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TX Real Estate practice questions

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Question 1Agency and Fiduciary Duties

Which fiduciary duty requires a licensee to place the principal's interests above the licensee's own interests?

  1. Accounting
  2. Loyalty Correct answer.
  3. Obedience
  4. Reasonable care

Explanation

Loyalty obligates the licensee to avoid self-dealing, secret profits, and any action that puts the licensee's or a third party's interests ahead of the principal's. The other fiduciary duties address competence, recordkeeping of funds, and following instructions.

Question 2Agency and Fiduciary Duties

A buyer's agent learns that the property the buyer plans to purchase has just been rezoned for industrial use. The agent must pass this information to the buyer because of which duty?

  1. Obedience
  2. Disclosure Correct answer.
  3. Reasonable care
  4. Accounting

Explanation

The duty of disclosure requires a licensee to tell the principal about all material information the licensee knows that could affect the principal's decision. Zoning changes affecting the intended use of the property are material.

Question 3Agency and Fiduciary Duties

Which duty owed to a client continues even after the agency relationship has ended?

  1. Reasonable care
  2. Accounting
  3. Confidentiality Correct answer.
  4. Obedience

Explanation

A licensee's obligation to keep a former client's confidential information confidential survives termination of the agency relationship. Obedience and the active duties of representation end when the representation ends.

Question 4Agency and Fiduciary Duties

A licensee is working with a person who is a customer rather than a client. What does the licensee owe this person?

  1. Full fiduciary duties of care and obedience
  2. Loyalty and advocacy
  3. Honesty and fair dealing Correct answer.
  4. Confidentiality of the person's finances

Explanation

A customer is a party the licensee is not representing, so the licensee owes honesty and fair dealing but not loyalty, advocacy, or confidentiality. Fiduciary duties flow only to a client.

Question 5Agency and Fiduciary Duties

Under TREC rules, when must a licensee give the Information About Brokerage Services form to a party?

  1. Only when a written agency agreement is signed
  2. At the first substantive communication Correct answer.
  3. Within three days after the first showing
  4. Before the party signs a contract

Explanation

The IABS notice must be provided at the time of the first substantive communication about a specific property or transaction. Waiting until contract signing or after showings is too late.

Question 6Agency and Fiduciary Duties

What is required before a broker may act as an intermediary in a transaction?

  1. Written approval from TREC
  2. Written disclosure to and written consent from all parties Correct answer.
  3. A separate license for each party
  4. Verbal consent from the buyer

Explanation

An intermediary relationship requires written disclosure to all parties and their written consent. Without that consent the broker cannot act for both sides of the transaction.

Question 7Agency and Fiduciary Duties

A property is listed under an exclusive right-to-sell agreement, and the seller personally finds a buyer before the listing expires. What is the broker entitled to?

  1. The agreed commission, even though the seller found the buyer Correct answer.
  2. Nothing, unless the broker procured the buyer
  3. Half of the agreed commission
  4. Nothing, because the seller caused the sale

Explanation

Under an exclusive right to sell, the broker earns the agreed commission no matter who procures the buyer during the listing term. That result distinguishes it from an exclusive agency listing.

Question 8Agency and Fiduciary Duties

A seller instructs the licensee to tell buyers the property has never flooded, although the licensee knows it flooded last year. The licensee should

  1. Resign the listing and tell no one
  2. Repeat the statement only if a buyer asks directly
  3. Refuse, because the duty of obedience covers only lawful instructions Correct answer.
  4. Follow the instruction because the seller is the client

Explanation

Obedience is owed only for lawful instructions, and a licensee may not make a false statement of material fact about a property. A false statement about flood history also breaches the duty of honesty owed to the buyer.

Question 9Agency and Fiduciary Duties

A broker acting as intermediary appoints one sponsored agent to represent the buyer and another to represent the seller. These agents are best described as

  1. Dual agents who must both remain neutral
  2. Intermediaries who may not advise their own party
  3. Subagents who both represent the seller
  4. Designated agents who may each advocate for their own party Correct answer.

