Real Estate License Practice Test – Contracts 1 — Questions and Answers

Question 1: Mr. and Mrs. Collins make an offer on their home to Mr. and Mrs. Gray, but they have yet to hear whether or not the offer has been accepted. In the meanwhile, they have spotted another house that they would want to buy. What is the best course of action for them?

Cancel their offer with penalty.
Wait for a response from Mr. and Mrs. Gray. If they accept the offer, pay the contract's withdrawal fee.
Withdraw their offer without incurring any penalties. (Correct answer)
Change their offer to one that Mr. and Mrs. Gray are unlikely to accept.

Correct answer: Withdraw their offer without incurring any penalties.

An offer to purchase real estate can be legally withdrawn by the offeror at any point before it has been formally accepted and that acceptance communicated back to the offeror. Since Mr. and Mrs. Collins have not yet received communication of acceptance from Mr. and Mrs. Gray, their offer is not yet a binding contract. They are therefore free to withdraw their offer without incurring any penalties.

Question 2: In order to be enforceable, which of the following contracts must be in writing?

A one-year lease listing for real estate.
A buyer's agreement to take over an existing loan secured by a deed of trust. (Correct answer)
A contract that does not have to be fulfilled within a year of its signing.

Correct answer: A buyer's agreement to take over an existing loan secured by a deed of trust.

The Statute of Frauds requires certain contracts to be in writing to be legally enforceable. Contracts involving the transfer of an interest in real estate, such as a buyer's agreement to take over an existing loan secured by a deed of trust, fall under this requirement. This ensures clarity and prevents fraudulent claims regarding significant real estate obligations.

Question 3: The _, also known as the words of conveyance, contains the phrases that describe the grantee's rights.

Clause of grant (Correct answer)
Clause of transfer
Rights of the grantee
Rights of the guarantor

Correct answer: Clause of grant

The 'granting clause,' also known as the words of conveyance, is the essential part of a deed that expresses the grantor's clear intention to transfer the property to the grantee. This clause typically contains specific phrases like 'grant and convey' or 'bargain and sell,' and it defines the nature and extent of the interest or rights being transferred to the grantee.

Question 4: When is it not necessary for a broker to propose an offer to acquire real estate to their principal?

When the offer is clearly frivolous or the broker is acting on the principal's written instructions. (Correct answer)
When the broker has written to the seller to explain why the offer was not presented.
When none of the contingencies have been removed.
If it's a commercial property that's being offered.

Correct answer: When the offer is clearly frivolous or the broker is acting on the principal's written instructions.

A real estate broker has a fiduciary duty to their principal (the seller) to present all offers received. However, this duty can be modified if the principal provides clear, written instructions to the broker specifying which types of offers should not be presented (e.g., offers below a certain price). Additionally, offers that are clearly frivolous or made in bad faith may not require presentation, as they do not constitute a bona fide offer.

Question 5: What is the closest definition of "delivery in escrow" in terms of deeds?

A deed is finished but not delivered, such as when the grantor dies and the deed is discovered at his or her home.
The grantor hands over the deed to a trustee, who keeps it until the grantee has completed all of the necessary steps. (Correct answer)
A deed isn't regarded valid until the grantor signs it.
From the grantor, the grantee receives physical possession of the completed deed.

Correct answer: The grantor hands over the deed to a trustee, who keeps it until the grantee has completed all of the necessary steps.

'Delivery in escrow' refers to the process where a deed is given to a neutral third party, the escrow agent or trustee, with specific instructions. This agent holds the deed until all the conditions of the purchase agreement are fully satisfied by both the buyer and seller. Once all conditions are met, the escrow agent then officially delivers the deed to the grantee, thereby transferring legal title.

Question 6: Each of the brokers, Jenny and Sam, has an open listing on the same property. The property was shown to a potential buyer by broker Jenny, but the buyer opted not to purchase it. Broker Sam called the same buyer two weeks later and arranged a sale of the property. The vendor is required to pay the following commission:

Each broker will receive 50%
To be worked out.
The full amount to Sam (Correct answer)
The full amount to Jenny

Correct answer: The full amount to Sam

In an open listing, the commission is paid only to the broker who is the 'procuring cause' of the sale. Jenny showed the property but the buyer didn't purchase it at that time. Sam later contacted the same buyer and successfully arranged the sale. Therefore, Sam was the procuring cause, and the vendor owes the full commission only to Sam.

