Texas Real Estate Sales Agent — All Questions

Which of the following is NOT one of the essential elements required for a valid, enforceable real estate contract?

• a.Legal capacity of the parties
• b.Consideration
• c.Notarization of all buyer signatures✓
• d.Offer and acceptance (mutual assent)

A valid contract requires offer and acceptance, consideration, legal capacity, legal purpose, and (for real estate) a writing. Notarization is not required to form a valid contract, though it may be needed to record certain documents.

The legal doctrine requiring that contracts for the sale of real estate be in writing to be enforceable is the:

• a.Doctrine of laches
• b.Statute of frauds✓
• c.Statute of limitations
• d.Parol evidence rule

The statute of frauds requires that contracts transferring an interest in real estate be in writing and signed to be enforceable. The parol evidence rule limits use of prior oral statements to change a written contract.

In Texas, residential real estate sales contracts most commonly use forms that are:

• a.Written by the local Realtor association and mandatory statewide
• b.Promulgated (standardized) by TREC for license holders to use✓
• c.Provided only by the buyer's lender
• d.Drafted individually by each buyer's attorney

TREC promulgates standardized contract forms that Texas license holders are generally required to use for common residential transactions. This promotes consistency and protects consumers, though the exact forms are periodically updated.

A license holder who is not a licensed attorney may generally:

• a.Give the buyer legal advice about contract interpretation
• b.Add extensive addenda they write themselves
• c.Draft custom contract language for unusual clauses
• d.Fill in the blanks on a promulgated TREC form✓

License holders may complete the blanks on promulgated forms but may not practice law by drafting custom contract provisions or giving legal advice. Complex or unusual terms should be referred to an attorney.

Earnest money in a real estate contract functions primarily as:

• a.A good-faith deposit showing the buyer's serious intent to purchase✓
• b.The full purchase price paid up front
• c.A payment that replaces the down payment entirely
• d.A nonrefundable fee paid to the listing agent

Earnest money is a deposit that demonstrates the buyer's good faith and is typically credited toward the purchase price or closing costs at closing. If the buyer defaults without a valid contingency, the earnest money may be forfeited to the seller.

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

• a.Forcing the lender to approve the loan
• b.Allowing the buyer to cancel and recover earnest money if approved financing cannot be obtained✓
• c.Guaranteeing the seller will lower the price
• d.Requiring the seller to pay all closing costs

A financing contingency lets the buyer terminate the contract and typically recover earnest money if they cannot obtain the specified loan. It shifts the risk of loan denial away from the buyer.

The Texas 'option period' (termination option) in the standard residential contract generally allows the buyer to:

• a.Occupy the home before closing rent-free
• b.Terminate the contract for any reason during the option period in exchange for the option fee✓
• c.Extend the closing date indefinitely
• d.Force the seller to make all requested repairs

For a negotiated option fee, the buyer receives an unrestricted right to terminate the contract within the option period, commonly used to complete inspections. If the buyer does not terminate, the option simply expires and the contract continues.

Which of the following best describes a bilateral contract?

• a.Only one party is obligated to perform
• b.It must always be oral
• c.Both parties exchange mutual promises to perform✓
• d.No consideration is exchanged

In a bilateral contract, both parties make enforceable promises, such as the buyer promising to pay and the seller promising to convey. A unilateral contract, by contrast, is a promise in exchange for an act.

When an offeree responds to an offer by changing a material term, the response is legally a:

• a.Void contract
• b.Binding acceptance of the original offer
• c.Unilateral contract
• d.Counteroffer that rejects the original offer✓

Changing a material term rejects the original offer and creates a counteroffer, which the original offeror may accept or reject. The original offer is no longer available for acceptance once a counteroffer is made.

A contract that is missing an essential element and has no legal effect from the beginning is:

• a.Enforceable
• b.Void✓
• c.Executed
• d.Voidable

A void contract lacks a required element and has no legal effect at all. A voidable contract is valid until one party with the right to do so elects to disaffirm it.

A contract signed by a minor is generally considered:

• a.Automatically enforceable against the minor
• b.A criminal offense
• c.Voidable at the option of the minor✓
• d.Void from the start

Contracts with minors are usually voidable at the minor's option because minors lack full legal capacity. The minor may disaffirm the contract, though the adult party is typically bound.

'Time is of the essence' in a contract means:

• a.The contract never expires
• b.Deadlines are merely suggestions
• c.Deadlines must be met exactly, and failure to do so is a breach✓
• d.The parties may perform whenever convenient

When time is of the essence, the stated dates and deadlines are strictly enforced, and missing them can constitute default. This clause is common in real estate contracts to ensure timely closing.