Explanation

When a broker acts as intermediary, the broker may appoint designated agents so that each party has an advocate. The designated agents may promote their own party's interests while the broker remains neutral.

Question 10Agency and Fiduciary Duties

A licensee who has listed a property wants to buy it personally. The licensee must

  1. Wait until the listing expires, then buy without disclosure
  2. Ask TREC for written permission to make an offer
  3. Disclose the interest in writing and obtain the principal's consent Correct answer.
  4. Buy through a relative and avoid disclosure

Explanation

Loyalty bars self-dealing unless the client knows the licensee's interest and consents in writing. The disclosure must be full and made before the licensee acquires the property.

Question 11Agency and Fiduciary Duties

A broker deposits a client's earnest money into the brokerage's general business account. This practice is

  1. Permitted with the client's verbal consent
  2. Permitted if the broker keeps a separate ledger
  3. Commingling, which is prohibited Correct answer.
  4. Required so that the funds stay liquid

Explanation

Trust funds must be kept in a separate trust account and may not be mixed with the broker's own money. Mixing them is commingling, which can subject the broker to disciplinary action.

Question 12Agency and Fiduciary Duties

A buyer and a seller both claim the earnest money the broker is holding. The broker should

  1. Hold the funds until all parties sign a release or a court orders disbursement Correct answer.
  2. Release the funds to the seller
  3. Release the funds to the buyer
  4. Split the funds between the parties

Explanation

When entitlement to trust funds is disputed, the broker must not release them on the broker's own judgment. The funds are released only on a written release signed by the parties or a court order.

Question 13Agency and Fiduciary Duties

Which information may a seller's agent properly withhold from a buyer?

  1. The property's location in a flood zone
  2. A known defect in the foundation
  3. The seller's willingness to accept less than the list price Correct answer.
  4. A prior water damage insurance claim

Explanation

The seller's negotiating position and motivation are confidential client information the agent must not reveal. Known physical defects and other material property facts, by contrast, must be disclosed.

Question 14Agency and Fiduciary Duties

While representing the seller, a licensee discovers a hidden foundation defect the buyer cannot see. The licensee must

  1. Tell the seller to disclose it only if the buyer asks
  2. Disclose the defect to the buyer Correct answer.
  3. Withdraw from the listing and say nothing
  4. Remain silent because the seller is the client

Explanation

Loyalty does not license concealment of a known material defect. The licensee owes honesty and fair dealing to the buyer and must disclose facts that would affect the buyer's decision.

Question 15Agency and Fiduciary Duties

Which statement about an agency coupled with an interest is correct?

  1. It may be revoked at any time without liability
  2. It must be filed with TREC to be valid
  3. It cannot be revoked while the agent's interest continues Correct answer.
  4. It ends automatically when the principal dies

Explanation

When the agent holds a beneficial interest in the subject of the agency, the principal cannot revoke the agency while that interest exists. This protects the agent's stake in the property.

Question 16Agency and Fiduciary Duties

A client dies while a listing agreement is still in effect. The agency relationship generally

  1. Continues until the listing expiration date
  2. Terminates automatically Correct answer.
  3. Continues if the heirs orally agree
  4. Passes to the broker as a matter of law

Explanation

The death of the principal terminates the agency relationship because the agent's authority comes from the principal. The heirs may later enter a new agreement, but this one ends.

Question 17Agency and Fiduciary Duties

A licensee wants to pay a friend who holds no real estate license for referring a buyer. Under Texas law, this payment is

  1. Permitted if the licensee pays from personal funds
  2. Permitted if the client approves
  3. Prohibited, because a referral fee may not be paid to an unlicensed person Correct answer.
  4. Permitted if the friend is a Texas resident

Explanation

Compensation for procuring real estate business may be paid only to a licensed broker or through the licensee's sponsoring broker. Paying an unlicensed person for a referral is prohibited.