Question 7: Broker Tim accepted a listing on a commercial office complex and was given a one-month option to buy the property. Broker Tim decides to purchase the property on the 25th day of the listing. Broker Tim must ____ before purchasing the house.

Any outstanding offers on the property should be disclosed to the seller.
Obtain the seller's written approval, acknowledging any profit or projected profit.
To the seller, you must disclose all relevant information.
All of the above. (Correct answer)

Correct answer: All of the above.

When a broker has an option to buy a property they are listing, they are acting in a dual capacity, creating a potential conflict of interest. To protect the seller, the broker must disclose all material facts, including any other offers and their potential profit, and obtain the seller's informed written consent. This ensures transparency and that the seller's best interests are prioritized.

Question 8: The ____ has the right of possession and equitable title.

Trustee.
Trustor.
Vendee. (Correct answer)
Vendor

Correct answer: Vendee.

In a land contract (or contract for deed), the vendee (buyer) receives equitable title and the right of possession upon signing the agreement. The vendor (seller) retains legal title until the full purchase price is paid. Equitable title grants the buyer the right to obtain legal title once all contract terms are fulfilled.

Question 9: A typical listing contract gives a broker the authority to ____

Assure a third party that their principal will accept an offer that meets the listing's terms.
Find a buyer and accept a deposit with a purchase offer. (Correct answer)
The real estate that is the subject of the listing must be transferred.
Find a buyer and bind their principal to a sale contract

Correct answer: Find a buyer and accept a deposit with a purchase offer.

A typical listing contract authorizes a broker to market the property and find a ready, willing, and able buyer. It also generally allows the broker to accept an earnest money deposit from a potential buyer along with their purchase offer. However, a broker does not have the authority to bind the principal (seller) to a sale contract or transfer the property themselves; only the seller can do that.

Question 10: ____ is referred to as "index," "triple net," and "flat."

Freehold estates.
Linkages
Rural land use.
Leases (Correct answer)

Correct answer: Leases

These terms refer to different methods of calculating and structuring rent payments in commercial leases. An 'index' lease ties rent to an economic index, a 'triple net' lease requires the tenant to pay property taxes, insurance, and maintenance, and a 'flat' lease has a fixed rent amount. These are all common classifications for lease agreements.

Question 11: An implied contract is __, which is a good example.

A potential seller informs an agent that he would like the agent to conduct a market analysis.
An occupant communicating that they anticipate the complete deposit back since the landlord did not' ever note damage to the property
a tenant who refuses to go despite not having paid rent
Rent is paid and the check is cashed after a formal lease expires. (Correct answer)

Correct answer: Rent is paid and the check is cashed after a formal lease expires.

An implied contract is formed by the actions and conduct of the parties, rather than explicit written or verbal agreement. When a tenant continues to pay rent and the landlord accepts it after a formal lease expires, their actions imply a new landlord-tenant agreement, typically a month-to-month tenancy. This demonstrates mutual intent through behavior, creating an enforceable contract.

Question 12: To avoid paying the broker's commission, a buyer and seller agree to wait until the seller's listing expires before closing the sale. What is the best way for the broker to earn his commission?

Submit a motion to the title company for an injunction.
Prove in court that he was the one who arranged the deal. (Correct answer)
Sue the party or parties that the broker represented.
The commission is forfeited if the listing is no longer active.

Correct answer: Prove in court that he was the one who arranged the deal.

If a buyer and seller collude to wait until a listing expires to avoid paying a commission, the broker can still pursue their commission. The broker must demonstrate in court that they were the 'procuring cause' of the sale, meaning their efforts initiated an uninterrupted chain of events that led to the successful transaction. This legal principle prevents parties from unfairly circumventing the broker's earned compensation.

