Real Estate Exam Contracts & Agency Guide 2026
Contracts and agency relationships together account for nearly 30% of the real estate licensing exam — and they're among the sections where candidates lose the most points. With the national pass rate at just 61.4%, mastering these topics can be the difference between passing and failing.
This guide covers everything you need to know about agency law, fiduciary duties, and contract essentials for the 2026 real estate exam.
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Part 1: Agency Relationships
What Is Agency?
Agency is a legal relationship in which one person (the agent) is authorized to act on behalf of another person (the principal/client). In real estate, this relationship is created by agreement — usually a listing agreement or buyer representation agreement.
| Term | Definition |
|---|---|
| Agent | The person authorized to act on behalf of the principal |
| Principal/Client | The person who hires the agent and is owed fiduciary duties |
| Customer | A third party the agent deals with but does not represent |
| Fiduciary | One who acts in the best interest of another (the agent) |
Client vs. Customer — Know the Difference
This distinction appears in multiple exam questions:
| Client (Principal) | Customer | |
|---|---|---|
| Relationship | Agency (fiduciary) | No agency |
| Duties owed | All 6 fiduciary duties (OLDCAR) | Honesty and fair dealing only |
| Created by | Written agreement (listing/buyer agreement) | Interaction without representation |
| Example | Seller in a listing agreement | Buyer without buyer's agent |
The 6 Fiduciary Duties: OLDCAR
The mnemonic OLDCAR is one of the most important memory tools for the real estate exam. These are the duties an agent owes to their client:
O — Obedience
Follow the client's lawful instructions. Key word: lawful. If a seller tells you to discriminate against buyers based on race, you must refuse — that's an unlawful instruction. But if a seller says "don't show the house on Sundays," you must comply.
L — Loyalty
Put the client's interests above all others, including your own. You cannot profit at your client's expense or place your financial interests above theirs. If you find out the buyer is willing to pay more than their offer, you cannot use this information to negotiate a higher commission.
D — Disclosure
Reveal all material facts that could affect the client's decision. This includes:
- Known property defects
- All offers received (even low ones)
- Relationships or conflicts of interest
- Any information that could impact the transaction
C — Confidentiality
Protect the client's private information, especially anything that could weaken their negotiating position:
- Financial situation or distress
- Motivation to sell or buy quickly
- Willingness to accept different terms
- Personal circumstances affecting the transaction
Note: Confidentiality survives the termination of the agency relationship.
A — Accounting
Track and account for all money and property entrusted to you. This includes:
- Earnest money deposits
- Rental income
- Security deposits
- Any client funds
Never commingle client funds with your personal or business funds.
R — Reasonable Care
Use your professional skills and diligence to the best of your ability. This means:
- Stay informed about market conditions
- Properly market listed properties
- Review documents carefully
- Advise clients to seek professional help when needed (inspections, legal advice)
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Types of Agency Relationships
Seller's Agent (Listing Agent)
- Represents the seller in the transaction
- Created by a listing agreement
- All fiduciary duties owed to the seller
- Responsible for marketing the property and negotiating the best price for the seller
Buyer's Agent
- Represents the buyer in the transaction
- Created by a buyer representation agreement
- All fiduciary duties owed to the buyer
- Responsible for finding properties and negotiating the best price for the buyer
Dual Agency
- One agent (or brokerage) represents both buyer and seller in the same transaction
- Must be disclosed and consented to in writing by both parties
- Agent has limited fiduciary duties to both parties
- Cannot advocate for one party over the other
- Prohibited in some states (Florida, Colorado, Kansas, and others)
Designated (Appointed) Agency
- The managing broker assigns different agents within the same brokerage to represent the buyer and seller
- Each designated agent owes full fiduciary duties to their respective client
- Avoids dual agency concerns when both parties use the same brokerage
- Not available in all states
Transaction Broker (Non-Agency)
- Facilitates the transaction without representing either party
- Owes honesty and fair dealing to both parties but NOT fiduciary duties
- Does not advocate for either side in negotiations
- Available in some states as an alternative to agency
Which OLDCAR Duties Apply to Each Agency Type?
This is a highly tested distinction — not all agents owe all 6 duties:
| Agency Type | Duties Owed |
|---|---|
| Exclusive agent (seller's or buyer's) | All 6: O-L-D-C-A-R |
| Dual agent | Limited: C-A-R (Confidentiality to both, Accounting, Reasonable Care) |
| Transaction broker/Facilitator | Minimal: A-R (Accounting, Reasonable Care) + honesty/fair dealing |
| To customers (non-clients) | None of OLDCAR — only honesty and fair dealing |
Exam Tip: In dual agency, the agent cannot fulfill Loyalty (can't put one above the other) or Obedience (conflicting instructions). They can still maintain Confidentiality for both parties, handle Accounting properly, and exercise Reasonable Care.
Types of Listing Agreements
| Agreement | Commission Due | Key Feature |
|---|---|---|
| Exclusive Right-to-Sell | Always — regardless of who sells | Most common; broker always earns commission |
| Exclusive Agency | Only if the broker or cooperating broker sells | Owner can sell independently without paying commission |
| Open Listing | Only to the broker who procures the buyer | Non-exclusive; multiple brokers can compete |
| