Contracts and Agency
Contracts and agency relationships are at the heart of real estate practice and carry the largest weight on the exam. This chapter reviews the elements of an enforceable contract, the main real estate agreements, and the fiduciary duties a licensee owes a principal.
Elements of a Valid Contract
A valid contract requires offer and acceptance (mutual assent), consideration, legal capacity of the parties, a lawful objective, and, for real estate, a writing signed by the parties under the statute of frauds. A contract with a minor or an incapacitated person is voidable at that party's option. Contracts may be classified as valid, void, voidable, or unenforceable, and understanding these distinctions helps a licensee spot problems early.
Listing and Purchase Agreements
An exclusive right-to-sell listing pays the broker regardless of who finds the buyer, while an exclusive agency listing lets the owner sell without owing commission, and an open listing allows multiple brokers to compete. A purchase agreement sets price, contingencies, closing date, and remedies. Time is often of the essence, and earnest money shows the buyer's good faith. Careful contract drafting reduces disputes and protects both parties.
Agency Relationships and Fiduciary Duties
An agency relationship forms when a principal authorizes a licensee to act on their behalf. The agent owes fiduciary duties often summarized as care, obedience, loyalty, disclosure, accounting, and confidentiality. Loyalty and confidentiality require the agent to protect the client's negotiating position, such as not revealing a buyer's maximum price. Agents also owe honesty and fair dealing to third parties, including disclosure of known material facts.