California Real Estate Broker Exam — All Questions

Which set lists the essential elements of a valid California contract?

• a.A written instrument, a notary acknowledgment, recording and delivery
• b.Capable parties, mutual consent, a lawful object and sufficient consideration✓
• c.An offer, an appraisal, a title report and a signed escrow instruction
• d.Utility, scarcity, demand and transferability of the subject matter

Civil Code section 1550 requires parties capable of contracting, their consent, a lawful object and a sufficient cause or consideration. A writing is required only for the categories listed in the statute of frauds, and notarization, recording and delivery relate to conveyances rather than to contract formation. An appraisal, a title report and escrow instructions are transactional steps that follow a binding contract. Utility, scarcity, demand and transferability are the four elements of value in appraisal theory, which belong to a different subject entirely.

A California seller signs a purchase agreement while under threat of physical harm from the buyer. The contract is:

• a.Void from the beginning, because a contract signed under threat has no legal existence
• b.Voidable at the option of the seller, because consent obtained by duress is not free✓
• c.Valid and enforceable, because the seller's signature appears on the document
• d.Unenforceable by either party, because both signed the same defective instrument

Consent must be free, mutual and communicated. Consent obtained by duress, menace, fraud, undue influence or mistake is not free, and the contract is voidable at the option of the injured party rather than void. That distinction matters: a voidable contract stands until the injured party rescinds, so the seller could choose to affirm it. Contracts that are void from the outset include those with an unlawful object or made by a person judicially determined to be of unsound mind. A signature alone does not cure defective consent, and the wrongdoer cannot claim the defect.

Under Civil Code section 1624, which agreement must be in writing and signed by the party to be charged?

• a.A lease of real property for a term longer than one year✓
• b.A month-to-month rental agreement for an unfurnished apartment
• c.An agreement to pay a contractor for repairs completed in six weeks
• d.An oral promise to sell a used automobile for eight thousand dollars

Section 1624(a)(3) requires a writing for an agreement leasing real property for a period longer than one year, or for the sale of real property or an interest in it, and section 1624(a)(4) covers an agreement employing a broker for compensation. A month-to-month tenancy runs for less than a year at a time and may be oral. A repair agreement performable within a year is outside subdivision (a)(1). A sale of goods is governed by the Commercial Code, whose own writing requirement applies at a different threshold and is not part of Civil Code section 1624.

A California buyer's offer is met with a seller's response changing the closing date and raising the price. Legally the seller has made:

• a.A ratification, which validates the buyer's offer as originally submitted
• b.A qualified acceptance, which binds both parties on the buyer's original terms
• c.A conditional revocation, which suspends the buyer's offer for a reasonable time
• d.A counteroffer, which terminates the buyer's original offer and creates a new one✓

Acceptance must be absolute and unqualified. A response that changes any term is a counteroffer: it rejects and terminates the original offer and puts a new offer before the original offeror, who is then free to accept, reject or counter again. There is no such thing as a qualified acceptance that binds on the original terms. A revocation withdraws an offer rather than suspending another party's offer. And ratification is the adoption of an act previously done without authority, such as a principal approving an unauthorized act of an agent.

A California purchase agreement is fully performed by both parties at closing. The contract is then described as:

• a.Executed, meaning both parties have completely performed their obligations✓
• b.Executory, meaning something remains to be done by one or both parties
• c.Voidable, meaning one party retains the power to rescind after performance
• d.Unilateral, meaning only one party ever made an enforceable promise

An executed contract is one that has been fully performed by all parties, which is the state a purchase agreement reaches at closing. An executory contract is one in which performance remains outstanding, which describes the agreement during the escrow period. Voidable describes a defect in consent rather than a stage of performance. A unilateral contract is a promise exchanged for an act rather than for a return promise, which describes an option rather than a purchase agreement in which both sides make promises.

Under an exclusive right to sell listing, the California broker earns the commission if the property sells during the listing term:

• a.Only if the seller expressly approves payment at the close of escrow
• b.Only if the broker or a cooperating broker produces the buyer
• c.Only if the buyer was first shown the property by the listing broker
• d.Regardless of who produces the buyer, including the seller acting alone✓

An exclusive right to sell listing entitles the broker to the agreed compensation on a sale during the term no matter who produces the buyer, the seller included. An exclusive agency listing reserves the seller's right to sell personally without a commission, which is the second option. Limiting payment to buyers the broker personally showed describes an open listing's procuring cause analysis rather than an exclusive right to sell. And a listing is a binding contract, so the seller cannot condition earned compensation on later approval.

