Contracts and Agency
This is the most heavily weighted national topic, covering the elements of enforceable contracts, the types of agreements used in real estate, and the agency relationship between licensees and the people they serve. Mastery here is essential to passing the exam.
Elements and Types of Contracts
A valid contract requires offer and acceptance (mutual assent), consideration, legal capacity of the parties, legal purpose, and, for real estate, a writing under the statute of frauds. Any change to a material term of an offer is a counteroffer that rejects the original offer. Real estate uses several contracts, including listing agreements, buyer agency agreements, and agreements of sale. A contract may be bilateral, where both parties promise performance, or unilateral, where only one party is obligated unless the other acts.
Listing Agreements
An exclusive-right-to-sell listing entitles the broker to a commission regardless of who procures the buyer, giving the broker the greatest protection. An exclusive-agency listing lets the seller sell without owing a commission, while an open listing allows multiple brokers and pays only the one who produces the buyer. Net listings, in which the broker keeps any amount above a set price, are discouraged or prohibited in many states because of the conflict of interest they create. Every listing should state the price, term, commission, and scope of authority.
Agency Relationships and Duties
Agency is the fiduciary relationship in which an agent acts on behalf of a principal. The agent owes the principal duties often summarized as care, obedience, loyalty, disclosure, accountability, and confidentiality. To customers, who are not clients, the agent owes only honesty and fair dealing. Agency can be created expressly by agreement or implied by conduct, and it terminates by performance, expiration, mutual agreement, or revocation.