Sixteen of eighty questions
are contracts and agency.

Contracts: the elements, and the four words people confuse

Contracts and agency is 16 of the 80 scored questions, the largest single area on the exam. Most of it is vocabulary used precisely, and the vocabulary is where the marks are.

• Required elements. Mutual assent — offer and acceptance, entered into voluntarily; legally competent parties; lawful consideration; and a legal purpose. For real property, add a writing under the statute of frauds.
• Express or implied. An express contract is stated, in words. An implied contract is inferred from conduct.
• Unilateral or bilateral. In a bilateral contract both sides promise; in a unilateral contract one side promises and the other performs if it chooses. An option is the classic unilateral contract: the optionor must sell if the optionee exercises, and the optionee need not buy.
• Executory or executed. Executory means something is still to be done; executed means fully performed. A signed purchase agreement before closing is executory, which is the trap — "executed" does not mean "signed".

• Statute of frauds. Contracts for the sale of real property, and leases longer than a stated term (commonly one year), must be in writing and signed to be enforceable.
• Electronic signatures. Under the federal E-SIGN Act and state UETA adoptions, an electronic signature and an electronic record satisfy a writing requirement. This is now the normal way residential contracts are executed.
• Time is of the essence. Where the contract says so, a deadline is a material term and missing it is a breach, not a delay.
• Remedies for breach. Specific performance compels the sale — available because every parcel of land is unique. Compensatory damages make the injured party whole. Liquidated damages are an amount the parties agreed in advance, which is what earnest money usually is. Rescission unwinds the contract and returns the parties to where they started.
• How a contract ends without breach. Performance; mutual agreement; novation, substituting a new contract or a new party with everyone's consent; operation of law; or impossibility.

The sales contract, from offer to equitable title

1. 1
   An offer is made, and it can be revoked until it is accepted.

   Acceptance must be communicated to the offeror. A counteroffer is a rejection of the original offer plus a new offer, which means the original is dead and cannot later be accepted — the single most commonly tested point in this section.
2. 2
   Earnest money is deposited, and it is not what makes the contract binding.

   Consideration is the mutual promises; the deposit is evidence of good faith and, usually, the agreed liquidated damages if the buyer defaults. It belongs in the broker's trust or escrow account, never commingled with the broker's own funds. How fast it must be deposited, and by whom it may be released, is state portion material.
3. 3
   On acceptance the buyer takes equitable title.

   Legal title stays with the seller until closing, but the buyer now holds an enforceable interest in the property itself, which is why specific performance is available and why the risk of loss question arises at all.
4. 4
   Contingencies have to be satisfied or waived.

   Financing, inspection, appraisal and sale-of-current-home are the common ones. A contingency is a condition: if it fails within its stated period, the party it protects may terminate and, normally, recover the deposit.
5. 5
   Closing, and the deed is delivered and accepted.

   That is the moment legal title passes — not the signing, and not the recording.

• Option contract. The optionee buys the right, for a period, to purchase at an agreed price. Unilateral, and the option money is normally not refundable.
• Installment land contract, also called a contract for deed or land contract. The buyer takes possession and pays over time; the seller keeps legal title until the last payment, while the buyer holds equitable title.
• Assignment of a purchase contract is how a wholesaler operates, and several states now regulate or restrict it. State portion.

Agency, fiduciary duty, and what changed in August 2024

Agency is a relationship of trust: the principal or client engages the agent to act on their behalf, and the agent owes fiduciary duties. Everyone else in the transaction is a customer, owed honesty and fair dealing but not loyalty.

• How agency is created. By express agreement — a listing or buyer representation agreement; by implication from conduct; by ratification, approving after the fact; or by estoppel, where a party is stopped from denying an agency others reasonably relied on.
• How it ends. Completion of the purpose; expiry of the term; mutual agreement; revocation or renunciation, which may be a breach; or by operation of law — death or incapacity of either party, bankruptcy, or destruction of the property.
• Dual agency is representing both sides in the same transaction. It requires informed written consent, it is illegal outright in several states, and even where allowed the agent cannot fully perform loyalty and disclosure to both. Designated agency is one broker appointing different licensees to each side.
• Transaction brokerage or facilitation is a non-agency relationship: the licensee helps the deal along and owes honesty and competence but no fiduciary duty to either side. Whether it exists is a state question.
• Vicarious liability is the principal being liable for the agent's acts within the scope of the agency, and the broker being liable for the licensees they supervise.

Listings, compensation, and staying inside your license

• The listing agreement is between the seller and the broker, not the salesperson. A salesperson works under the broker's license, is paid by their own broker, and cannot be paid directly by a client.
• Compensation is always negotiable and never set by law. Any suggestion that there is a standard rate is an antitrust problem, not just bad practice.
• Antitrust is the risk that gets brokerages sued: price fixing agreeing commission rates between competing firms; group boycott agreeing to refuse to deal with a discount broker; market allocation dividing territories or client types; and tie-in arrangements. Sherman Act penalties are criminal.
• Procuring cause is the uninterrupted chain of events that brought about the sale. It decides commission disputes on open listings and after a listing expires.
• Unauthorised practice of law. A licensee may fill in the blanks on an approved form. Drafting clauses, advising on the legal effect of documents, or opining on title is practicing law. So is preparing a deed in most states.
• Errors and omissions insurance covers negligence in professional services. It generally does not cover fraud, intentional wrongdoing, or the mishandling of trust funds — which are exactly the things that end licenses.