A California net listing provides that the broker keeps everything above a stated net figure to the seller. Such a listing:

• a.Is permitted, but the broker must disclose the amount of the profit✓
• b.Is prohibited outright by the Real Estate Law in every California transaction
• c.Requires prior written approval from the Real Estate Commissioner before use
• d.Converts automatically into an exclusive right to sell listing by operation of law

California permits a net listing, but Business and Professions Code section 10176(g) makes taking any secret or undisclosed compensation, commission or profit, or failing to reveal the full amount of the licensee's compensation before or at the meeting of the minds, a ground for suspension or revocation. Because the broker's profit under a net listing is unknown until a price is agreed, the disclosure duty is where brokers get into trouble. The form is not prohibited, no Commissioner approval exists for it, and no statute converts it into another form of listing.

A California exclusive listing contains a safety clause, sometimes called a protection or extender clause. Its function is to:

• a.Guarantee the broker a minimum fee even if the property does not sell at all
• b.Allow the seller to cancel the listing without cause at any point during the term
• c.Preserve the broker's commission if a registered prospect buys after expiration✓
• d.Extend the listing term automatically for successive periods until the property sells

A safety clause protects the broker's commission for a stated period after expiration where the buyer is someone the broker introduced to the property and identified to the seller in writing, usually within a short window after the listing ends. It prevents a seller and a prospect from waiting out the listing. It does not create a cancellation right for the seller, does not guarantee a fee where no sale occurs, and does not extend the listing itself; an exclusive listing must still carry a definite termination date under section 10176(f).

Under Business and Professions Code section 10147.5, the notice about the negotiability of compensation must appear:

• a.In at least 10-point boldface type immediately preceding the compensation provision✓
• b.In at least 14-point boldface type on the signature page of the agreement
• c.In ordinary type anywhere in the agreement, provided the parties initial it
• d.In a separate document delivered within three days after the agreement is signed

Section 10147.5 requires the statement that the amount or rate of real estate commissions is not fixed by law, that they are set by each broker individually, and that they may be negotiable, in not less than 10-point boldface type immediately preceding any provision relating to compensation, and subdivision (c) forbids printing the amount or rate in the form agreement. The 14-point boldface requirement belongs to the mortgage loan modification notice in section 10147.6. Ordinary type, initials and later delivery in a separate document do not satisfy the section.

Under Civil Code section 1670.50, a buyer-broker representation agreement must include terms addressing:

• a.The lender the buyer will use and the amount of the loan the buyer expects to obtain
• b.The buyer's maximum purchase price, minimum down payment and target closing date
• c.Compensation, services, when compensation is due, and termination✓
• d.The specific properties the buyer intends to view during the term of the agreement

Section 1670.50(b) requires the agreement to include, at a minimum, terms related to compensation of the real estate broker, the services to be rendered, when compensation is due, and contract termination. Subdivision (c) also requires the agent to give the buyer the agency disclosure form required by section 2079.14 before the representation agreement is executed. Price, down payment, closing date, financing details and a list of properties may all be discussed but none of them is a term the statute mandates.

Commissioner's Regulation 2906.2 creates a rebuttable presumption that it is practicable for a California buyer's agent to obtain a signed buyer-broker representation agreement before the agent:

• a.Orders a preliminary title report on the selected property
• b.Submits the buyer's written offer to the listing broker
• c.Shows the buyer a property in person or virtually✓
• d.Requests a loan preapproval letter from the buyer's lender

Regulation 2906.2(a) states that for purposes of Civil Code section 1670.50(a) there is a rebuttable presumption that it is practicable for a buyer's agent, or an affiliated salesperson or broker associate, to obtain a signed buyer-broker representation agreement before showing a buyer a property in person or virtually. Subdivision (b) defines a virtual showing, and subdivision (c) clarifies that a seller's agent showing a property at an open house is not acting as a buyer's agent. Submitting an offer, ordering a title report and gathering a preapproval letter are all later steps.

A California buyer submits a written offer and then telephones the listing agent to revoke it, before the seller has communicated any acceptance. The offer is:

• a.Irrevocable for three days, the period the law allows the seller to consider an offer
• b.Irrevocable, because the offer was in writing and accompanied by a deposit check
• c.Revoked, because an offer may be withdrawn before acceptance is communicated✓
• d.Revoked only if the buyer records a written notice with the county recorder

An offer may be revoked at any time before acceptance has been communicated to the offeror, and communication of the revocation to the offeree or the offeree's agent is effective. Putting the offer in writing does not make it irrevocable, and a deposit check is not consideration for keeping it open; that is what an option contract does. California imposes no statutory period during which an offer must remain open. And revocation is a communication between the parties, never a recorded instrument.