Question 13: It is an example of ____ when a current contract is replaced by a completely new contract.

Rescission
Reconstruction.
Novation. (Correct answer)
Assignment

Correct answer: Novation.

Novation is the legal act of replacing an existing contract with a completely new one, often involving a new party or new terms, and extinguishing the obligations of the old contract. It requires the consent of all parties involved in both the old and new agreements. This differs from an assignment, which transfers rights without necessarily creating a new contract or releasing the original party.

Question 14: A single-family home's listing time differs from that of commercial property because:

Commercial property listing periods are limited by legislation, whereas single family residences can be advertised for as long as the seller wants.
A single-family home is usually advertised for 60-120 days, whereas commercial properties are usually offered for 6 months to a year. (Correct answer)
The listing for a commercial property does not have an expiration date, whereas the listing for a single family home does.
Single-family homes are only allowed to be advertised for one year by law, whereas commercial properties can be offered for up to 18 months.

Correct answer: A single-family home is usually advertised for 60-120 days, whereas commercial properties are usually offered for 6 months to a year.

The typical listing period for residential properties, like single-family homes, is generally shorter, often ranging from two to four months. Commercial properties, however, usually have longer listing periods due to their complexity, higher price points, and smaller pool of potential buyers, often requiring six months to a year or more to find a suitable purchaser. This reflects the different market dynamics for each property type.

Question 15: Once a piece of property is _, real estate agents will earn money.

Loaned or Abetted
Financially Secure
Valued
Sold or Exchanged (Correct answer)

Correct answer: Sold or Exchanged

Real estate agents typically earn their commission when a property is successfully sold or exchanged, meaning a transaction has closed and title has transferred. Their compensation is contingent upon bringing about a completed deal between a willing buyer and seller. Simply valuing a property or securing a loan does not, by itself, entitle an agent to a commission.

Question 16: By _, an offer is terminated.

The offeror's refusal.
the offeree's request for an extension
the offeree's refusal (Correct answer)
the offeree's revocation

Correct answer: the offeree's refusal

An offer to enter into a contract can be terminated in several ways. The offeree's refusal, also known as rejection, directly communicates their unwillingness to accept the terms, thereby ending the offer. Other methods include revocation by the offeror, a counteroffer (which acts as a rejection of the original offer), lapse of time, or death/incapacity of either party.

Question 17: To be legally entitled to a commission on a nonexclusive listing, a broker must be able to show that ____.

they were the procuring cause of the sale. (Correct answer)
The buyer was promptly informed of any conflicts of interest.
Somehow, this contributed to the property's eventual selling.
The property was actively advertised.

Correct answer: they were the procuring cause of the sale.

In a nonexclusive listing (like an open listing), multiple brokers can attempt to sell the property, and the seller can also sell it independently. To earn a commission, a broker must prove they were the 'procuring cause' of the sale, meaning their efforts directly led to the successful transaction without a break in the chain of events. Simply advertising or contributing in some minor way is not sufficient.

Question 18: The legal act of giving and receiving a deed is referred to as .

Transfer Title
Transfer of Sale
Transfer of Goods
Passing Title (Correct answer)

Correct answer: Passing Title

'Passing title' refers to the legal process of transferring ownership of real property from one party to another, typically through the delivery and acceptance of a deed. This act signifies the conveyance of legal rights and interests in the property. It is the culmination of a real estate transaction where the seller's interest is extinguished and the buyer's is established.

Question 19: Except for the _, any of the following may seek particular performance when damages for a breach of contract are insufficient.

Seller of a parcel of land.
Attorney-in-fact for one of the principals.
Broker (Correct answer)
Purchaser.

Correct answer: Broker

Specific performance is a legal remedy compelling a party to fulfill the terms of a contract, typically sought when monetary damages are inadequate, such as in real estate transactions where each property is unique. While buyers and sellers (or their attorneys-in-fact) can seek specific performance, a broker generally cannot. A broker's remedy for a breach of contract (e.g., non-payment of commission) is typically monetary damages, not forced performance of the sale itself.

