NAR Real Estate Transactions & Contract Management 3 — Questions and Answers
Question 1: A buyer's agent submits an offer with an inspection contingency. The inspection reveals a cracked foundation. The buyer wants to back out. Under the inspection contingency, what is the most likely outcome?
- The buyer forfeits the earnest money
- The buyer may withdraw and receive the earnest money back (Correct answer)
- The seller must repair the foundation before the buyer can exit
- The contract automatically extends to allow repairs
Correct answer: The buyer may withdraw and receive the earnest money back
An inspection contingency allows the buyer to withdraw from the contract and recover their earnest money if they are unsatisfied with the inspection results within the contingency period.
Question 2: What is the legal term for the moment a contract becomes binding when the seller accepts the buyer's offer and communicates that acceptance?
- Ratification
- Execution
- Mutual assent / contract formation (Correct answer)
- Closing
Correct answer: Mutual assent / contract formation
Mutual assent—also called meeting of the minds—occurs when both parties agree to the same terms, and acceptance is communicated, forming a binding contract.
Question 3: Which document is used to modify an existing purchase contract after both parties have signed it?
- Counteroffer
- Addendum
- Amendment (Correct answer)
- Disclosure statement
Correct answer: Amendment
An amendment modifies the terms of an already-ratified contract and must be signed by all parties to be effective.
Question 4: A seller receives two offers simultaneously. One is slightly lower but has no contingencies; the other is higher but has multiple contingencies. What factor makes the lower offer potentially more attractive?
- Lower price reduces the seller's tax liability
- Fewer contingencies mean fewer opportunities for the buyer to exit, reducing risk to the seller (Correct answer)
- The lower offer will appraise more easily
- Multiple contingencies benefit the seller by providing more exit options
Correct answer: Fewer contingencies mean fewer opportunities for the buyer to exit, reducing risk to the seller
Fewer contingencies reduce the seller's risk of the deal falling through, making a lower, cleaner offer potentially more attractive than a higher offer laden with contingencies.
Question 5: What is 'prorations' in the context of a real estate closing?
- Fees charged by the title company for document preparation
- The division of ongoing expenses like property taxes and HOA dues between buyer and seller based on the closing date (Correct answer)
- The buyer's down payment calculation
- The lender's origination fee calculation
Correct answer: The division of ongoing expenses like property taxes and HOA dues between buyer and seller based on the closing date
Prorations fairly divide ongoing property expenses between buyer and seller based on the closing date so each party pays only for their time of ownership.
Question 6: Under the NAR Code of Ethics, when a listing agent receives multiple offers, what is the agent's obligation?
- Present only the highest offer to avoid confusing the seller
- Present all offers promptly and objectively to the seller (Correct answer)
- Rank offers and present only the top three
- Hold offers until the listing has been active for at least 48 hours
Correct answer: Present all offers promptly and objectively to the seller
NAR's Code of Ethics (Article 1) requires listing agents to present all offers promptly and honestly to give the seller a fair opportunity to evaluate every proposal.
Question 7: What does an 'as-is' clause in a purchase contract typically indicate?
- The seller will make all necessary repairs before closing
- The buyer accepts the property in its current condition and waives repair requests (Correct answer)
- The property cannot be inspected
- The price is non-negotiable
Correct answer: The buyer accepts the property in its current condition and waives repair requests
An 'as-is' clause means the buyer agrees to purchase the property in its present condition and the seller will make no repairs, though the buyer may still conduct inspections.
NAR Real Estate Transactions & Contract Management 3
A buyer's agent submits an offer with an inspection contingency.
The inspection reveals a cracked foundation.
The buyer wants to back out.
Under the inspection contingency, what is the most likely outcome?