Real Estate Exam

Contract

A legally enforceable agreement between competent parties to do a legal act, supported by consideration.

Four essentials of a valid contract

Competent parties, offer and acceptance (mutual assent), consideration, and a legal purpose. Real estate contracts must also be in writing.

Statute of Frauds

Requires contracts to sell/transfer real property (and leases over 1 year) to be in writing to be enforceable.

Valid contract

Meets all legal requirements and is binding and enforceable on both parties.

Void contract

Has no legal effect because it lacks an essential element (e.g., illegal purpose); never enforceable.

Voidable contract

Otherwise valid, but one party has the right to cancel it (minor, fraud, duress, misrepresentation).

Unenforceable contract

Valid between the parties but a court will not enforce it (e.g., not in writing, statute of limitations passed).

Express vs implied contract

Express: all terms stated orally or in writing. Implied: created by the parties' conduct rather than words.

Bilateral contract

Both parties promise to perform (a promise for a promise), such as a sales contract.

Unilateral contract

Only one party is obligated to perform, such as an option or an open listing.

Executory vs executed contract

Executory: obligations not yet fully performed (before closing). Executed: all parties have fully performed (after closing).

Offer and acceptance

An offer becomes a binding contract when the offeree accepts and communicates that acceptance to the offeror.

Counteroffer

A reply that changes an offer's terms; it rejects and terminates the original offer.

Ways an offer terminates

Acceptance, withdrawal, rejection/counteroffer, lapse of time, death or insanity, or destruction of the property.

Option contract

A unilateral contract giving the optionee the right to buy within a set time for consideration.

Assignment

Transfer of contract rights/obligations from the assignor to the assignee.

Specific performance

A court remedy forcing the breaching party to complete the contract as agreed.

Liquidated damages

A breach amount agreed to in advance in the contract, often the earnest money deposit.

As-Is contract

Seller pays for no repairs but must still disclose known material defects; buyer may cancel within the inspection period for any reason.

Statute of Frauds exceptions

Partial performance (buyer takes possession, makes improvements, or pays part of the price) can make an oral contract enforceable.

Contract enforcement time limits

Oral (parol) contracts: 4 years. Written contracts: 5 years.

Open listing

Unilateral listing; owner pays only the broker who produces a buyer and may sell it themselves. Not allowed in the MLS.

Exclusive agency listing

Bilateral listing; one broker is paid a commission, but the owner keeps the right to sell it themselves without paying.

Exclusive right of sale listing

Bilateral listing; broker earns a commission no matter who sells. Best protection for the broker.

Contingency

A condition that must be met for a contract to proceed (financing, inspection, appraisal).

Escrow (earnest money)

A good-faith deposit held by a neutral third party; it is not the broker's money and stays held until the deal closes or terminates.

Sales associate escrow deadline

Must deliver a received deposit to the broker by the end of the NEXT business day.

Broker escrow deposit deadline

Must place escrow funds into the account by the end of the 3rd business day after receiving them.

Commingling

Illegally mixing the broker's personal funds with escrow/trust funds. Prohibited.

Escrow personal-fund limits

A broker may keep up to $1,000 personal funds in a sales-escrow account and $5,000 in a property-management escrow account.

Conversion

Unauthorized use of escrow/trust funds for the broker's own purposes; illegal.

Conflicting demands step 1

Broker must notify FREC in writing within 15 business days.

Conflicting demands step 2

Broker must institute a settlement procedure within 30 business days.

Four escrow settlement procedures

Escrow Disbursement Order (EDO), Mediation, Litigation (interpleader), and Arbitration.

Escrow Disbursement Order (EDO)

An order from FREC directing how disputed escrow funds should be disbursed.

Escrow recordkeeping

Escrow records are kept at least 5 years (plus 2 years beyond any lawsuit) and reconciled monthly with a signature.

Principal office vs branch office

Principal office registration is transferable to a new location; branch office registration is not transferable.

Brokerage sign requirement

The office sign must show the broker's full licensed name and trade name; the legal name cannot be abbreviated.

Blind advertising

An advertisement missing the brokerage name; illegal. All ads must name the brokerage.

Institutional vs specific advertising

Institutional promotes image/name recognition; specific advertising promotes a particular property or service.

Team advertising rule

A team must include "team" or "group" in its name and display the brokerage name in equal-or-larger font.

RESPA

Real Estate Settlement Procedures Act; requires settlement-cost disclosure and prohibits kickbacks and unearned referral fees.

Kickback

An illegal payment or gift for referring business without performing a service; a RESPA violation.

Sherman/Clayton Antitrust Act

Prohibits price-fixing and monopolies and makes real estate commissions always negotiable.

Compensation (one-broker rule)

A sales associate may be paid only by their employing broker and may sue only that broker for a commission.

Personal transaction disclosure

A licensee buying or selling their own property must disclose that they hold a real estate license.

Unlicensed assistant limits

May do clerical work and open doors but may not discuss any property details, terms, or value.

Net listing

Owner sets a net amount and the broker keeps the excess as commission; legal in Florida but discouraged and barred from the MLS.