Substituting a new contract for an existing one, or replacing a party with a new party by agreement, is known as:

• a.Assignment without consent
• b.Specific performance
• c.Liquidated damages
• d.Novation✓

Novation replaces an original contract or party with a new one, releasing the original obligor with all parties' consent. It differs from a simple assignment, which transfers rights but may not release the assignor.

If a buyer defaults, a contract clause that pre-sets the seller's damages (often the earnest money) is called a:

• a.Subordination clause
• b.Liquidated damages clause✓
• c.Habendum clause
• d.Specific performance clause

A liquidated damages clause fixes in advance the amount one party recovers if the other defaults, avoiding the need to prove actual damages. In many residential contracts, the earnest money serves this role.

A legal remedy in which a court orders a defaulting seller to actually convey the property as agreed is:

• a.Liquidated damages
• b.Novation
• c.Rescission
• d.Specific performance✓

Specific performance compels a party to perform the contract as promised, and it is available in real estate because each parcel is considered unique. A court may order the seller to deliver the deed rather than merely pay money.

The 'parol evidence rule' generally prevents a party from:

• a.Signing a contract electronically
• b.Assigning contract rights
• c.Recording a deed at the county
• d.Using prior oral statements to contradict the terms of a complete written contract✓

The parol evidence rule bars introducing prior or contemporaneous oral agreements to alter the terms of a fully integrated written contract. It supports the reliability of the written document.

In Texas, the Seller's Disclosure Notice for residential property generally requires the seller to disclose:

• a.The seller's asking price strategy
• b.The buyer's loan terms
• c.Known conditions and defects of the property✓
• d.The listing agent's commission

The Seller's Disclosure Notice requires sellers of most residential properties to disclose known material conditions and defects. It is based on the seller's actual knowledge, and requirements can change over time.

An 'as-is' clause in a purchase contract generally means the buyer agrees to:

• a.Accept the property in its present condition, without the seller being obligated to make repairs✓
• b.Pay above the appraised value
• c.Give up the right to a deed
• d.Waive the right to inspect the property

An as-is clause means the seller is not obligated to make repairs and the buyer accepts the current condition, though buyers typically still inspect. It does not eliminate the seller's duty to disclose known material defects.

An assignment of a contract typically transfers:

• a.Only obligations, never rights
• b.Ownership of the brokerage firm
• c.The assignor's rights under the contract to a third party✓
• d.Title to the real estate immediately

An assignment transfers the assignor's contractual rights to an assignee, who may then enforce them, subject to any anti-assignment terms. Unlike novation, an assignment may not release the original party from liability.

A contract in which all parties have fully performed their obligations is described as:

• a.Executory
• b.Void
• c.Voidable
• d.Executed✓

An executed contract is one that has been fully performed by all parties, such as after a completed closing. An executory contract still has obligations remaining to be performed.

For an acceptance to create a binding contract under the common law 'mirror image' rule, the acceptance must:

• a.Include additional consideration
• b.Be delivered only in person
• c.Match the terms of the offer exactly without material changes✓
• d.Add several new favorable terms for the offeree

Under the mirror image rule, acceptance must agree to the offer's terms exactly; a change in material terms is a counteroffer, not an acceptance. This ensures both parties agree to the same bargain.

A contract provision allowing a buyer to transfer their rights and obligations under the purchase contract to another buyer is a(n):

• a.Assignment clause✓
• b.Defeasance clause
• c.Habendum clause
• d.Subordination clause

An assignment clause permits the buyer to assign the contract to a third party, who then steps into the buyer's position, subject to any limits in the contract. Some contracts restrict or prohibit assignment without the seller's consent.

The TREC One to Four Family Residential Contract (Resale) is the promulgated form generally used for the sale of:

• a.A brand-new home purchased directly from the builder before construction begins
• b.Unimproved farm and ranch acreage that has no residential structures on it
• c.A previously owned single-family home, duplex, triplex, or fourplex✓
• d.Only large multi-tenant apartment complexes and mixed-use commercial towers

This TREC form is used for resale (previously owned) residential property of one to four units. New construction from a builder, unimproved land, and farm and ranch tracts each have their own separate promulgated forms.

A buyer is purchasing a finished home directly from a builder in a completed subdivision. Which TREC promulgated form is generally appropriate?

• a.The Farm and Ranch Contract, because the lot was formerly agricultural land
• b.The New Home Contract (Completed Construction)✓
• c.The One to Four Family Residential Contract (Resale), used for any home sale
• d.The Residential Condominium Contract, used for all newly built dwellings

TREC promulgates a New Home Contract (Completed Construction) for a home already built and sold by the builder. The Resale form is for previously owned property, and condominium and farm and ranch sales use their own dedicated forms.