Question 18Agency and Fiduciary Duties

In Texas, an agency relationship between a broker and a client may be created by

  1. Only a TREC-approved form
  2. Only after the first property showing
  3. Only an oral agreement made before witnesses
  4. A written agreement or the conduct of the parties Correct answer.

Explanation

Agency can arise from an express written agreement or from the actions of the parties that show consent to the relationship. A written agreement gives certainty, but it is not the only way the relationship arises.

Question 19Agency and Fiduciary Duties

A buyer client asks the licensee whether the title commitment shows a valid easement. The licensee should

  1. Explain how the easement affects title personally
  2. Tell the buyer the easement is void
  3. Advise the buyer to consult an attorney Correct answer.
  4. Say nothing because title is not the licensee's concern

Explanation

Interpreting the legal effect of a title document is the practice of law, which a licensee may not undertake. The duty of care is met by spotting the issue and directing the client to a qualified professional.

Question 20Agency and Fiduciary Duties

A broker is acting as intermediary in a transaction. Which action is proper for the broker?

  1. Explaining contract terms to both parties and treating them fairly Correct answer.
  2. Telling the buyer that the seller will accept less
  3. Advising the seller to hold firm on price
  4. Negotiating only on the seller's behalf

Explanation

An intermediary must treat both parties fairly and may relay information and explain options, but may not advocate for one side over the other. Revealing either party's negotiating position is prohibited.

Question 21Agency and Fiduciary Duties

A seller client says, "Do not mention the mold in the basement to any buyer." The licensee knows the mold is extensive. The licensee should

  1. Resign the listing and say nothing to the buyer
  2. Mention the mold only after the sale closes
  3. Disclose the mold, because a licensee may not conceal a known material defect Correct answer.
  4. Follow the instruction because the seller is the client

Explanation

Confidentiality and loyalty do not permit a licensee to conceal a known material defect from a buyer. The duty of honesty and fair dealing to the other party overrides the client's instruction to hide it.

Question 22Agency and Fiduciary Duties

In an intermediary transaction, the buyer's designated agent learns the buyer would pay $20,000 above the list price. Which statement is correct?

  1. The agent must tell the broker, who may then inform the seller
  2. The information must be relayed to the seller because the broker acts for both parties
  3. The agent may trade the information for the seller's lowest acceptable price
  4. The designated agent must keep it confidential from the broker and the seller's side Correct answer.

Explanation

Each designated agent represents only the appointed party and must guard that party's confidential information. Intermediary status does not convert confidential client information into information shared with the other side.

Question 23Agency and Fiduciary Duties

Without any signed agreement, a licensee begins advising a buyer on price, preparing offers, and negotiating on the buyer's behalf, and the buyer accepts the help. A court would most likely find

  1. No agency, because no written agreement exists
  2. A subagency running to the listing broker
  3. An unlawful intermediary relationship
  4. An agency relationship created by the conduct of the parties Correct answer.

Explanation

Agency may be created by the parties' conduct when the client consents to the licensee acting on the client's behalf. The absence of a signed agreement affects enforceability of a commission claim, not whether the relationship exists.

Question 24Agency and Fiduciary Duties

A licensee recommends a lender to a buyer client and accepts $500 from the lender for the referral without telling the buyer. This conduct

  1. Needs no disclosure because the licensee does not work for the lender
  2. Breaches loyalty by taking an undisclosed benefit connected to the transaction Correct answer.
  3. Is proper because lenders commonly pay referral fees
  4. Is permitted if the loan closes successfully

Explanation

Loyalty prohibits secret profits, so any compensation or benefit a licensee receives from a third party in connection with the client's transaction must be disclosed and consented to. An undisclosed payment from a service provider is a conflict of interest.

Question 25Agency and Fiduciary Duties

Months after a listing expires, the licensee uses a fact learned during the listing, that the seller would accept far less than the old list price, to have a relative buy the home. Which statement is correct?

