Chapter 13
Contracts for Sale and Closing
Test Problems
1. If a buyer defaults on a contract to purchase real property, which of the following is not a
remedy the seller can pursue?
2. When contracts for the sale of real property are placed with a disinterested third party for
executing and closing, they are said to be placed in:
3. Which of the following conditions would be a defect to mutual assent in a contract for the
sale of real property?
4. Oral evidence in contract disputes is prohibited by:
5. Which of the following is one of the terms of a real estate contract?
6. Real estate transactions do not close when the contract for sale is signed by both parties
because:
7. An earnest money deposit is:
8. In most straightforward transactions involving houses or other relatively small properties,
the contract is:
9. Equitable title to real estate is:
10. The purpose of a closing statement is to:
Study Questions
1. If a closing occurs on September 1 of a 365-day year, how will the year’s property tax of
$900 be prorated? (Note: the day of closing “belongs” to the buyer.)
Solution: Property taxes are assessed for the calendar year, and paid in arrears.
Therefore, the seller owes from January 1 through the day before closing, a total of 243
tax bill in proportion to the days of ownership results in the following allocation:
Seller’s portion: (243/365) x $900 = .666 x $900 = $599.40
Since the buyer will pay the seller’s share of the taxes, in the closing statement the buyer
is credited with $599.40 while the seller is charged that amount.
Use the following information to answer questions 2–5. Rosie Malone sold her house to
D.M. Band. The contract was signed June 1, 2017, and closing was set for June 25, 2017.
Rosie had prepaid her three-year hazard insurance policy in the amount of $1,825.00 on April
2. How would the hazard insurance premium be prorated?
3. How would the water and sewer charges be prorated?
4. How will the mortgage assumption be entered?
5. How will the monthly mortgage payment be prorated?
2. Solution: The hazard insurance premium will be prorated on the basis of the total number of
Allocating the premium accordingly gives the following result:
Seller’s portion: (451/1095) x $425 = .412 x $425 = $175.10
Since the seller has prepaid the buyer’s share of the premium, in the closing statement the
3. Solution: The water and sewer charges must be prorated for the month of June. The charges
are paid in arrears for the previous month. The seller “owns” 25 days of the month while the
buyer “owns” the remaining 5 days. Thus the charges will be allocated as follows:
Seller’s portion: (25/30) x $100 = .833 x $100 = $83.30
Since the buyer is paying the seller’s share of the charges, in the closing statement the
4. Solution: Under the CFPB Closing Disclosure the assumption of a mortgage is a benefit to
5. Solution: The monthly mortgage payment is paid in arrears, or after the interest is actually
charges, the charges will be allocated as follows:
Seller’s portion: (25/30) x $817.83 = .833 x $817.83 = $681.25
Since the buyer will pay the seller’s share of the interest, in the closing statement the
6. The owner of a parcel of land containing approximately 25 acres contracted a debilitating
disease and decided to sell his real estate as quickly as possible. Within a week, he received
an offer of $320,250. The owner accepted this offer by signing a standard form contract that
had been obtained and prepared by the buyer. Soon after, when the owner’s family
discovered the situation, they convinced him he had sold the land at much too low a price and
he should not complete the transaction.
The owner commissioned an appraisal that showed the land to be worth $460,000, a
difference of $5,590 per acre between the contract price and the property value. He then
refused to attend the closing and to deliver title to the buyer. The buyer sued the owner for
damages in the amount of the difference between the property value and the contract price
($139,750). The buyer contended he had a valid contract and he was damaged by the owner’s
unwillingness to complete the transaction. The seller contended he was not of sound mind
when he signed the contract and the price was so ridiculously low, the contract should not be
enforced.
Identify the issues the court probably would consider in deciding whether or not to enforce
the contract.
Solution: The court would need to consider the following issues: (a) Was the contract
properly executed? Did it contain the seven requirements of a valid real estate contract? (b)
7. A couple decided to sell their house in Washington, D.C., without the aid of a real estate
broker. Their asking price was $425,000, which they believed was about $15,000 less than
the price they would need to list the property with a broker. They realized they would
probably have to accept an offer as low as $420,000. Another couple looked at the house,
liked it, and offered to buy it for $423,500. The sellers were delighted and suggested that they
would fill in the blanks on a form sales contract used by many of the local real estate
brokerage firms, and both parties could sign it. The buyers, however, objected, saying they
preferred to write their own contract. The wife was an attorney who worked for the U.S. State
Department, specializing in international law.
What advice would you have given the sellers?
Solution: The sellers should be wary of allowing the buyer to draft the sales contract. First, a
person experienced in international law is unlikely to know all of the particular legal issues
8. Given the following situation and facts, complete a closing settlement statement similar to
that shown in Exhibit 13-4.
On May 15, 2017, Eric Martin signed a contract to purchase a rental house for $195,000.
Closing is to occur June 8, 2017, with the day of closing to be counted as a day of ownership
by the buyer. Eric can assume the seller’s first mortgage, which will have a balance of
$149,000 on June 8. The seller, Reuben Smith, has agreed to take a second mortgage of
$30,000 as part of the payment at closing. Eric paid an escrow deposit of $10,000 when he
signed the purchase contract. Other pertinent facts include:
a. The monthly interest on the first mortgage is $745, which must be paid by the 20th of
the month.
b. Reuben paid a hazard insurance policy for the calendar year 2017. The premium was
$850, and Eric has agreed to purchase Reuben’s interest in the policy.
c. The monthly rental of $1,250 has been collected by Reuben for June.
d. The total amount of property tax for 2017 is estimated to be $2,200. The tax will be
paid by Eric at the end of the year.
e. The broker will pay the following expenses for Reuben and will be reimbursed at the
closing:
Abstract continuation $ 85.00
Attorney’s fee 300.00
Deed stamps (tax) 1,365.00
Brokerage commission (6%) 11,700.00
f. The broker will also pay the following expenses for Eric and will be reimbursed at
the closing:
Attorney’s fee $250.00
Deed recording fee 6.00
Mortgage recording fee 10.00
Mortgage note stamps (tax) 682.50
Intangible tax on mortgage 390.00
Solution:
Four items must be prorated between the seller and buyer:
1. Interest for the month of June for the existing mortgage.
2. Hazard insurance policy for the calendar year of 2013.
The prorations are as follows:
Interest is paid in arrears, by the buyer. Thus the seller owes the buyer for the seller’s
share of the bill:
Hazard insurance was prepaid by the seller for the calendar year. Thus, the buyer owes
the seller for the buyer’s share of the premium:
Monthly rent was paid in advance to the seller. Thus, the seller owes the buyer his
share of the rent:
Property taxes are paid in arrears, by the buyer. So the seller owes the buyer for the
seller’s portion of the payment:
See the CFPB Closing Disclosure demonstration form as a guide to completing the form:
https://www.consumerfinance.gov/owning-a-home/closing-disclosure/