilateral executory contract. D) The buyer and seller do not have a valid contract until the seller delivers title at closing.

Answer 47

Explanation The answer is the buyer and seller have an express, bilateral executory contract. Because the seller has promised to sell and the buyer has promised to buy, it is clearly a bilateral contract. It is express because they announced their intentions in writing. The contract is executory because the sale has not yet closed.

Question 48

A minor signed a sales contract to purchase a home. Which of the following describes this contract? A) Voidable by the seller B) Void C) Valid and binding D) Voidable by the minor

Answer 48

Explanation The answer is voidable by the minor. Minors who are parties to a contract always make the contract voidable. It is incumbent upon the seller to not allow a minor to enter into a contract. The seller will have to wait for the minor to cancel or move forward.

Question 49

The parties are returned to their original positions before the contract was created if there is A) a novation. B) a counteroffer. C) an assignment. D) a rescission.

Answer 49

Explanation The answer is a rescission. Any monies or property exchanged must be returned.

Question 50

An option to purchase binds which of the following parties? A) Neither buyer nor seller B) Buyer only C) Both buyer and seller D) Seller only

Answer 50

Explanation The answer is seller only. The potential buyer (optionee) who purchases an option to purchase is not bound to purchase the property. Should the optionee decide to exercise the option, the optionor (seller) is bound to proceed with the sale in keeping with all the details contained in the option.

Question 51

A buyer and a seller enter into a sales contract for the sale of a home. The seller backs out of the contract at the last minute, and the buyer suffers a financial loss of $1,500 and must rent a home in which to live. Unless the contract provides otherwise, all of these are legal actions that are likely to succeed EXCEPT A) the buyer may sue the seller for damages to recover the $1,500 loss. B) the buyer may sue the seller for the rent he paid. C) the buyer may sue the seller for specific performance, forcing the sale of the home to the buyer. D) the seller is not liable because the buyer should not have incurred the $1,500 cost before the sale.

Answer 51

Explanation The answer is the seller is not liable because the buyer should not have incurred the $1,500 cost before the sale. In this case, the seller breached the contract without legal excuse. The buyer is likely to be successful in a suit against the seller for specific performance, for the $1,500 loss, and for the cost of rent as a hardship. However, many contracts limit the remedies available to parties.

Question 52

The period during which the parties to a contract may begin legal action to enforce their rights is determined by a state's A) executive branch. B) statute of frauds. C) real estate authority. D) statute of limitations.

Answer 52

Explanation The answer is statute of limitations. The statute of limitations will vary for different legal actions, and any rights not enforced within the applicable time period are lost.

Question 53

A buyer who owns the property in equity has A) an executory contract. B) a liquidated damages contract. C) an option contract. D) a lease.

Answer 53

Explanation The answer is an executory contract. During any point in the executory contract (time period between signed offer to title transfer), the buyer has equitable title (also called the owner in equity).

Question 54

A buyer makes an offer on a seller's house and the seller accepts. Both parties sign the sales contract. At this point, the buyer has what type of title to the property? A) Voidable B) Contract C) Equitable D) Escrow

Answer 54

Explanation The answer is equitable. Upon formation of the agreement of sale between the seller and the buyer, the buyer received equitable title. Upon later delivery and acceptance of the deed, the buyer will also receive legal title—sometimes called actual title.

Question 55

A broker accepted a listing and later discovered that the client had been declared incompetent by a court. What is the current status of the listing? A) The listing must be renegotiated between the broker and the client, based on the new information. B) The listing entitles the broker to collect a commission from the client’s guardian or trustee if the broker produces a buyer. C) The listing is of no value to the broker because the contract is void. D) The listing is unaffected because the broker acted in good faith as the owner’s agent.

Answer 55

Explanation The answer is the listing is of no value to the broker because the contract is void. If the seller has been declared legally incompetent, the listing is void.

Question 56

If a contract seems to be valid, but neither party can sue the other to force performance, the contract is said to be A) voided. B) unenforceable. C) breached. D) rescinded.

Answer 56

Explanation The answer is unenforceable. An unenforceable contract may appear to be valid; however, neither party can sue the other to enforce performance.

Question 57

The buyer of real estate takes possession but not legal title to property under A) a purchase money mortgage. B) a land contract. C) an option. D) a counteroffer.