A liquidated damages provision in a California residential purchase agreement for a dwelling of not more than four units, one of which the buyer intends to occupy, limits the seller's damages to:

• a.Ten percent of the purchase price, without any separate signature requirement
• b.The full amount of the buyer's deposit, regardless of the size of the deposit
• c.The seller's actual out-of-pocket costs proven at trial in every case
• d.No more than 3 percent of the purchase price where separately initialed✓

Civil Code section 1675 provides that in a contract to buy and sell a dwelling of not more than four residential units, one of which the buyer intends to occupy, a liquidated damages provision is valid to the extent it does not exceed 3 percent of the purchase price, with amounts above that presumed invalid unless the party seeking to uphold them proves reasonableness. Section 1677 requires the provision to be separately signed or initialed by each party and, in a printed contract, set out in at least 10-point bold type or in contrasting red print in at least 8-point bold type. Retaining the entire deposit regardless of size, or 10 percent, exceeds the statutory presumption.

A California buyer and seller sign a purchase agreement, and the buyer then refuses to close although the seller has performed. The seller's remedy of specific performance asks the court to:

• a.Reform the contract to substitute terms the court considers more reasonable
• b.Award the seller punitive damages equal to three times the deposit amount
• c.Rescind the contract and restore both parties to their positions before signing
• d.Order the buyer to complete the purchase according to the terms of the contract✓

Specific performance is an equitable remedy compelling a party to perform the contract as written, and it is available in real estate because each parcel is unique so money damages may be inadequate. Punitive damages punish tortious conduct and are not a contract remedy, and no California statute trebles a real estate deposit. Rescission unwinds the contract, which is the opposite of compelling performance. Reformation corrects a written instrument that fails to express the parties' actual agreement, usually because of mutual mistake.

A California purchase agreement provides that the buyer's obligation is conditioned on obtaining a loan at a stated maximum rate. This provision is:

• a.A covenant, whose breach entitles the seller to damages but not to cancellation
• b.A contingency, which suspends the buyer's duty until it is satisfied or waived✓
• c.A condition subsequent, which terminates a duty that has already become absolute
• d.An option, which gives the buyer an irrevocable right to purchase for a stated period

A financing contingency is a condition precedent: the buyer's duty to complete the purchase does not become absolute unless and until the condition is satisfied or the buyer waives it. A covenant is a promise to do or refrain from doing something, and it operates on a different footing from a condition. A condition subsequent extinguishes a duty that has already arisen, which is not what a financing contingency does. An option is a separate contract supported by its own consideration, giving the optionee an irrevocable right to buy on stated terms.

Under Business and Professions Code section 10142, when a California licensee obtains a signature on a purchase agreement, the licensee must deliver a copy to the person signing:

• a.Within thirty days after the close of the escrow for the transaction
• b.As soon as reasonably practicable after the signature is obtained✓
• c.Only when the person signing makes a written request for the copy
• d.At the time the escrow holder issues the final settlement statement

Section 10142 requires a licensee who prepares or secures a signature on an agreement authorizing or retaining the licensee, or on a contract pertaining to those services or transactions, to deliver a copy to the person signing it as soon as reasonably practicable after the signature is obtained, and it allows electronic delivery where the parties have agreed to transact electronically. Waiting until after closing or until a settlement statement issues defeats the purpose, and the duty is not conditioned on the signer asking for the document.

A California real property sales contract as defined in Civil Code section 2985 is an agreement to convey title on satisfaction of conditions that does not require conveyance within:

• a.Thirty days from the date the buyer takes possession
• b.Ninety days from the date the contract is formed
• c.Five years from the date the contract is formed
• d.One year from the date the contract is formed✓

Section 2985(a) defines a real property sales contract as an agreement in which one party agrees to convey title to real property to another upon the satisfaction of specified conditions and that does not require conveyance of title within one year from the date of formation. It is the California land contract, sometimes called a contract of sale or installment land contract, under which the vendee takes equitable title and possession while the vendor keeps legal title as security. The other periods appear in various statutes but none of them is the definitional line.

In a California lease, the landlord's interest during the term is called the:

• a.Life estate, which terminates on the death of the named tenant
• b.Leasehold estate, while the tenant holds the leased fee estate
• c.Leased fee estate, while the tenant holds a leasehold estate✓
• d.Estate at sufferance, which arises the moment the lease is signed

When an owner leases property, the owner retains the leased fee, consisting of the right to receive rent and to have the property returned at the end of the term, and the tenant holds a leasehold estate giving the right of possession. Reversing the labels inverts the relationship. A life estate is measured by someone's lifetime and is a freehold estate rather than a leasehold. An estate at sufferance arises when a tenant remains in possession after the right to possession has ended, which is a holdover situation rather than the ordinary result of signing a lease.

