Arkansas Real Estate Broker Exam — All Questions

Which is an essential element of a valid real estate contract?

• a.A licensed broker's signature
• b.A recorded legal description
• c.An earnest money deposit
• d.Legally competent parties✓

A valid contract requires competent parties, mutual assent shown by offer and acceptance, consideration, a lawful object, and, for an interest in land, a writing signed by the party to be charged under the statute of frauds. Capacity is one of those elements: a contract signed by a minor or by a person adjudicated incompetent is voidable or void. A broker's signature is not an element, since owners may contract directly. Earnest money is customary evidence of good faith but is not required for a contract to be binding, and recording affects notice to third parties rather than validity between the parties.

An option to purchase real estate is a unilateral contract because:

• a.both parties are bound but only one may sue for performance
• b.only the optionor is bound; the optionee may choose not to buy✓
• c.neither party is bound until the option money is deposited
• d.only the optionee is bound; the optionor may sell to anyone

In an option, the optionor sells the optionee a right to buy on stated terms within a stated time. The optionor is bound to keep the offer open and to convey if the option is exercised; the optionee has no obligation to buy and loses only the option consideration by walking away. That one-sided obligation is what makes it unilateral. A sales contract, by contrast, is bilateral, because each side has promised something: the buyer to buy and the seller to sell, and either may sue for breach.

Regulation 10.10(a) makes an Arkansas licensee responsible for seeing that the exact agreement of the parties is in writing and that:

• a.the principal broker keeps the only signed original in the file
• b.the parties receive copies of those agreements signed by all parties✓
• c.the agreements are filed with the Commission within thirty days
• d.the agreements are recorded in the county where the property lies

Regulation 10.10(a) provides that a licensee "shall see that the exact agreement of the parties regarding real estate is in writing" and "shall also see that clients and other parties to the transaction with whom the licensee deals receive copies of such agreements signed by all parties," naming exclusive agency agreements, real estate contracts, closing statements, lease agreements, management agreements and financial commitments as examples. It strongly recommends obtaining written acknowledgment that copies were received. Regulation 10.10(b) adds that non-exclusive agreements are strongly recommended to be in writing as well. Recording and Commission filing are not required.

When a firm holds an exclusive listing, Regulation 10.13(a) requires a selling licensee who receives an offer to present it to the listing firm not later than:

• a.forty-eight hours after the buyer signs the written offer
• b.the close of the next business day after receiving the offer✓
• c.the next regularly scheduled meeting of the two brokers
• d.the close of the third business day after receiving the offer

Regulation 10.13(a) provides that "any offers received by the selling licensee shall be presented to the firm holding the exclusive listing contract not later than the close of the next business day after receipt of the offer. Likewise, all earnest moneys and deposits shall be forwarded to the listing firm for deposit in the listing firm's trust account." The same rule bars the selling licensee from contacting the seller about showing or negotiating without permission from the listing firm; the selling licensee may accompany the listing licensee when the offer is presented, but only with that licensee's permission.

Earnest money delivered with an offer to purchase in Arkansas is:

• a.trust funds belonging to others until the contract directs otherwise✓
• b.a nonrefundable option fee that the buyer forfeits in every instance
• c.the seller's property from the moment the offer is delivered to them
• d.the listing broker's commission, earned when the offer is accepted

Regulation 10.8(a) defines trust funds as "money or other things of value not belonging to the principal broker but which are received by the principal broker or any of the principal broker's licensees in connection with a real estate transaction or real estate activity, including, without limitation, clients' moneys, earnest moneys, rents, advance fees, deposits," and provides that any funds deposited in a broker's trust account are presumed to be trust funds. Regulation 10.7(a)(1) requires a licensee to deliver such money to the principal broker immediately, and Regulation 10.9(a) forbids disbursing it contrary to the contract under which it was received.

A financing contingency in a sales contract protects the buyer by:

• a.extending the closing date automatically until financing is arranged
• b.obligating the lender to fund the loan at the contract interest rate
• c.permitting the buyer to cancel if the stated loan cannot be obtained✓
• d.requiring the seller to carry the balance if the lender declines

A contingency is a condition that must be satisfied or waived before a party's duty to perform arises. A financing contingency describes the loan the buyer will seek, usually by type, amount, maximum rate and a deadline, and if that loan cannot be obtained within the deadline the buyer may terminate and, under the contract's terms, recover the earnest money. It does not bind the seller to provide financing, does not obligate any lender, and does not extend the closing date by itself; an extension requires a written amendment signed by both parties.