Answer 57

Explanation The answer is land a contract. The land contract, also known as a contract for deed, contract of sale, installment contract, or one of many other names, provides for the buyer of property to take possession and acquire equitable title, while legal title is held by the seller until sufficient payment is made by the buyer to the seller. With a purchase money mortgage, the buyer receives legal title to the property but places a security interest on it in favor of the seller.

Question 58

A 14-year-old comes into a brokerage office and says, "I want to make an offer on this property. Here is a certified check for 10% of the asking price. Please help me with the paperwork." Why should the broker be concerned? A) The sales contract may be disaffirmed by the minor. B) Because one of the parties is a minor, the contract is illegal. C) The sales contract will be void because the minor's age is a matter of public record. D) The earnest money deposit must be at least 20% of the asking price when a minor is involved in the transaction.

Answer 58

Explanation The answer is the sales contract may be disaffirmed by the minor. A minor may void the contract by saying, "I am underage." A minor's guardian may purchase for the minor.

Question 59

A buyer purchased a home under a land contract. In this form of seller-carry lending, the seller A) holds the deed to the home until final payment. B) passes title at the closing and has a second lien against the property. C) has equitable title and the buyer has legal title. D) holds the deed and possession of the property until final payment.

Answer 59

Explanation The answer is holds the deed to the home until final payment. The deed is passed to the purchaser in a land (installment) contract upon payment in full.

Question 60

Earnest money A) is considered to be consideration and is required in a purchase offer. B) may become the seller’s if the buyer defaults. C) is required as part of all purchase agreements. D) will be a credit to the seller and a debit to the buyer at closing.

Answer 60

Explanation The answer is may become the seller's if the buyer defaults. Earnest money is not consideration, so it is not an essential element of a contract nor is it required; it is a show of good faith on the part of the buyer and liquidated damages for the seller, if the buyer defaults.

Question 61

Under an installment contract, the legal title to the property is held by A) the trustor. B) the vendee. C) the vendor. D) the trustee.

Answer 61

Explanation The answer is the vendor. A vendor is the seller who retains legal title to the property during an installment contract term.

Question 62

An amendment A) is rarely used in real estate contracts. B) changes the contract. C) clarifies the promises made in a contract. D) has no effect on farm and ranch contracts.

Answer 62

Explanation The answer is changes the contract. An amendment is a change or modification to the existing content of a contract.

Question 63

A buyer signs a contract under which he is given the right to purchase a property for $130,000 anytime in the next six months. The buyer pays the current owner $500 at the time that contract is signed. Which of the following BEST describes this agreement? A) Installment B) Contingency C) Sales D) Option

Answer 63

Explanation The answer is option. The buyer has purchased an option. The $500 is the option price. If the option isn't exercised within the three-month option period, the option will lapse.

Question 64

A transfer of rights or duties under a contract is A) an assignment. B) a counteroffer. C) a novation. D) a rescission.

Answer 64

Explanation The answer is an assignment. Generally, rights and obligations under a contract may be assigned to a third party as long as they do not involve a contract for personal services. Many contracts have a clause that either allows or forbids assignment.

Question 65

The transfer of rights or duties under a contract to a third party is called A) a novation. B) a conveyance. C) a substitution D) an assignment.

Answer 65

Explanation The answer is an assignment. The transfer of rights or duties under a contract to a third party is called an assignment.

Question 66

While suffering from a mental illness that caused delusions, hallucinations, and loss of memory, a person signed a contract to purchase real estate. Which statement regarding the contract to purchase is TRUE? A) The contract is void. B) The contract is fully valid and enforceable. C) The contract lacks consent. D) The contract is voidable.

Answer 66

Explanation The answer is the contract is voidable. A person suffering from a mental illness may either declare the contract void or hold the seller of the real estate to the contract. That is to say, the contract is voidable, but only by the person who is mentally ill.

Question 67

A buyer and a seller sign a contract for the sale of real property. A few days later, they decide to change many terms of the contract, while retaining the basic intent to buy and sell. The process by which the new contract replaces the old one is called A) assemblage B) novation. C) rescission. D) assignment.

Answer 67

Explanation The answer is novation. When a new contract replaces an old one, the process is novation. The new contract may be between the same parties or between one of the original parties and a new party. In any event, the parties' obligations under the old contract are terminated.

Question 68

All of these are essential to a valid real estate sales contract EXCEPT A) an earnest money deposit, held in an escrow account. B) offer and acceptance. C) consideration. D) legally competent parties.