  1. The conduct violates only the duty of accounting
  2. The conduct is allowed because the listing has ended
  3. The conduct is allowed if the seller accepts the offer
  4. The licensee breached confidentiality, which continues after termination Correct answer.

Explanation

Confidentiality survives the end of the agency, so a former client's negotiating position may not be used for the licensee's benefit. Exploiting that information also breaches the continuing obligation of loyalty.

Question 26Agency and Fiduciary Duties

A licensee has a signed listing agreement with a seller. The seller tells the licensee to screen out prospective buyers who have young children because the seller does not want to rent to families. The licensee should

  1. follow the instruction, since the fiduciary duty of obedience requires carrying out the seller's directions
  2. decline to follow the instruction, because the duty of obedience covers only lawful directions Correct answer.
  3. follow the instruction only if the seller signs a written authorization directing the licensee to do so
  4. follow the instruction but keep a written record that the seller requested it

Explanation

A broker owes the client the fiduciary duty of obedience, but that duty is limited to instructions that are lawful. A direction to screen out buyers with children is unlawful housing discrimination, so the licensee must refuse it and cannot be protected by getting it in writing or documenting the request.

Question 27Contracts and Promulgated Contract Forms

Which requirement must a contract for the sale of Texas real estate satisfy to be enforceable under the Statute of Frauds?

  1. It must be recorded in the county clerk's real property records before closing
  2. It must be acknowledged before a notary public by both the buyer and the seller
  3. It must be signed by two disinterested witnesses who are not parties to the sale
  4. It must be in writing and signed by the party against whom enforcement is sought Correct answer.

Explanation

The Texas Statute of Frauds (Business & Commerce Code Chapter 26) requires a contract for the sale of real property to be in writing and signed by the party to be charged with enforcement. Notarization, witness signatures, and recording affect proof or priority but are not required for the contract to be binding between the parties.

Question 28Contracts and Promulgated Contract Forms

Which body promulgates the standard contract forms that Texas license holders must use for residential resale transactions?

  1. The Texas Department of Licensing and Regulation
  2. The Texas Association of REALTORS®
  3. The Consumer Financial Protection Bureau
  4. The Texas Real Estate Commission Correct answer.

Explanation

TRELA Section 1101.281 directs the Texas Real Estate Commission to promulgate contract forms for residential sales, and license holders must use those forms for the transactions they cover. Trade associations publish their own forms, and federal agencies regulate disclosures, but neither promulgates the Texas residential contract.

Question 29Contracts and Promulgated Contract Forms

The "Effective Date" of the TREC One to Four Family Residential Contract (Resale) is best described as which date?

  1. The date the title company opens escrow and receives the earnest money
  2. The date the parties select in the contract for the closing to occur
  3. The date the last party signs and delivers acceptance to the other party Correct answer.
  4. The date the buyer's offer is prepared and dated by the buyer's agent

Explanation

The Effective Date is the date final acceptance is delivered, meaning the date the last party signs and communicates acceptance. Option periods, financing deadlines, and most notice timeframes run from that date, not from offer preparation, escrow opening, or the closing date.

Question 30Contracts and Promulgated Contract Forms

During the option period in the TREC One to Four Family Residential Contract, what right does the buyer have?

  1. The buyer may extend the option period automatically without paying an added fee
  2. The buyer may terminate only if the seller refuses to complete agreed repairs
  3. The buyer may terminate only if the property fails the lender's appraisal
  4. The buyer may terminate the contract for any reason by giving timely written notice Correct answer.

Explanation

The option period purchased by the option fee gives the buyer an unrestricted right to terminate within that period for any reason or no reason. The buyer must give written notice before the option period expires, and the option fee itself is not refundable.

Question 31Contracts and Promulgated Contract Forms

A buyer pays a $500 option fee, exercises no termination right, and the sale closes. How is that option fee handled at closing under the TREC One to Four Family Residential Contract?