Buyer and seller both demand the earnest money after a contract falls through. Regulation 10.9(c) lets the Arkansas principal broker resolve the standoff by:

• a.paying the funds to whichever party first makes a written demand
• b.filing an interpleader action in a court of competent jurisdiction✓
• c.holding the funds until the licenses of both agents are renewed
• d.applying the funds to the firm's commission and refunding the rest

Regulation 10.9(c)(5) lists the filing of an interpleader action in a court of competent jurisdiction as one of the circumstances in which a broker has properly discharged the duty to account for and remit trust funds. The broker deposits the disputed money with the court and lets the court decide who is entitled to it. Regulation 10.9(c) also permits disbursement upon a written agreement signed by all parties having an interest in the funds, or upon a court order. Paying whoever asks first, or taking the commission out of disputed funds, would violate Regulation 10.9(a) and (b).

Ark. Code Ann. §§ 17-42-317(c) and 17-42-318(c) both provide that nothing in those sections permits a licensee to:

• a.present an offer directly to a seller who is represented by counsel
• b.perform any act or service that constitutes the practice of law✓
• c.accept compensation from a party other than the principal broker
• d.prepare a comparative market analysis for a prospective seller

Sections 17-42-317(c) and 17-42-318(c) each read: "This section does not permit a licensee to perform any act or service that constitutes the practice of law." The line matters in Arkansas because Regulation 10.10(c) requires real estate forms used in the regular course of business to be approved by a licensed Arkansas attorney before use, following Pope County Bar Association, Inc. v. Suggs. Presenting offers is expressly required by § 17-42-317(a)(2), preparing a market analysis is authorized by Ark. Code Ann. § 17-42-110 subject to the limits in subsection (d), and the compensation restriction comes from Regulation 8.3(b), not from these subsections.

The statute of frauds affects real estate practice by requiring that a contract for the sale of an interest in land be:

• a.in writing and signed by the party to be charged✓
• b.notarized and recorded in the county land records
• c.reviewed by an attorney before either party signs it
• d.supported by earnest money of at least one percent

The statute of frauds makes certain agreements unenforceable unless there is a written memorandum signed by the party against whom enforcement is sought. Contracts for the sale of land or an interest in land are the classic category, along with leases longer than a stated term. The writing must identify the parties, the property and the essential terms. Notarization and recording relate to acknowledging and giving public notice of an instrument, not to enforceability between the parties; and neither earnest money nor attorney review is required by the statute, though AREC Regulation 10.10(c) does require attorney-approved forms.

Regulation 10.12(a) requires that all offers received on a specific property be:

• a.presented to the seller in the exact order the offers were received
• b.presented to the seller only if they meet or exceed the list price
• c.promptly presented to the seller by the listing firm or its designee✓
• d.presented to the seller only after the earnest money check clears

Regulation 10.12(a) provides that "all offers received on a specific property shall promptly be presented to the seller by the listing firm or other licensee designated by an authorized representative of the listing firm." There is no low-offer exception and no waiting for funds to clear. The duty is reinforced by Ark. Code Ann. § 17-42-317(a)(2), which requires the seller's agent to accept delivery of and present offers in a timely manner regardless of whether the property is already under contract, and by Regulation 10.13(a), which routes offers received by a selling licensee to the listing firm by the close of the next business day.

Under Ark. Code Ann. § 17-42-107(b), a salesperson or executive broker suing to recover a commission may bring that action only against:

• a.the principal broker with whom the licensee is or was licensed✓
• b.the closing agent who disbursed the funds at settlement
• c.the buyer who agreed in writing to pay the licensee's fee
• d.the seller who signed the listing contract with the firm

Section 17-42-107(b) provides that "no salesperson, executive broker, or associate broker may sue in his or her own capacity for the recovery of fees, commissions, or compensation for services as a salesperson, executive broker, or associate broker unless the action is against the principal broker with whom he or she is licensed or was licensed at the time the acts were performed." Section 17-42-107(a) is the companion rule for the firm side: no action for compensation may be brought at all unless the plaintiff held an active principal broker or property management broker license, or owned the firm that performed the acts through such a licensee, at the time.

In a mortgage loan, the instrument that creates the borrower's personal promise to repay the debt is the:

• a.promissory note✓
• b.mortgage instrument
• c.satisfaction piece
• d.deed of trust

Two instruments are executed at a residential closing. The promissory note is the borrower's written promise to repay a stated sum on stated terms, and it is the evidence of the debt. The mortgage, or in title-theory practice the deed of trust, is the security instrument: it pledges the property as collateral and gives the lender the right to foreclose if the note is not paid. A satisfaction or release is recorded after the debt is paid to clear the lien. A note without a security instrument is an unsecured debt; a security instrument without a note secures nothing.