Answer 68

Explanation The answer is an earnest money deposit, held in an escrow account. Earnest money is an optional term in a contract, not a requirement. The essential elements of a contract are offer and acceptance, consideration, legally competent parties, consent, and legal capacity.

Question 69

Under what circumstance may a real estate professional practice law? A) Only if the real estate professional is also a licensed attorney B) Only when attending the closing C) Only when drafting real estate contract forms D) Only when entering into an implied contract

Answer 69

Explanation The answer is only if the real estate professional is also a licensed attorney. Real estate professionals may be permitted by state law to use contract forms drafted by attorneys and provided by their trade associations or employing brokers. A real estate professional cannot practice law unless also licensed as an attorney.

Question 70

The buyer has made an offer that the seller has accepted, and proper notice has been given to the buyer of the seller's acceptance. The offer is now considered A) an assignment. B) an executory contract. C) a unilateral contract. D) an executed contract.

Answer 70

Explanation The answer is an executory contract. The period between when the contract is agreed to and signed by both parties and the time it is executed (closed) is called the executory period.

Question 71

The buyer and seller agreed to a closing date of September 7 and that time is of the essence. Which of these is the closest meaning of the phrase? A) Closing must be on or before September 7. B) If either party gives notice, the date can be moved back. C) If closing is not held on September 7, there is an automatic extension built in. D) The date of closing may only be delayed by one day at a time.

Answer 71

Explanation The answer is closing must be on or before September 7. Time is of the essence requires that the contract be completed during that time frame; otherwise, the party who fails to perform on time is liable for breach of contract.

Question 72

All of the following are essential to the formation of a contract EXCEPT A) performance. B) consideration. C) offer. D) acceptance.

Answer 72

Explanation The answer is performance. Performance becomes an issue when a contract is terminated, not when it is formed.

Question 73

If a property owner is forced under threat of violence to sign a contract to sell property for a low price, the contract is voidable because there is lack of A) offer and acceptance. B) consideration. C) discharge. D) consent.

Answer 73

Explanation The answer is consent. Because a contract must be entered into by consent as a free and voluntary act of each party, a contract made under duress deprives a person of that ability. The contract is voidable by the injured party.

Question 74

The amount of the earnest money in a sales contract should A) pay the broker's commission. B) discourage the buyer from walking away from the agreement. C) pay for any required inspections. D) cover any expenses the buyer might incur if the seller defaults.

Answer 74

Explanation The answer is discourage the buyer from walking away from the agreement. The amount of earnest money should be sufficient that the seller feels reassured that the buyer is committed to the purchase. Earnest money is not used to pay for inspections or the broker's commission.

Question 75

Under a land contract, the buyer is called A) the vendor. B) the vendee. C) the beneficiary. D) the trustor.

Answer 75

Explanation The answer is the vendee. Under a land contract, the buyer is called the vendee.

Question 76

A buyer purchased a home under a land contract. In this form of seller-carry lending, the seller A) holds the deed to the home until final payment. B) has equitable title and the buyer has legal title. C) passes title at the closing and has a second lien against the property. D) holds the deed and possession of the property until final payment.

Answer 76

Explanation The answer is holds the deed to the home until final payment. The deed is passed to the purchaser in a land (installment) contract upon payment in full.

Question 77

When the parties agree to terms and show their intentions in words, whether orally or written, the agreement is said to be A) an executed contract. B) a voidable contract. C) a unilateral contract. D) an express contract.

Answer 77

Explanation The answer is an express contract. In an express contract, the parties state the terms and show their intentions in words—oral or written. Most real estate contracts are express contracts; they have been committed to writing. Under the statute of frauds, certain types of contracts must be in writing to be enforceable in a court of law.

Question 78

A buyer and a seller agree on a purchase price of $300,000 for a house. The contract contains a clause stating that "time is of the essence." Which statement is TRUE? A) If the closing date passes and no closing takes place, the contract may be rescinded by the party who was ready to settle on the scheduled date. B) The closing date must be stated as a particular calendar date, and not simply as a formula, such as "two weeks after loan approval." C) A "time is of the essence" clause is not binding on either party. D) The closing must take place within a reasonable period before the stated date.

Answer 78

Explanation The answer is if the closing date passes and no closing takes place, the contract may be rescinded by the party who was ready to settle on the scheduled date. "Time is of the essence" refers to the settlement date. If one party fails to go to settlement by that date, the other party may rescind (cancel) the contract.