When a buyer's purchase depends on obtaining a conventional, FHA, or VA loan from a third-party lender, the license holder attaches which TREC document to the contract?

• a.The Non-Realty Items Addendum listing personal property conveyed with the home
• b.The Third Party Financing Addendum✓
• c.The Seller's Temporary Residential Lease authorizing the seller to remain after closing
• d.The Addendum for Sale of Other Property by Buyer used for contingent sales

The Third Party Financing Addendum documents the loan type and gives the buyer the right to terminate if the specified financing is not approved. The other addenda cover unrelated matters such as leasebacks, contingent sales, and personal property.

Under the termination option (option period) in the TREC residential contract, in exchange for the option fee the buyer receives:

• a.The unrestricted right to terminate the contract for any reason within the option period✓
• b.The right to occupy and move into the property immediately without paying rent
• c.An automatic extension of the closing date for as long as the buyer wishes
• d.A guarantee that the seller will complete every repair the buyer requests after inspection

The option fee buys the buyer an unrestricted right to terminate the contract for any reason during the negotiated option period, commonly used to complete inspections. It does not force repairs, grant occupancy, or extend closing.

Under the current TREC residential contract, the buyer must generally deliver the earnest money and the option fee to the escrow agent within how many days after the effective date?

• a.Within 30 days, the same deadline that applies to the buyer's loan application
• b.Within 3 days after the effective date of the contract✓
• c.Within 10 business days, excluding weekends and any federal holidays
• d.There is no deadline, so the buyer may deliver both amounts any time before closing

The current TREC contract requires the buyer to deliver the earnest money and option fee to the escrow agent within 3 days after the effective date. Missing that deadline can be a default; exact timing rules are set by TREC and can change.

The 'effective date' of a TREC residential contract is important because it:

• a.Starts the countdown for time-sensitive periods such as the option period and financing deadlines✓
• b.Determines the date the listing agreement between the seller and broker expires
• c.Marks the day the deed is recorded in the county real property records
• d.Is always the same as the closing date set out in the body of the contract

The effective date is the date of final acceptance and communication of the fully agreed contract, and it starts the clock for the option period, financing, and other performance deadlines. It is distinct from the closing date and the recording of the deed.

A residential listing agreement between a seller and a broker is BEST described as:

• a.A financing instrument that pledges the home as security for the broker's commission
• b.An employment (agency) contract authorizing the broker to market and find a buyer for the property✓
• c.A conveyance that transfers legal title to the broker and holds it until the property is finally sold to a qualified buyer
• d.A unilateral promise by the buyer to purchase the property at a stated price

A listing agreement is an employment contract that creates an agency relationship, authorizing the broker to market the property and earn a commission. It does not transfer title, pledge the property, or bind a buyer.

A buyer representation agreement is used primarily to:

• a.Waive the buyer's right to inspect the property during the option period
• b.Transfer the buyer's earnest money directly to the listing broker at the time of signing
• c.Guarantee in writing that the buyer will qualify for a mortgage loan on any property
• d.Establish an agency relationship in which the broker represents the buyer's interests✓

A buyer representation agreement creates an agency relationship in which the broker owes the buyer fiduciary duties and can negotiate on the buyer's behalf. It does not transfer earnest money, guarantee financing, or waive inspection rights.

For a contract for the sale of Texas real estate to be enforceable under the statute of frauds, it must be:

• a.In writing and signed by the party against whom enforcement is sought✓
• b.Witnessed by two disinterested adults who are present when the parties sign
• c.Notarized by a Texas notary and recorded in the county records within ten days
• d.Reviewed and approved in advance by an attorney representing each party

The statute of frauds requires a contract conveying an interest in real estate to be in writing and signed by the party to be charged. Notarization, recording, attorney review, and witnesses are not required to make the agreement enforceable between the parties.

An 'amendment' to a TREC residential contract is used when the parties want to:

• a.Change an agreed term of the existing contract, such as price or repairs, after it is signed✓
• b.Report the closed sale to the local appraisal district for property tax purposes
• c.Cancel the contract entirely and release the earnest money back to the buyer
• d.Add a completely unrelated second property to the same purchase transaction

The Amendment form lets the buyer and seller modify agreed terms of an existing contract, such as sales price, closing date, or repairs, with both parties' signatures. Termination and release of earnest money are handled by a separate form.