Question 20: When put into the deed, deed restrictions and easements on a property are considered ____.

an awful investment
reservations and exceptions (Correct answer)
an investment in a turnaround
a consideration

Correct answer: reservations and exceptions

When deed restrictions or easements are included in a deed, they are typically referred to as 'reservations and exceptions.' A reservation is a right retained by the grantor (seller), such as an easement for access. An exception is something withheld from the grant, meaning it's not being conveyed with the rest of the property, thus limiting the grantee's (buyer's) full enjoyment or ownership rights.

Question 21: When a buyer defaults on a land sales contract, the seller ____.

directs the trustee to begin the foreclosure process
a quiet title action is filed. (Correct answer)
an Iis pendens action is filed
through the courts, seeks a shortfall judgment against the buyer

Correct answer: a quiet title action is filed.

In a land sales contract (contract for deed), the seller retains legal title while the buyer (vendee) has equitable title. If the buyer defaults, the seller typically files a 'quiet title action' to remove the cloud of the buyer's equitable interest from the title and regain full, clear ownership. This is different from a traditional foreclosure process, which applies when a mortgage or deed of trust is involved.

Question 22: Carol made a real estate purchasing offer. The seller accepted the offer, but Heather died before the seller's representative informed her of the acceptance. Which of the following statements is true based on these facts?

Even if Carol was unaware of the acceptance, the offer and acceptance form an enforceable contract.
Carol's death results in the offer being revoked. (Correct answer)
Because Carol's deed was not delivered before her death, the accepted offer is binding on the administrator's estate.
The notification of the seller's acceptance to Carol's estate's administrator or executor obligates her estate to complete and close escrow.

Correct answer: Carol's death results in the offer being revoked.

An offer to purchase real estate is terminated by the death or incapacity of either the offeror (buyer) or the offeree (seller) before acceptance has been communicated. Even though the seller accepted the offer, Carol's death occurred before she was notified of the acceptance, meaning no binding contract was formed. Death revokes an unaccepted offer.

Question 23: On a handshake, Joan sells her house to her brother Mike. This agreement is:

valid only in certain states
unenforceable (Correct answer)
illegal
valid because they are related

Correct answer: unenforceable

The Statute of Frauds requires that contracts for the sale of real estate must be in writing to be legally enforceable. A handshake agreement, while it might indicate intent, does not meet this legal requirement. Therefore, Joan's verbal agreement to sell her house to Mike is unenforceable in court, even if they are related.

Question 24: Broker Jack listed an empty lot for $120,000 with Seller Venus. Mariell, a potential buyer, made a $100,000 purchase offer that was set to expire in 30 days. Seller Venus replied the next day with a bid of $110,000. Mariell, the counter's buyer, turned it down. Seller Venus signed and handed to Broker Jack a signed acceptance of Buyer Mariell's initial $100,000 purchase offer three days later. When Buyer Mariell was informed of Seller Venus acceptance, Mariell replied that he did not intend to purchase the property. As a result of the above activities ____.

There is no agreement (Correct answer)
The contract is void.
A counteroffer must be made by the buyer.
There has been a one-on-one agreement.

Correct answer: There is no agreement

Mariell's initial offer was rejected by Seller Venus's counteroffer of $110,000, which automatically terminated the original offer. When Mariell rejected the counteroffer, there was no active offer on the table. Seller Venus's later attempt to accept Mariell's original $100,000 offer was ineffective because that offer had already been terminated. Therefore, no agreement was formed.

Question 25: Who is in charge of deciding on a property's listing price?

the owner of the property (Correct answer)
the mortgage company
broker of real estate
the assessor

Correct answer: the owner of the property

The property owner ultimately has the right and responsibility to decide the listing price for their property. While a real estate broker can provide professional advice, market analysis, and recommendations, the final decision on the asking price rests with the seller. The broker acts as an agent, carrying out the seller's instructions.

Real Estate License Practice Test – Contracts 1

Mr. and Mrs.
Collins make an offer on their home to Mr. and Mrs.
Gray, but they have yet to hear whether or not the offer has been
accepted.
In the meanwhile, they have spotted another house that they would want to buy.
What is the best course of action for them?