NAR Real Estate Transactions & Contract Management 2 — Questions and Answers
Question 1: A buyer submits an offer with an earnest money deposit of $5,000. If the seller accepts and the buyer later defaults without a valid contingency, what typically happens to the earnest money?
- It is returned to the buyer in full
- It is forfeited to the seller as liquidated damages (Correct answer)
- It is split equally between buyer and seller
- It is held in escrow indefinitely
Correct answer: It is forfeited to the seller as liquidated damages
When a buyer defaults without a valid contingency, the earnest money is typically forfeited to the seller as liquidated damages per the purchase contract.
Question 2: Which clause in a purchase contract allows the buyer to exit if they cannot secure financing at a specified rate or amount within a set time frame?
- Inspection contingency
- Appraisal contingency
- Financing contingency (mortgage contingency) (Correct answer)
- Home sale contingency
Correct answer: Financing contingency (mortgage contingency)
A financing contingency (mortgage contingency) protects the buyer's right to exit the contract if they cannot obtain the loan terms specified within the deadline.
Question 3: At closing, the seller's existing mortgage balance is $180,000. The property sells for $250,000. How is this typically handled?
- The buyer assumes the seller's mortgage automatically
- The seller's mortgage is paid off from sale proceeds at closing (Correct answer)
- The seller must pay off the mortgage before listing
- The title company absorbs the remaining balance
Correct answer: The seller's mortgage is paid off from sale proceeds at closing
The seller's outstanding mortgage is paid off from the sale proceeds at closing, and the seller receives the remaining equity.
Question 4: What does 'time is of the essence' mean when included in a real estate contract?
- Deadlines are suggestions and may be loosely followed
- All dates and deadlines in the contract must be strictly met or the breaching party may be in default (Correct answer)
- The contract must close within 30 days regardless of terms
- Only the closing date is firm; other dates are flexible
Correct answer: All dates and deadlines in the contract must be strictly met or the breaching party may be in default
'Time is of the essence' means all contractual deadlines are material terms, and failure to meet them can constitute a breach of contract.
Question 5: A seller counters a buyer's offer by changing the closing date and initialing the change. What has the seller created?
- A binding acceptance
- A counteroffer that voids the original offer (Correct answer)
- An addendum to the original offer
- A conditional acceptance
Correct answer: A counteroffer that voids the original offer
Any material change to an offer—even a minor one like the closing date—creates a counteroffer, which voids the original offer and requires the buyer's acceptance.
Question 6: Which of the following best describes 'specific performance' as a remedy in a real estate dispute?
- A monetary penalty paid by the breaching party
- A court order compelling a party to fulfill the contract terms (Correct answer)
- Cancellation of the purchase agreement
- Mediation between the parties
Correct answer: A court order compelling a party to fulfill the contract terms
Specific performance is a legal remedy that compels a party to carry out the exact terms of the contract rather than simply paying damages.
Question 7: In a real estate transaction, what is the primary purpose of a title search?
- To verify the property's market value
- To identify any liens, encumbrances, or ownership defects on the property (Correct answer)
- To confirm the property passed inspection
- To calculate transfer taxes owed at closing
Correct answer: To identify any liens, encumbrances, or ownership defects on the property
A title search examines public records to uncover any liens, judgments, easements, or ownership issues that could affect the buyer's clear title.
NAR Real Estate Transactions & Contract Management 2
A buyer submits an offer with an earnest money deposit of $5,000.
If the seller accepts and the buyer later defaults without a valid contingency, what typically happens to the earnest money?