In the TREC residential contract, the buyer's right to terminate if the property does not appraise for at least the sales price is typically addressed in the:

• a.Non-Realty Items Addendum listing which fixtures and personal property convey
• b.Seller's Temporary Residential Lease attached when the seller remains after closing
• c.Homeowners Association Addendum disclosing mandatory membership and assessments
• d.Third Party Financing Addendum, which governs the appraisal condition for a financed purchase✓

In a financed purchase, the appraisal (property approval) condition is part of the Third Party Financing Addendum, which lets the buyer terminate if the lender's required value is not met. The other addenda cover leasebacks, personal property, and HOA matters.

A contract 'contingency' is BEST described as:

• a.A clause that makes the entire contract void from the very moment it is signed
• b.The commission amount the seller agrees to pay the listing and buyer brokerages
• c.A condition that must be satisfied or waived before a party is obligated to close✓
• d.A penalty automatically charged to whichever party is the first to breach the agreement

A contingency is a condition, such as financing, appraisal, or inspection, that must be met or waived for the contract to proceed to closing. If a valid contingency fails, the protected party may usually terminate without penalty.

A buyer's offer to purchase becomes a binding contract at the moment:

• a.The buyer signs and dates the offer, regardless of whether the seller has responded
• b.The listing agent enters the property into the multiple listing service as pending
• c.The title company opens an escrow file and orders the title commitment
• d.The seller accepts the exact terms and that acceptance is communicated back to the buyer✓

A binding contract forms when the offeree accepts the offer's exact terms and that acceptance is communicated to the offeror. Signing an offer, changing the MLS status, or opening escrow does not by itself create the contract.

An offeror generally may revoke an offer to purchase real estate:

• a.Never, because a written real estate offer is irrevocable once it is delivered
• b.Any time before the offeree communicates acceptance, unless the offer is an option supported by consideration✓
• c.Only after waiting a full ten business days from the date the written offer was first delivered to the other party
• d.Only with the written permission of the listing broker handling the transaction

An offer may generally be revoked any time before the offeree accepts and communicates that acceptance. An exception is an option contract, where separate consideration keeps the offer open for the agreed period.

The 'consideration' element of a valid purchase contract refers to:

• a.Something of legal value that each party gives or promises, such as money for the property✓
• b.The careful thought the buyer gives before deciding to submit an offer
• c.The appraiser's professional opinion of the property's current fair market value, based on comparable recent sales
• d.The polite and professional way each party treats the other during negotiations

Consideration is the bargained-for exchange of legal value, such as the buyer's promise to pay money and the seller's promise to convey title. It is a required element for an enforceable contract.

A contract induced by one party's intentional false statement of a material fact that the other party reasonably relies on may be:

• a.Automatically enforced against both parties because it was signed voluntarily
• b.Converted into an option contract for the benefit of the innocent party
• c.Voidable by the innocent party because of fraud in the inducement✓
• d.Treated as fully executed the moment the misrepresentation is discovered

Fraud in the inducement makes a contract voidable at the option of the innocent party, who may rescind and seek damages. A contract based on fraud is not automatically enforced against the defrauded party.

The TREC residential contract's default paragraph generally gives the non-defaulting SELLER, when the buyer defaults, the right to:

• a.Force the buyer's lender to fund the loan despite the buyer's refusal to close
• b.Terminate and receive the earnest money as liquidated damages, or seek to enforce specific performance✓
• c.Require the buyer's real estate agent to personally pay the seller's lost profit
• d.Automatically keep the buyer's earnest money and also collect triple that amount as a penalty

On buyer default, the seller may typically terminate and receive the earnest money as liquidated damages or pursue specific performance, as provided in the contract's default paragraph. The remedies do not include treble penalties or forcing a lender to fund.

'Specific performance' is a particularly meaningful remedy in real estate contracts because:

• a.Each parcel of land is considered unique, so money damages may not fully compensate the buyer✓
• b.It allows the defaulting party to walk away by simply forfeiting the earnest money deposit
• c.It automatically doubles the amount of monetary damages the injured party can recover
• d.It requires the losing party to pay all of the winning party's attorney fees and court costs in every single case

Because real property is legally treated as unique, courts may order specific performance so the buyer actually receives the bargained-for parcel rather than mere money damages. It is an equitable remedy compelling the party to perform as promised.

When a seller accepts a buyer's offer but changes the closing date and returns it signed, the seller has made:

• a.An assignment of the contract to the buyer's lender for funding
• b.A valid acceptance, because changing the closing date is never considered a material term
• c.A counteroffer, which the buyer may accept, reject, or counter in turn✓
• d.A binding option contract that keeps the original offer open for thirty days

Changing a material term such as the closing date rejects the original offer and creates a counteroffer. No binding contract exists until one party accepts the other's terms without material change.

