Contracts
Contracts are the backbone of every transaction and the most heavily weighted national topic on the broker exam. Because a broker supervises the agreements that flow through the office, this topic covers what makes a contract valid, how offers work, the main contracts used in practice, and remedies for breach.
Essential Elements and Validity
A valid contract requires mutual assent (a clear offer and acceptance), consideration, legal capacity of the parties, a lawful object, and, under the statute of frauds, a writing for real estate sale contracts. Contracts are classified as valid (fully enforceable), void (no legal effect, such as an illegal purpose), voidable (one party may cancel, such as a minor's contract or one induced by fraud), or unenforceable (valid but barred from court enforcement, such as an oral land-sale contract). A broker reviewing office contracts must confirm every element is present before funds move.
Offer, Acceptance, and Counteroffers
An offer becomes a binding contract only when accepted exactly as made and the acceptance is communicated to the offeror. Any change to material terms is a counteroffer, which rejects the original offer and creates a new one. An offer may be revoked before acceptance and terminates on rejection, expiration, or the death or incapacity of a party. An option is a separate contract in which the optionor gives the optionee, for consideration, the irrevocable right to buy within a set time. A broker must train agents that multiple counteroffers can create confusion about which terms are actually on the table.
Common Real Estate Contracts
A listing agreement is an employment contract between a seller and a broker; types include exclusive right to sell (commission owed however the property sells during the term), exclusive agency (no commission if the owner sells it alone), and open (nonexclusive). A purchase and sale agreement sets the terms between buyer and seller. A buyer-broker agreement engages an agent to represent a buyer. A lease conveys the right to occupy. An installment (land) contract lets the buyer take possession while the seller keeps legal title until the price is paid. Listing and buyer agreements belong to the broker, not the individual agent.
Performance, Breach, and Remedies
A contract may end by full performance, mutual rescission, assignment, or novation (substituting a new contract or party, releasing the original). When a party breaches, remedies include specific performance (a court order to complete the sale, available because land is unique), money damages, liquidated damages (a pre-agreed amount such as forfeiture of the earnest money), and rescission (canceling and restoring the parties to their original positions). Time-is-of-the-essence clauses make deadlines strict. A broker holding a disputed deposit must not release it based on the agent's opinion of who breached.