In a fully amortizing fixed-rate mortgage, each scheduled payment:

• a.rises each year while the interest rate stays fixed for the whole term
• b.covers interest only, leaving the full principal due at the maturity date
• c.is level, with the interest share falling as the principal share rises✓
• d.is level, with the interest share rising as the principal share falls

In full amortization the periodic payment stays level and is split between interest and principal. Interest is charged on the outstanding balance, so as the balance falls the interest portion of each payment falls and the principal portion grows, and the loan reaches a zero balance at maturity. A payment that rises on a schedule describes a graduated payment mortgage, and a loan that pays interest only leaves a balloon balance due at maturity. Negative amortization is the opposite case, where the payment does not even cover accrued interest and the balance grows.

A due-on-sale clause in a mortgage gives the lender the right to:

• a.release part of the security when the balance falls
• b.raise the interest rate when market rates increase
• c.demand the full balance when the property is sold✓
• d.collect a penalty when the borrower repays the loan early

A due-on-sale or alienation clause lets the lender accelerate the loan and call the entire unpaid balance due if the borrower transfers the property without the lender's consent. Its practical effect is that most modern conventional loans cannot be assumed. An escalation clause changes the rate; a partial release clause frees individual parcels from a blanket mortgage as the balance is paid down; and a prepayment penalty charges the borrower for paying early. Under Regulation Z, adding a prepayment penalty after the Closing Disclosure has been delivered is one of the three changes that restart the three-business-day waiting period.

Private mortgage insurance on a conventional loan protects:

• a.the property against fire and storm damage
• b.the lender against loss if the borrower defaults✓
• c.the borrower against loss if the lender fails
• d.the borrower's family if the borrower dies

Private mortgage insurance is bought by the borrower but indemnifies the lender, covering part of the lender's loss on default. It is typically required on a conventional loan when the loan-to-value ratio exceeds eighty percent, which is why a twenty percent down payment avoids it. Mortgage life insurance pays off the balance if the borrower dies, and hazard or homeowners insurance covers physical damage to the property. FHA charges its own mortgage insurance premiums, and VA charges a funding fee rather than mortgage insurance.

A lender requires flood insurance on a home because the home is:

• a.within one mile of a river, lake, or other body of water
• b.in a special flood hazard area shown on a FEMA flood map✓
• c.built before the National Flood Insurance Program began
• d.financed with a loan exceeding eighty percent of its value

Federal law requires flood insurance as a condition of a federally regulated or federally related mortgage when the improved structure sits in a special flood hazard area, the zone with roughly a one percent annual chance of flooding, as delineated on FEMA's Flood Insurance Rate Map. The lender documents the finding on a standard flood hazard determination form. Proximity to water is not the legal test, since the mapped zone is what governs; the age of the structure affects rating rather than the requirement; and the loan-to-value ratio is what triggers private mortgage insurance, not flood coverage.

The seller has paid the full calendar-year property tax and the sale closes on June 30. At settlement the buyer ordinarily:

• a.receives a credit for the remaining half of the year
• b.pays nothing, because the seller's payment covered the year
• c.reimburses the seller for the entire year's property tax
• d.reimburses the seller for the remaining half of the year✓

Prorating divides a recurring expense between seller and buyer according to who owned the property during the period the expense covers. Because the seller has already paid taxes covering the rest of the calendar year, the buyer must reimburse the seller for the portion running from the closing date to year end. On the settlement statement that appears as a debit to the buyer and a credit to the seller. The mirror case is a tax paid in arrears: there the seller credits the buyer for the part of the period the seller owned the property.

In a judicial foreclosure, the lender obtains a court decree and the property is then:

• a.transferred to the county for sale at the next tax auction
• b.conveyed directly to the lender without any sale being held
• c.returned to the borrower once the arrearage has been cured
• d.sold at a public sale, with the proceeds applied to the debt✓

Judicial foreclosure is a lawsuit. The lender proves the default, the court enters a decree of foreclosure, and the property is sold at a public sale conducted under the court's authority, with the proceeds applied first to costs and then to the secured debt. If the sale brings less than the debt the lender may seek a deficiency judgment where state law allows one; if it brings more, the surplus goes to junior lienholders and then to the borrower. Conveying the property directly to the lender without a sale describes a deed in lieu of foreclosure, which is a voluntary alternative.