  1. It is retained by the listing broker as additional compensation
  2. It is credited to the buyer against the sales price at closing Correct answer.
  3. It is refunded to the buyer at closing as a separate disbursement
  4. It is paid to the title company as an additional escrow fee

Explanation

The termination option paragraph makes the option fee nonrefundable but provides that it is credited to the sales price at closing. It is consideration for the option right, not a fee earned by a broker or an escrow charge.

Question 32Contracts and Promulgated Contract Forms

A buyer timely terminates the contract during the option period and asks for the earnest money back. How should the escrow agent disburse the earnest money and the option fee?

  1. The earnest money is refunded to the buyer and the option fee is kept by the seller Correct answer.
  2. Both amounts are divided equally between the buyer and the seller
  3. Both the earnest money and the option fee are refunded to the buyer
  4. Both amounts are kept by the seller as liquidated damages for the failed sale

Explanation

A termination inside the option period is a right the buyer purchased, so the buyer is not in default and the earnest money is returned. The option fee is the nonrefundable price of that right and stays with the seller.

Question 33Contracts and Promulgated Contract Forms

A buyer using the Third Party Financing Addendum applies for a loan, is denied, and gives the required written notice within the time allowed. What is the result?

  1. The buyer may terminate the contract and have the earnest money refunded Correct answer.
  2. The seller may declare the buyer in default but must return half the earnest money
  3. The buyer must close with cash or forfeit the earnest money to the seller
  4. The buyer is in default because a financing contingency shifts the risk to the buyer

Explanation

The Third Party Financing Addendum conditions the buyer's obligation on obtaining the specified financing. If financing is not obtained and the buyer gives timely written notice, the buyer may terminate and the earnest money is refunded.

Question 34Contracts and Promulgated Contract Forms

Which statement best describes the Seller's Disclosure Notice used in a Texas residential resale?

  1. It is a property inspection report prepared by an inspector hired by the seller
  2. It is the seller's written statement of the property's known condition based on the seller's knowledge Correct answer.
  3. It guarantees that the buyer will not need to obtain a home inspection
  4. It is a warranty by the seller that the property has no defects

Explanation

Texas Property Code Chapter 5 requires the seller to give the buyer a written notice of the property's condition based on the seller's actual knowledge. It is a disclosure device, not a warranty, an inspection report, or a substitute for the buyer's own inspections.

Question 35Contracts and Promulgated Contract Forms

The federal lead-based paint disclosure and pamphlet requirement applies to which transaction?

  1. A lease of an apartment that has never been occupied
  2. A resale of a house built in 1995
  3. A sale of vacant land that has no dwelling on it
  4. A resale of a house built in 1972 Correct answer.

Explanation

The federal rule covers the sale or lease of housing constructed before 1978, which is when lead-based paint was banned for residential use. A 1972 home falls within that window, while newer housing and land without a dwelling do not.

Question 36Contracts and Promulgated Contract Forms

Under the TREC One to Four Family Residential Contract (Resale), which party generally pays for the owner's title insurance policy?

  1. The seller, as part of the cost of conveying marketable title Correct answer.
  2. The buyer, because the buyer is the insured under the policy
  3. The listing broker, who pays it from the brokerage commission
  4. The lender, as one of the conditions for approving the loan

Explanation

The promulgated contract allocates the premium for the owner's title policy to the seller, consistent with long-standing Texas practice. The buyer ordinarily pays for the lender's policy and any endorsements the buyer wants.

Question 37Contracts and Promulgated Contract Forms

A buyer needs to move into the home ten days before closing. Which TREC-promulgated form is designed for that arrangement?

  1. Buyer's Temporary Residential Lease Correct answer.
  2. Seller's Temporary Residential Lease
  3. Addendum for Sale of Other Property by Buyer
  4. Amendment to Contract

Explanation

The Buyer's Temporary Residential Lease allows the buyer to occupy the property as a tenant before the sale closes. The seller's version covers the opposite situation, and neither an amendment nor a sale-of-other-property addendum creates a leasehold.

