Unit 11: Real Estate Contracts- 8%

Question 1

Amendment

Answer 1

A change to the existing content of a contract (i.e., if words or provisions are added to or deleted from the body of the contract). Must be initialed by all parties.

Question 2

Assignment

Answer 2

The transfer in writing of interest in a bond, mortgage, lease, or other instrument.

Question 3

Bilateral Contract

Answer 3

See contract.

Question 4

Breach Of Contract

Answer 4

Violation of any terms or conditions in a contract without legal excuse; for example, failure to make a payment when it is due.

Question 5

Consideration

Answer 5

(1) That received by the grantor in exchange for the deed. (2) Something of value that induces a person to enter into a contract.

Question 6

Contingencies

Answer 6

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

Question 7

Contract

Answer 7

A legally enforceable promise or set of promises that must be performed and for which, if a breach of the promise occurs, the law provides a remedy. A contract may be either unilateral, by which only one party is bound to act, or bilateral, by which all parties to the instrument are legally bound to act as prescribed.

Question 8

Counteroffer

Answer 8

A new offer made in response to an offer received. It has the effect of rejecting the original offer, which cannot be accepted thereafter unless revived by the offeror.

Question 9

Disclosure

Answer 9

Relevant information or facts that are known or should have been known.

Question 10

Earnest Money

Answer 10

Money deposited by a buyer under the terms of a contract, to be forfeited if the buyer defaults but to be applied to the purchase price if the sale is closed.

Question 11

Enforceable Contract

Answer 11

A contract that meets all the elements of a valid contract, including compliance with any applicable statute of frauds or other law that requires it to be in writing and signed by the parties.

Question 12

Executed Contract

Answer 12

A contract in which all parties have fulfilled their promises and thus performed the contract.

Question 13

Executory Contract

Answer 13

A contract under which something remains to be done by one or more of the parties.

Question 14

Express Contract

Answer 14

See express agreement.

Express Agreement

An oral or written contract in which the parties state the contract’s terms and express their intentions in words

Question 15

Implied Contract

Answer 15

See implied agreement.

Implied Agreement

A contract under which the agreement of the parties is demonstrated by their acts and conduct.

Question 16

Land Contract

Answer 16

See installment sale.

Question 17

Liquidated Damages

Answer 17

An amount predetermined by the parties to a contract as the total compensation to an injured party should the other party breach the contract.

Question 18

Novation

Answer 18

Substituting a new obligation for an old one or substituting new parties to an existing obligation.

Question 19

Offer And Acceptance

Answer 19

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 20

Option

Answer 20

An agreement to keep open for a set period an offer to sell or purchase property.

Question 21

Owner Financing

Answer 21

The seller is the primary lender, securing the property by means of a deed, note and mortgage, deed of trust, or contract for deed. In its traditional form, the buyer takes possession of the property and the seller retains legal title until paid in full, but some states have softened this outcome to provide that the buyer is entitled to legal title after a specified period of successful loan payments.

Question 22

Purchase Money Mortgage

Answer 22

A note secured by a mortgage or deed of trust given by a buyer, as borrower, to a seller, as lender, as part of the purchase price of the real estate.

Question 23

Rescission

Answer 23

The practice of one party canceling or terminating a contract, which has the effect of returning the parties to their original positions before the contract was made.

Question 24

Statute Of Frauds

Answer 24

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

Question 25

Suit For Specific Performance

Answer 25

See specific performance.

Question 26

“Time Is Of The Essence”

Answer 26

A phrase in a contract that requires the performance of a certain act within a stated period of time.

Question 27

Unenforceable Contract

Answer 27

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 28

Unilateral Contract

Answer 28

A one-sided contract wherein one party makes a promise so as to induce a second party to do something. The second party is not legally bound to perform; however, if the second party does comply, the first party is obligated to keep the promise.

Question 29

Valid Contract

Answer 29

A contract that complies with all the essentials of a contract and is binding and enforceable on all parties to it.