Fair housing: seven classes, and the practices with names

The Fair Housing Act, 42 USC 3601 and following, began as Title VIII of the Civil Rights Act of 1968. It now protects seven classes, and the two added last are the two people forget.

• Steering. Directing people toward or away from areas based on a protected class, however gently and however well meant.
• Blockbusting, also called panic selling. Inducing people to sell by representing that members of a protected class are moving into the area.
• Redlining. Refusing or varying loans or insurance based on the composition of a neighborhood rather than the merits of the borrower or property.
• Advertising. 42 USC 3604(c) prohibits any notice, statement or advertisement indicating a preference or limitation. This applies even to transactions that are otherwise exempt.
• Enforcement. A complaint may be filed with HUD within one year, or a civil action brought in federal court within two years.

Value, and the three ways to estimate it

Market value is the most probable price a property should bring in a competitive and open market, with buyer and seller each acting prudently, neither under duress, and a reasonable exposure time. Market price is what a property actually sold for, which may be neither. Cost is a third thing again, and none of the three has to equal the others.

• The four characteristics of value are DUST. Demand, Utility, Scarcity, Transferability. All four must be present.
• Principle of substitution. A buyer will pay no more than the cost of acquiring an equally desirable substitute. This underlies all three approaches.
• Highest and best use. The use that is legally permissible, physically possible, financially feasible and maximally productive. All four, in that order.
• Progression and regression. A modest house gains value among better ones; a superior house loses value among lesser ones.
• Conformity, contribution, anticipation, change, supply and demand. Contribution is the one used in practice: an improvement adds what it contributes to value, which is frequently less than it cost.

• Depreciation has three causes. Physical deterioration — wear and tear. Functional obsolescence — the design is outdated, a one-bathroom four-bedroom house. External or economic obsolescence — something outside the property line, a new motorway. Physical and functional may be curable or incurable; external obsolescence is always incurable, because you cannot fix it from inside the boundary.
• Gross rent multiplier is sale price divided by monthly gross rent; gross income multiplier uses annual gross income. They are rules of thumb, they ignore expenses entirely, and the exam checks whether you noticed which period was quoted.
• A CMA is not an appraisal. A comparative market analysis is a licensee's pricing opinion for a client. A broker price opinion is a fuller written opinion, often for a lender. Only a licensed or certified appraiser produces an appraisal, and for most federally related transactions that is required by law.
• Assessed value is for taxation and is usually a fraction of market value set by an assessment ratio. Ad valorem tax is assessed value times the rate, often expressed in mills — one mill is one thousandth, or $1 per $1,000 of assessed value.

Financing, the federal disclosure clock, and the arithmetic

• Lien theory and title theory. In a lien theory state the borrower holds title and the lender has a lien; in a title theory state the lender holds title until the debt is paid. A deed of trust adds a third party, the trustee, and is what makes non-judicial foreclosure possible where it is used.
• Primary and secondary markets. The primary market originates loans to borrowers. The secondary market — Fannie Mae, Freddie Mac, Ginnie Mae — buys them from originators, which is what replenishes the money to lend again. It does not lend to the public.
• Conventional, FHA, VA, USDA. FHA insures and requires a mortgage insurance premium; VA guarantees a portion for eligible veterans, commonly with no down payment; USDA serves designated rural areas. Conventional loans above 80 percent loan-to-value normally carry private mortgage insurance.
• Clauses worth knowing. An acceleration clause makes the whole balance due on default. An alienation or due-on-sale clause makes it due on transfer, and is what prevents a loan being assumed. A defeasance clause requires release of the lien when the debt is paid. A subordination clause lets a later lien take priority.
• Points. One discount point is one percent of the loan amount, paid up front to buy the interest rate down. Note it is a percentage of the loan, not of the purchase price.

• RESPA, at 12 CFR 1024. Section 8 prohibits giving or accepting any fee, kickback or thing of value for the referral of settlement service business, and prohibits unearned fees and fee splitting where no service was performed. Paying for services actually rendered at market value is permitted. "Thing of value" is defined broadly enough to catch trips, discounts and special banking terms.
• Regulation Z implements Truth in Lending: the APR, the finance charge, and the rule that advertising a trigger term such as a down payment amount, payment amount, number of payments or finance charge requires the full disclosures to accompany it. A stated APR alone is not a trigger term.
• Prorations. Anything the seller has prepaid is credited to the seller and debited to the buyer; anything owed and unpaid for the seller's period of ownership is debited to the seller and credited to the buyer. The day of closing is conventionally charged to one side or the other by agreement, and whether your state uses a 360-day banker's year or actual days is a state portion question.