A straight note, as the term is used in California practice, calls for:

• a.Periodic interest-only payments, with the principal due at maturity✓
• b.Level payments that fully retire both principal and interest over the term
• c.Payments that increase by a fixed percentage during each year of the term
• d.No payments of any kind until the property is sold or refinanced

A straight note, also called a term note, requires the borrower to pay interest periodically with the whole principal falling due in a single payment at maturity, so the balance never amortizes. A note calling for level payments that retire principal and interest is a fully amortized note. A payment that steps up each year describes a graduated payment loan. And a note requiring nothing until sale or refinance describes certain shared appreciation or deferred payment arrangements rather than a straight note.

A California broker who arranges the sale of fractional interests in a promissory note secured by a deed of trust must be alert to:

• a.The Alquist-Priolo Act, because the security property may lie in a fault zone
• b.The Subdivision Map Act, because the note is being divided into separate parcels
• c.The Unruh Civil Rights Act, because investors are business establishment customers
• d.Securities law, because a multi-lender arrangement can constitute the offer of a security✓

Selling fractional interests in a note to multiple investors can amount to the offer and sale of a security, and Business and Professions Code section 10177(n) makes a violation of the Corporate Securities Law a ground for discipline. Article 6 of the Real Estate Law, beginning at section 10237, sets conditions under which multi-lender transactions may proceed, and section 10177(p) makes violating that article a disciplinary ground. The Subdivision Map Act divides land, not notes. Unruh concerns discrimination by business establishments, and Alquist-Priolo concerns fault zone disclosure.

An option to purchase California real property is best classified as:

• a.An executed contract, since the option money changes hands at the outset
• b.A bilateral contract in which both parties promise to complete the transaction
• c.A unilateral contract binding the optionor but not the optionee✓
• d.A voidable contract, since the optionee may rescind it at any time before exercise

An option is a unilateral contract: the optionor promises to hold the offer open on stated terms for a stated time in exchange for consideration, while the optionee makes no promise to buy. That asymmetry is the point of the device. A bilateral contract would require mutual promises to perform, which a purchase agreement has but an option does not. The contract is executory until the option is exercised or lapses. And describing it as voidable confuses the optionee's freedom not to exercise with a defect in consent.

For a California option to be binding on the optionor, the arrangement must be supported by:

• a.A deposit held in the optionor's own personal bank account
• b.A recorded memorandum of option filed with the county recorder
• c.Actual consideration given by the optionee for the right to buy✓
• d.An appraisal establishing that the option price equals market value

An option must be supported by actual consideration moving from the optionee, because without it the optionor's promise to hold the offer open is a bare promise the optionor may withdraw. Recording a memorandum of option gives constructive notice and protects the optionee against later purchasers but is not what makes the option binding. Where the option money is deposited does not create the obligation, and money received by a broker on behalf of another is trust funds in any event. An option price need not equal market value; the parties set it.

Under Business and Professions Code section 10146, advance fees a California broker collects from a principal are:

• a.Refundable only if the principal cancels the agreement within three business days
• b.Earned income of the broker that may be deposited in the brokerage operating account
• c.Trust funds that must be deposited in a trust account, not the broker's own funds✓
• d.Exempt from the trust fund regulations because they are paid before services begin

Section 10146 states that advance fees collected are trust funds and not the funds of the agent, that they must be deposited in a trust account with a bank or other recognized depository, and that amounts may be withdrawn for the agent's benefit only when actually expended for the principal's benefit or five days after a verified account has been mailed to the principal. Each principal must receive a verified copy of the accounting at the end of each calendar quarter and when the contract is completely performed. Mishandling raises a presumption of a violation of Penal Code sections 506 and 506a, and the principal may recover treble damages.

Business and Professions Code section 10085 authorizes the Real Estate Commissioner to require that materials used to obtain advance fee agreements be submitted:

• a.At least ten calendar days before the materials are used, if the Commissioner asks✓
• b.Within thirty days after the first advance fee has been collected from a principal
• c.Only when a consumer has filed a verified written complaint about the materials
• d.Annually, as part of the broker's license renewal application to the Department

Section 10085 lets the Commissioner require that any or all materials used in obtaining advance fee agreements, including contract forms, solicitation letters and cards, and radio and television advertising, be submitted at least ten calendar days before use, and permits an order within ten days of receipt that the material not be used, disseminated or published if it would tend to mislead. Using material after such an order is a misdemeanor punishable by a fine not exceeding $2,500 or up to six months in county jail. The section imposes no post-collection, complaint-triggered or renewal-based filing.