Question 30

Void Contract

Answer 30

A contract that has no legal force or effect because it does not meet the essential elements of a contract.

Question 31

Voidable Contract

Answer 31

A contract that seems to be valid on the surface but may be rejected or disaffirmed by one or both of the parties.

Question 32

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?

Answer 32

A)
The parties must document this agreement in the special provisions paragraph of the contract.
B)
The parties should amend the contract.
C)
They have to proceed under the terms of the current contract; because the parties are already under contract, no further negotiations are allowed.
D)
The broker must contact an attorney to get advice.

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 33

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

Answer 33

A)
never allowed.
 B)
a non-qualifying assumption.
 C)
a subordination of loan.
 D)
a novation.

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 34

A buyer and a seller have entered into a binding contract for the sale of real estate. During this phase and until closing, the buyer has which type of title?

Answer 34

A)
Equitable
 B)
Escalating
 C)
Legal
 D)
Executory

The answer is equitable. The buyer has equitable title, which recognizes that they buyer has an interest, but has not received legal title. Legal title will pass at closing when the seller gives the buyer the deed.

Question 35

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?

Answer 35

A)
If closing is not held on September 7, there is an automatic extension built in.
B)
The date of closing may only be delayed by one day at a time.
C)
Closing must be on or before September 7.
D)
If either party gives notice, the date can be moved back.

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 36

A buyer who owns the property in equity has

Answer 36

A)
a lease.
 B)
an option contract.
 C)
an executory contract.
 D)
a liquidated damages contract.

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 37

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

Answer 37

A)
mutual assent.
 B)
consideration.
 C)
performance.
 D)
counteroffer.

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

Question 38

When is a contract considered discharged?

Answer 38

A)
When the agreement is terminated
 B)
When the agent is hired
 C)
When the agreement is signed by all parties
 D)
When the agreement is filed with the county

The answer is when the agreement is terminated. A contract is discharged when the agreement is terminated. A contract terminates when it has been completely performed, with all its terms fulfilled, but a contract may be terminated for another reason, such as a party’s breach or default.

Question 39

A legally enforceable agreement in which two parties promise to do something for each other is classified as

Answer 39

A)
an option agreement.
 B)
a bilateral contract.
 C)
a legal pledge.
 D)
an escrow agreement.

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 40

An option to purchase binds which of the following parties?

Answer 40

A)
Neither buyer nor seller
 B)
Buyer only
 C)
Both buyer and seller
 D)
Seller only

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 41

In the period after an offer to purchase real estate is accepted and the sale is closed, the buyer acquires an interest in the property that is called

Answer 41

A)
equitable title.
 B)
quiet title.
 C)
after-acquired title.
 D)
preliminary title.

The answer is equitable title. A person who holds equitable title has rights that vary from state to state, but equitable title may give the buyer an insurable interest in the property.

Question 42

A real estate professional has found a buyer for a seller’s home. The buyer has indicated in writing a willingness to buy the property for $1,000 less than the asking price and has provided an earnest money check for $5,000. The seller is out of town for the weekend, and the real estate professional has been unable to inform the seller of the signed document. At this point, there is

Answer 42

A)
an executory agreement.
 B)
a voidable contract.
 C)
an implied contract.
 D)
an offer.

The answer is an offer. A written offer to buy property—an offer that has not been seen or acted upon by the property owner—is simply an offer. Even if the offer had been for full price, no contract would yet exist and the offeror would have no claim on the offeree.

Question 43

During the period after a real estate sales contract is signed, but before title actually passes, the status of the contract is

Answer 43

A)
unilateral.
 B)
voidable.
 C)
executory.
 D)
implied.

The answer is executory. A contract is executory when its terms have not yet been carried out. When the contract’s terms have been fulfilled, it is said to be executed.

Question 44

A transfer of rights or duties under a contract is

Answer 44

A)
a counteroffer.
 B)
an assignment.
 C)
a rescission.
 D)
a novation.