Question 38Contracts and Promulgated Contract Forms

Which situation calls for use of the TREC Seller's Temporary Residential Lease?

  1. The buyer moves into the property before the sale closes
  2. The seller stays in the property a few days after closing and pays rent to the buyer Correct answer.
  3. The seller leases the property from a tenant while the home is being marketed
  4. The buyer rents the property to a third party after the closing

Explanation

The Seller's Temporary Residential Lease lets the seller remain in possession for a short period after closing as a tenant of the buyer. It protects the buyer's ownership interest and sets the rent and terms for that occupancy.

Question 39Contracts and Promulgated Contract Forms

A buyer's purchase is contingent on selling the buyer's current home under the Addendum for Sale of Other Property by Buyer, and the seller receives a backup offer. What does the addendum generally permit?

  1. The seller may accept a backup offer and the buyer must then waive the contingency within the stated time Correct answer.
  2. The seller must reject all backup offers until the buyer's current home has been sold and the closing has occurred
  3. The buyer automatically receives a 30-day extension of the closing date written into the contract
  4. The contract converts into a temporary lease of the property until the buyer's current home sells

Explanation

This addendum keeps the seller free to market the property and accept a backup contract. When the seller does so, the buyer is put on notice and must remove the sale-of-other-property contingency within the time stated, or the contract may be terminated.

Question 40Contracts and Promulgated Contract Forms

A second contract is written on the Backup Contract Addendum. When does the backup contract take effect?

  1. When both parties sign it, regardless of whether the first contract closes
  2. When the backup buyer's earnest money is deposited with the escrow agent
  3. When the first contract's option period expires without any termination
  4. When the first contract terminates and the seller gives notice to the backup buyer Correct answer.

Explanation

The backup addendum makes the second contract contingent on termination of the first contract and requires the seller to notify the backup buyer when that happens. Depositing money or signing alone does not activate it, because the first contract remains in force.

Question 41Contracts and Promulgated Contract Forms

How is a contract that uses the Short Sale Addendum best described?

  1. Contingent on the lender's written approval of the short sale by the stated deadline Correct answer.
  2. Enforceable only after the buyer pays the difference between price and loan balance
  3. Void, because a seller may not sell a home for less than the loan balance owed
  4. Fully binding on the lender as soon as the seller signs the contract

Explanation

The Short Sale Addendum makes the buyer's and seller's obligations contingent on the lienholder approving the short sale in writing within the time allowed. If approval is not obtained, the parties have specified rights to terminate and have the earnest money refunded.

Question 42Contracts and Promulgated Contract Forms

A seller has agreed to leave the refrigerator and the washer and dryer for the buyer. How should this be documented in a TREC transaction?

  1. By a verbal agreement confirmed at the final walk-through
  2. By noting the items on the seller's disclosure notice
  3. By adding a purchase price adjustment in the Amendment to Contract form
  4. By listing the items on the Non-Realty Items Addendum attached to the contract Correct answer.

Explanation

Personal property is not conveyed by the real estate contract unless it is specifically listed, and the promulgated Non-Realty Items Addendum exists for that purpose. A verbal side agreement is unenforceable and a disclosure notice addresses condition, not included property.

Question 43Contracts and Promulgated Contract Forms

After the contract is executed, the buyer and seller agree to extend the closing date by one week. What is the proper procedure?

  1. Have the buyer's agent email the title company confirming the new date
  2. Accept a written extension granted unilaterally by the seller to the buyer
  3. Have the listing agent strike through the old date and initial the change
  4. Sign a written amendment to the contract that both parties execute Correct answer.

Explanation

A contract change must be made in writing and signed by both parties, which the Amendment to Contract accomplishes. A license holder may not unilaterally alter the printed text of a promulgated form, and a one-sided notice does not modify the agreement.

Question 44Contracts and Promulgated Contract Forms

The buyer and seller agree not to proceed with the sale and want the earnest money returned to the buyer. Which TREC form fits this situation?