A general warranty deed differs from a special warranty deed in that the general warranty deed:

• a.Is used exclusively to move property between spouses as part of a divorce or estate-planning settlement arrangement
• b.Warrants title against defects arising at any time, even before the grantor owned the property✓
• c.Must always be signed by both the grantor and the grantee to be valid
• d.Transfers only the interest the grantor happens to own, with no promises about title

A general warranty deed warrants title against all defects, including those predating the grantor's ownership, giving the grantee the broadest protection. A special warranty deed covers only defects arising during the grantor's period of ownership.

The clause in a deed that defines the extent of the ownership interest being conveyed, such as 'to have and to hold,' is the:

• a.Defeasance clause, which cancels a lien once the underlying debt is paid
• b.Acceleration clause, which lets a lender demand the full balance on default
• c.Habendum clause✓
• d.Subordination clause, which changes the priority order of competing liens

The habendum clause, beginning 'to have and to hold,' describes the extent and type of ownership interest granted. Acceleration, defeasance, and subordination clauses are features of financing instruments, not the granting portion of a deed.

For a deed to transfer title, 'delivery and acceptance' generally means the deed must be:

• a.Delivered by the grantor with intent to convey and accepted by the grantee during the grantor's life✓
• b.Signed by the grantee and returned to the grantor to confirm the grantee agrees
• c.Physically handed to the grantee's attorney rather than to the grantee in person
• d.Mailed to the county clerk and stamped as officially recorded before it has any effect

Title passes when the grantor delivers the deed intending to convey and the grantee accepts it, typically while the grantor is alive. Recording is not required for a valid transfer between the parties, and the grantee need not sign the deed.

A title commitment issued by a title company before closing primarily tells the buyer:

• a.The monthly principal and interest payment the buyer will owe after closing
• b.The conditions under which the title company will insure title, including exceptions and required items✓
• c.The exact price the seller originally paid when the seller first acquired the property
• d.A guaranteed appraised value that the lender will accept for loan approval

A title commitment sets out the terms and exceptions under which the title company will issue a policy, disclosing liens, easements, and requirements that must be resolved. It is not a purchase-price history, an appraisal, or a loan payment schedule.

A 'cloud on title' refers to:

• a.A temporary weather-related delay that postpones the scheduled closing date
• b.A claim, lien, or defect that may impair or call into question the owner's title✓
• c.An appraisal that comes in below the agreed sales price of the property
• d.The lender's requirement that the buyer purchase private mortgage insurance

A cloud on title is any claim, encumbrance, or apparent defect, such as an old lien or a break in the chain of title, that could impair marketable title. It is often resolved through a release, correction, or a quitclaim deed.

'Marketable title' is BEST described as title that is:

• a.Guaranteed by the seller to be completely free of every possible easement forever
• b.Certified personally by the real estate sales agent handling the transaction
• c.Automatically transferred to the buyer as soon as the offer is accepted
• d.Reasonably free from doubt and defects so that a prudent buyer would accept it✓

Marketable title is title reasonably free from doubt, defects, or the threat of litigation, such that a well-informed buyer would accept it. It need not be perfect, but it must not expose the buyer to unreasonable risk.

In the TREC contract, if the buyer terminates during the option period, the earnest money is generally:

• a.Forfeited to the seller as liquidated damages for the failed transaction
• b.Refunded to the buyer, while the seller keeps the separately negotiated option fee✓
• c.Split evenly between the buyer and the seller regardless of who terminated
• d.Paid entirely to the listing broker to compensate for lost marketing time

A timely termination during the option period entitles the buyer to a refund of the earnest money, while the option fee is generally retained by the seller as consideration for the option. The option gives the buyer the right to walk away for any reason.

An 'executory contract' is one in which:

• a.One or more obligations remain to be performed, such as before closing occurs✓
• b.The seller has executed the deed but the buyer has refused to accept it
• c.Both parties have already fully performed every obligation, and nothing remains to be done
• d.The contract has been declared void by a court and has no further legal effect

An executory contract still has performance remaining by one or both parties, as in the period between signing and closing. Once all obligations are performed, the contract is described as executed.

A seller and buyer sign a contract, then later mutually agree in writing to cancel it and return the parties to their pre-contract positions. This is:

• a.Subrogation, substituting one party's legal claim in place of another's
• b.Specific performance, in which a court compels the parties to complete the sale
• c.Assignment, transferring the buyer's rights to a third party who will close instead
• d.Rescission, unwinding the contract by mutual agreement of the parties✓

Rescission cancels the contract and, by mutual agreement, restores the parties to their positions before they contracted. It differs from assignment, specific performance, and subrogation, which serve entirely different purposes.