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 45

In case the buyer decides not to buy for no legal reason, the contract may provide that the earnest money be used as

Answer 45

A)
punitive damages.
 B)
liquidated damages.
 C)
nominal damages.
 D)
actual damages.

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

Question 46

A buyer and a seller enter into a real estate sales contract. Under the contract’s terms, the buyer will pay the seller $500 a month for 10 years. The seller will continue to hold legal title, while the buyer will live in the home and pay all real estate taxes, insurance premiums, and regular upkeep costs. What kind of contract do the buyer and seller have?

Answer 46

A)
Contract for mortgage
 B)
Land sales contract
 C)
Unilateral contract
 D)
Option contract

The answer is land sales contract. This arrangement has a variety of names: contract for a deed, land contract, installment contract, land sales contract, and more. Its most important characteristic is that no deed is given to the buyer (vendee) until all the payments in the contract have been made, although some states give the buyer an equitable interest in the property after a specified period of successful payments.

Question 47

A special feature of a residential lease option is that it may provide for

Answer 47

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.

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 48

All of these are essential to a valid real estate sales contract EXCEPT

Answer 48

A)
legally competent parties.
 B)
offer and acceptance.
 C)
consideration.
 D)
an earnest money deposit, held in an escrow account.

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 49

If a buyer defaults on a purchase agreement and the seller keeps the buyer’s earnest money, which of the following remedies has the seller elected?

Answer 49

A)
Partial performance
 B)
Liquidated damages
 C)
Rescission
 D)
Money damages

The answer is liquidated damages. The earnest money a seller may be entitled to retain after the buyer breaches is called liquidated damages.

Question 50

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

Answer 50

A)
the addendum.
 B)
the preliminary title report.
 C)
the letter of intent.
 D)
the land contract.

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 51

Which of these is NOT typically a factor in determining the amount of the earnest money deposit?

Answer 51

A)
Whether it is an amount sufficient to discourage the buyer from defaulting
B)
Whether it is an amount sufficient to cover any expenses the seller might incur if the buyer defaults
C)
Whether it is an amount sufficient to compensate the seller for taking the property off the market
D)
Whether it is an amount sufficient to cover the broker fees

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 52

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

Answer 52

A)
the buyer may sue the seller for specific performance, forcing the sale of the home to the buyer.
B)
the seller is not liable because the buyer should not have incurred the $1,500 cost before the sale.
C)
the buyer may sue the seller for the rent he paid.
D)
the buyer may sue the seller for damages to recover the $1,500 loss.

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 53

All of the following are essential to the formation of a contract EXCEPT

Answer 53

A)
acceptance.
 B)
performance.
 C)
offer.
 D)
consideration.

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

Question 54

A contract that exchanges a promise for a promise is said to be

Answer 54

A)
bilateral.
 B)
relateral.
 C)
unilateral.
 D)
omnilateral.

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

Question 55

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?

Answer 55

A)
The contract is voidable.
 B)
The contract is fully valid and enforceable.
 C)
The contract is void.
 D)
The contract lacks consent.

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 56

The listing broker and the seller know that the foundation of the seller’s house is unsafe. If they do not inform the buyer of this condition, the contract to purchase the property would be

Answer 56

A)
voidable by the buyer.
 B)
valid.
 C)
voidable by the seller.
 D)
void.

The answer is voidable by the buyer. Intentional deceit of material facts is fraud. Fraud is one of the conditions that can make a contract voidable by the party defrauded.

Question 57

Earnest money

Answer 57

A)
may become the seller’s if the buyer defaults.
B)
is required as part of all purchase agreements.
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.

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 58

A contract is said to be executed when it includes

Answer 58

A)
the competent parties.
 B)
the offer and acceptance.
 C)
the consideration.
 D)
the signatures of the parties.

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 59

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?

Answer 59

A)
Because the seller changed the date of possession rather than the sales price, there is a valid contract.
B)
While the seller technically rejected the buyer’s offer, the seller’s behavior in scheduling movers creates an implied contract between the parties.
C)
The seller has rejected the buyer’s offer and made a counteroffer, which the buyer is free to accept or reject.
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.