  1. Amendment to Contract
  2. Backup Contract Addendum
  3. Notice of Buyer's Termination of Contract
  4. Release of Contract Correct answer.

Explanation

The Release of Contract is a mutual agreement that terminates the contract and authorizes the escrow agent to disburse the earnest money as the parties direct. An amendment would keep the contract alive with changed terms.

Question 45Contracts and Promulgated Contract Forms

A buyer receives the subdivision information and resale certificate under the Addendum for Property Subject to Mandatory Membership in a Property Owners Association and objects to restrictions in those documents. What is the buyer's position?

  1. The buyer must close the transaction and then sue the seller for misrepresentation of the restrictions
  2. The buyer has no remedy, because association membership runs with the land
  3. The buyer may terminate only within the period stated in the addendum after receiving the documents Correct answer.
  4. The buyer may terminate at any time before closing for any reason whatsoever

Explanation

The association addendum gives the buyer a limited, time-sensitive right to terminate after reviewing the subdivision information and resale certificate. That right must be exercised within the stated period after receipt, or the buyer proceeds to closing.

Question 46Contracts and Promulgated Contract Forms

Which statement about the Notice of Buyer's Termination of Contract is accurate?

  1. It may be given at any time before the closing date of the contract
  2. It must be in writing and delivered within the option period to be effective Correct answer.
  3. It must be signed by both the buyer and the seller to become effective
  4. It must state a specific reason for the buyer's decision to terminate

Explanation

The termination option is exercised by written notice delivered before the option period expires; no reason is required. If the notice comes after the option period, the buyer no longer has an unconditional right to terminate.

Question 47Contracts and Promulgated Contract Forms

A license holder represents a client in the sale of a 20,000-square-foot office building. Which statement about contract forms is correct?

  1. The license holder must personally draft the contract to comply with state licensing law
  2. The license holder may use a non-promulgated commercial contract form for this transaction Correct answer.
  3. The license holder must use the TREC One to Four Family Residential Contract for this sale
  4. The license holder must obtain TREC approval of the contract form before it is used

Explanation

TREC-promulgated contract forms are required for transactions the forms were promulgated to cover, principally residential sales. A commercial office building sale is outside that scope, so the parties may use a different contract form, usually prepared with attorney assistance.

Question 48Contracts and Promulgated Contract Forms

In a typical Texas residential resale, who usually holds the buyer's earnest money?

  1. The seller's own bank account until the closing occurs
  2. The buyer's broker until the transaction closes
  3. The escrow agent or title company named in the contract Correct answer.
  4. The listing broker's trust account at the brokerage

Explanation

The promulgated contract names an escrow agent, typically a title company, to hold the earnest money and disburse it at closing or on termination. The contract, not informal practice, determines who holds the funds.

Question 49Contracts and Promulgated Contract Forms

After a contract is terminated, both the buyer and the seller claim the earnest money. What may the escrow agent do?

  1. Decide which party is legally entitled to the money and then disburse it
  2. Return the funds to the buyer because the buyer originally made the deposit
  3. Refuse to disburse until the parties agree in writing or a court orders the disbursement Correct answer.
  4. Release the funds to the seller because the seller is the payee of record

Explanation

An escrow agent is a stakeholder, not a judge of the parties' dispute. The usual practice is to hold the funds until the parties provide a written release or a court resolves the entitlement.

Question 50Contracts and Promulgated Contract Forms

A buyer purchases a home by taking over the seller's existing FHA-insured loan under a loan assumption addendum. Which requirement applies?

  1. The lender must approve the assumption and the buyer must meet the lender's underwriting requirements Correct answer.
  2. Nothing is required; the buyer simply makes the payments to the seller each month
  3. The buyer must obtain an entirely new loan from a different lender before closing
  4. The seller must pay off the existing loan at closing, after which the buyer may assume it on the same terms

Explanation

An assumption transfers the buyer's obligation to the existing lender, so the lender's approval and credit review are required. The seller should also confirm whether the lender will release the seller from liability.