Real Estate Salesperson Exam (National Portion) Contracts Summary

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.

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.

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.

Acceptance must match the offer exactly. Any change is a counteroffer, which rejects the original offer. The buyer may now accept, reject, or counter the counteroffer.

Wrong choices

• A binding contract is formed with the new date: A change is not acceptance; it creates a counteroffer.
• The original offer remains open for the buyer: A counteroffer ends the original offer.
• The buyer must accept the new date: The buyer is free to accept or reject the counteroffer.

A contingency is a condition that must be met before the contract becomes binding. A financing contingency lets the buyer cancel if a loan cannot be obtained on the stated terms. Other common ones are inspection and appraisal contingencies.

Wrong choices

• Time is of the essence: This clause requires that deadlines be met exactly.
• Liquidated damages: This clause sets in advance the damages for a breach.
• Acceleration clause: This is a loan clause that makes the whole debt due on default.

Earnest money is a deposit from the buyer that shows serious intent. It is usually held in a broker's escrow (trust) account or by an escrow or title company, and is applied toward the price at closing.

Wrong choices

• The broker's commission paid at listing: Commission is paid to the broker, usually at closing.
• The lender's loan origination fee: An origination fee is a lender charge.
• A fee the seller pays to list the home: Listing fees are not earnest money.

An executed contract has been fully performed, such as a sale after closing. An executory contract still has duties left to perform, such as a purchase agreement before closing.

Wrong choices

• Executory: Executory means some duties are still to be done.
• Voidable: Voidable means a party can cancel it.
• Unilateral: Unilateral means only one party made a promise.

When a contract says time is of the essence, the dates and deadlines are strict. A party who misses one may be in breach, and the other party may be allowed to cancel.

Wrong choices

• The contract can be completed whenever convenient: The clause means the opposite.
• The closing must happen within 30 days: The clause does not set any specific number of days.
• Only the buyer must meet deadlines: Both parties must meet the deadlines.

A contract with a minor is usually voidable by the minor: the minor may cancel it, but the adult cannot. A void contract (for example, one for an illegal purpose) has no legal effect at all.

Wrong choices

• Void from the start: It is not void; the minor may choose to keep or cancel it.
• Valid and enforceable against the minor: The minor can cancel it, so it is not fully enforceable against the minor.
• Unenforceable by either party: The adult party is bound if the minor chooses to keep the contract.

In an option contract, the owner (optionor) gives the optionee the right, but not the duty, to buy at a set price within a set time in exchange for consideration. It is unilateral until the optionee exercises it.

Wrong choices

• A right of first refusal: A right of first refusal only lets the holder match another buyer's offer.
• A land contract: A land contract is an installment sale with the seller financing.
• A lease: No right to occupy the property was given.