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 60

A contract is said to be bilateral if

Answer 60

A)
only one party to the agreement is bound to act.
B)
both parties to the contract exchange binding promises.
C)
one of the parties is a minor.
D)
the contract has yet to be fully performed.

The answer is both parties to the contract exchange binding promises. When both parties to a contract are bound by it, the contract is said to be bilateral. A contract yet to be performed is executory. A contract that binds only one party to act is unilateral. A contract made with a minor is usually voidable by the minor.

Question 61

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?

Answer 61

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 must take place within a reasonable period before the stated date.
C)
A “time is of the essence” clause is not binding on either party.
D)
The closing date must be stated as a particular calendar date, and not simply as a formula, such as “two weeks after loan approval.”

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 62

In a land contract, the vendee

Answer 62

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

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 63

Should the buyer default, an example of liquidated damages to the seller in a purchase contract could be

Answer 63

A)
damages for the taking of private land for public use.
 B)
forfeiture of the earnest money deposit.
 C)
recovery of money lost as a result of the breach.
 D)
a court action for specific performance.

The answer is forfeiture of the earnest money deposit. If a buyer provides earnest money, the earnest money is often identified in the contract as predetermined liquidated damages and is the seller’s remedy for a buyer’s default.

Question 64

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

Answer 64

A)
liquidated damages.
 B)
mutual performance.
 C)
mutual rescission.
 D)
specific performance.

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

Question 65

A buyer makes an offer on a house, and the seller accepts in writing. What is the current status of this relationship?

Answer 65

A)
The buyer and seller do not have a valid contract until the seller delivers title at closing.
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 have an express, bilateral executed contract.

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 66

If, upon the receipt of an offer to purchase a property, the seller makes a counteroffer, the prospective buyer is

Answer 66

A)
bound by the original offer.
 B)
bound by whichever offer is lower.
 C)
not able to counter the counteroffer.
 D)
relieved of the original offer.

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 67

In states that have adopted it, the Uniform Vendor and Purchaser Risk Act will come into play if

Answer 67

A)
damage occurs to the property between the time a contract is entered into and the buyer takes possession.
B)
either seller or buyer is injured between the time a contract is entered into the sale is closed.
C)
the sales price of the property can be shown to be too high relative to changing market values.
D)
more than one prospective buyer has made an offer on property and the seller is unsure of which offer should take precedence.

The answer is damage occurs to the property between the time a contract is entered into and the buyer takes possession.

Question 68

If a buyer defaulted some time ago on a written contract to purchase a seller’s real estate, the seller can still sue for damages if he is not prohibited from doing so by

Answer 68

A)
the statute of frauds.
 B)
the law of agency.
 C)
the statute of limitations.
 D)
the broker-attorney accord.

The answer is the statute of limitations. The statute of limitations in every state limits the time within which parties to a contract may bring legal suit to enforce their rights.

Question 69

If the parties change their original promises by executing an amendment and then decide they want to make a change to the closing date

Answer 69

A)
they can do so as long as both parties agree to the change.
B)
the broker must rewrite the contract form after all the changes so that there is a neat and clearly understood contract form.
C)
they should write this change in Paragraph 11, Special Provisions.
D)
there is nothing they can do; the amendment has already been filled out.

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 70

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

Answer 70

A)
originated by a real estate professional.
 B)
accompanied by earnest money deposits.
 C)
in writing to be enforceable.
 D)
on preprinted forms.

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 71

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

Answer 71

A)
redraw the entire contract.
B)
have both parties initial or sign in the margin near each change.
C)
have each party write a letter to the other approving the changes.
D)
write a letter to each party listing the changes.

The answer is have both parties initial or sign in the margin near each change. All parties must initial or sign the changes. Use of a preprinted contract that is commonly used in the area usually makes the contract terms easier to understand for all parties, even when some of the terms must be adapted to a particular transaction.