Question 79

In a land contract, the vendee A) is not responsible for the real estate taxes on the property. B) has possession during the term of the contract. C) does not pay interest and principal. D) obtains legal title at closing.

Answer 79

Explanation The answer is has possession during the term of the contract. In a land (installment) contract, the vendee is the buyer, who has possession during the term of the contract. The buyer also has equitable, but not legal, title.

Question 80

A prospective buyer submits an offer to purchase a residential property. All of the following circumstances would automatically terminate the offer EXCEPT A) the seller received a better offer from another buyer. B) after submitting the offer, the buyer died. C) the house on the property was destroyed in a storm. D) the seller made a counteroffer.

Answer 80

Explanation The answer is the seller received a better offer from another buyer. The question is about terminating an offer, not a contract. Death of the offeror, destruction of the property before acceptance, and a counteroffer from the seller would all terminate an offer. The seller's simply receiving a better offer from another purchaser would not terminate the original offer.

Question 81

If the parties change their original promises by executing an amendment and then decide they want to make a change to the closing date A) the broker must rewrite the contract form after all the changes so that there is a neat and clearly understood contract form. B) they should write this change in Paragraph 11, Special Provisions. C) there is nothing they can do; the amendment has already been filled out. D) they can do so as long as both parties agree to the change.

Answer 81

Explanation The answer is they can do so as long as both parties agree to the change. The process can continue until all parties are satisfied with the terms of the contract, as amended.

Question 82

Earnest money checks should be deposited A) as soon as the broker receives it. B) when an accepted offer becomes a contract. C) upon receipt of the offer. D) before closing.

Answer 82

Explanation The answer is when an accepted offer becomes a contract. Each state has deposit requirements once the offer becomes a contract. The earnest money is typically deposited in the listing brokerage firm's escrow or trust account or a title company account.

Question 83

A real estate broker uses earnest money placed in the company trust account to pay for the rent owed on the brokerage's office. Using escrow funds for this purpose is A) illegal. B) legal if the trust account is reimbursed by the end of the calendar month. C) illegal, unless the client has approved the expenditure. D) legal if the seller gives consent in writing.

Answer 83

Explanation The answer is illegal. Earnest money does not belong to the brokerage and must be placed in an escrow (trust) account. To convert that money for personal use is illegal, regardless of any plan to later reimburse the account. It doesn't make any difference if there remains enough money in the trust account to cover immediate client needs.

Question 84

A buyer who owns the property in equity has A) a lease. B) an executory contract. C) an option contract. D) a liquidated damages contract.

Answer 84

Explanation The answer is an executory contract. During any point in the executory contract (time period between signed offer to title transfer), the buyer has equitable title (also called the owner in equity).

Question 85

When a seller deliberately deceives a buyer about the condition of real property, their contract of sale would be considered A) illegal. B) a novation. C) void. D) voidable.

Answer 85

Explanation The answer is voidable. Only the "deceived" (or potentially injured) person has the right to terminate, so the contract is voidable.

Question 86

A real estate buyer takes over the seller's loan that originated in 2005. The lender releases the seller of liability and substitutes the buyer as the party primarily liable for the mortgage debt. This type of transaction is A) never allowed. B) a non-qualifying assumption. C) a subordination of loan. D) a novation.

Answer 86

Explanation The answer is a novation. When a real estate purchaser assumes the seller's existing mortgage loan, the lender may choose to release the seller and substitute the buyer as the party primarily liable for the mortgage debt.

Question 87

All of the following are essential elements of a contract EXCEPT A) consideration. B) lawful objective. C) words of conveyance. D) mutual agreement.

Answer 87

Explanation The answer is words of conveyance. The essential elements of a valid contract are the following: competent parties, mutual agreement, lawful objective, consideration, and in writing. Words of conveyance are required in deeds.

Question 88

When the parties agree to terms and show their intentions in words, whether orally or written, the agreement is said to be A) a unilateral contract. B) an express contract. C) a voidable contract. D) an executed contract.

Answer 88

Explanation The answer is an express contract. In an express contract, the parties state the terms and show their intentions in words—oral or written. Most real estate contracts are express contracts; they have been committed to writing. Under the statute of frauds, certain types of contracts must be in writing to be enforceable in a court of law.