Commingling vs conversion

Commingling = mixing personal and escrow funds; conversion = actually using escrow funds for personal purposes.

Rental information violation

Charging for a rental list that is inaccurate; a first-degree misdemeanor and refundable to the consumer.

Promissory note

The borrower's written promise to repay the debt; signed by the mortgagor; the evidence of the debt.

Mortgage

The instrument that pledges property as security (collateral) for the note; an example of hypothecation.

Hypothecation

Pledging property as security for a loan while keeping possession of it.

Mortgagor

The borrower, who gives the mortgage and receives the loan.

Mortgagee

The lender, who receives the mortgage.

Lien theory (Florida)

The borrower keeps title and possession while the lender holds a lien; Florida uses judicial foreclosure.

Satisfaction of mortgage

The document a lender records (within 60 days of payoff) showing the loan is fully paid.

Acceleration clause

Lets the lender demand the entire remaining balance upon default.

Due-on-sale (alienation) clause

Requires the full balance to be paid when the property is sold or transferred; blocks unapproved assumption.

Defeasance clause

Requires the lender to release the lien and return title once the debt is paid in full.

Subordination clause

Allows a lien to move to a lower priority position behind a later lien.

Exculpatory clause

Limits the lender to the property only (non-recourse); no deficiency judgment against the borrower.

Estoppel certificate

A lender's statement of the exact loan balance, interest, and terms at a given time.

Equity of redemption

The borrower's right to cure the default and reclaim the property before the foreclosure sale.

Lis pendens

A recorded notice of a pending lawsuit such as a foreclosure; it is not itself a lien.

PMI

Private Mortgage Insurance; required when LTV exceeds 80% and removable near 78% LTV.

Appraisal

An unbiased professional opinion of value as of a specific date, prepared by a licensed appraiser.

CMA

Comparative Market Analysis; a licensee's value estimate from comparable sales; not an appraisal, used to price listings.

DUST (characteristics of value)

Demand, Utility, Scarcity, Transferability.

Sales comparison approach

Estimates value from similar recently sold properties; best for residential resale. Adjust the comps, never the subject.

Cost approach

Land value plus replacement cost minus depreciation; best for new or unique/special-purpose property.

Income approach

Value = NOI divided by the capitalization rate; used for income-producing/commercial property.

Capitalization rate

The rate of return on an investment property; Cap Rate = NOI divided by Value.

Gross Rent Multiplier (GRM)

Price divided by monthly rent; used for small rentals. Value = monthly rent times GRM.

Net Operating Income (NOI)

Effective gross income minus operating expenses; it excludes mortgage/debt service.

Principle of substitution

A buyer will pay no more than the cost of an equally desirable substitute; the basis of all three approaches.

Highest and best use

The legal, physically possible, and financially feasible use that produces the greatest value.

Progression and regression

Progression: a lesser home gains value near higher-value homes. Regression: a superior home loses value near lower-value homes.

Three types of depreciation

Physical deterioration, functional obsolescence, and external (economic) obsolescence.

Real property

Land, improvements, and the bundle of legal rights of ownership.

Bundle of rights

Possession, Disposition, Enjoyment/use, Exclusion, and Control.

Fixture

Personal property permanently attached so it becomes real property; tested by IRMA.

IRMA

Fixture test: Intention, Relationship of the parties, Method of attachment, Adaptation.

Riparian vs littoral rights

Riparian: land on flowing water (river/stream). Littoral: land on non-flowing water (ocean, sea, lake).

Freehold estate

Ownership for an indefinite duration, such as fee simple or a life estate.

Fee simple

The most complete form of ownership, holding the full bundle of rights.

Life estate

Ownership lasting for someone's lifetime; then passes to a remainderman or reverts to the grantor.

Tenancy in common

Co-ownership with NO right of survivorship; shares may be unequal and are inheritable.

Joint tenancy

Co-ownership with right of survivorship; requires four unities (Possession, Interest, Time, Title).

Tenancy by the entireties

Ownership by a married couple as a single unit with survivorship; becomes tenancy in common upon divorce.

Non-freehold (leasehold) estates

Estate for years (fixed term), tenancy at will (no fixed term), and tenancy at sufferance (holdover, no permission).

Homestead protection

A family-residence life estate protected from forced sale for most debts, except taxes, mortgages, and mechanic's/vendor's liens.

Elective share

A surviving Florida spouse's right to claim 30% of the estate, overriding a will.

Condominium

Owner holds a unit deed to their unit plus shared ownership of the common elements.

Cooperative

Owner holds shares of stock and a proprietary lease rather than a deed.

Condo/HOA rescission periods

Condo: 15 days from the developer (7 business days for a resale). HOA: 3 days to review documents.

Title

Ownership of real property that is enforceable by law.

Actual vs constructive notice

Actual: knowledge gained directly (seeing/reading). Constructive: legal notice given by recording in the public records.

Marketable title

Title reasonably free of defects that a court would compel a buyer to accept.

Abstract of title

A summarized history (chain) of all recorded documents affecting a title.