Real Estate Salesperson Exam (National Portion): Contracts Concepts
Importance ★★★★★ · 56% (estimate)
Overview
This chapter covers how real estate contracts are formed, when they can be enforced, and what happens when someone fails to perform. It is the largest part of the largest content area.
A valid contract needs competent parties, offer and acceptance, consideration, and a legal purpose, and under the Statute of Frauds a contract to sell real estate must be in writing. A bilateral contract exchanges promises; a unilateral contract has a promise from one side only. A contract signed by a minor is voidable by the minor, while a contract for an illegal purpose is void. An executory contract still has duties to perform; an executed contract is complete.
Any change to an offer is a counteroffer that rejects the original offer. Earnest money shows good faith and is held in escrow. Contingencies, such as financing or inspection, must be met or waived before closing. After signing, the buyer holds equitable title until closing. An option gives the optionee the right, but not the duty, to buy. Remedies for breach include liquidated damages, compensatory damages, rescission, and specific performance.
Key concepts
Statute of Frauds
A rule that certain contracts, including contracts to sell real estate, must be in writing to be enforceable.
Memory tipReal estate sale = in writing
Bilateral contract
A contract in which both parties exchange promises, such as a purchase agreement.
Memory tipPromise for a promise
Voidable contract
A contract that one party may choose to cancel, such as one signed by a minor.
Memory tipVoid = no effect at all
Counteroffer
A response that changes the terms of an offer; it rejects the original offer.
Memory tipAny change kills the offer
Equitable title
The buyer's interest in the property after signing a purchase contract and before closing.
Memory tipLegal title passes at closing
Option contract
A contract giving the optionee the right, but not the duty, to buy at a set price within a set time.
Memory tipOptionor must sell if exercised
Liquidated damages
An amount agreed in advance as full damages for a breach, often the earnest money.
Memory tipAgreed damages
Often tested
- Executed = fully performed; executory = still to be performed.
- Time is of the essence makes deadlines strict.
- A financing contingency lets the buyer cancel if a loan cannot be obtained.
3 sample questions
Verified practice questions from this unit.
Question 1. A contract in which both parties exchange promises, such as a purchase agreement, is a:
- ① Implied contract
- ② Bilateral contract
- ③ Void contract
- ④ Unilateral contract
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Answer: ② Bilateral contract
Key point: Promise for a promise = bilateral
In a bilateral contract, each party promises to do something: the seller promises to sell and the buyer promises to buy. In a unilateral contract, only one side promises, such as an option or an open listing.
Wrong choices
- Unilateral contract: In a unilateral contract only one party makes a promise.
- Implied contract: An implied contract is created by actions, not words.
- Void contract: A void contract has no legal effect.
Question 2. Which of the following is an essential element of a valid contract?
- ① Recording
- ② Earnest money
- ③ A real estate agent's signature
- ④ Consideration
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Answer: ④ Consideration
Key point: Valid contract: parties, agreement, consideration, legal purpose
Essential elements of a valid contract include competent parties, offer and acceptance (mutual agreement), consideration (something of value), and a legal purpose. Real estate sale contracts must also be in writing.
Wrong choices
- Recording: Recording is not an element of a valid contract.
- Earnest money: Earnest money is common but not required for validity.
- A real estate agent's signature: Agents do not need to sign for a contract to be valid.
Question 3. Under the Statute of Frauds, a contract for the sale of real estate must be:
- ① Approved by a court
- ② Recorded to be valid
- ③ In writing to be enforceable
- ④ Notarized to be valid
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Answer: ③ In writing to be enforceable
Key point: Real estate sale contract → must be in writing
The Statute of Frauds requires certain contracts, including contracts to sell real estate, to be in writing and signed to be enforceable. An oral agreement to sell land generally cannot be enforced in court.
Wrong choices
- Recorded to be valid: Recording is not required for a contract to be enforceable.
- Notarized to be valid: Notarization is generally not required for a purchase contract.
- Approved by a court: No court approval is needed.
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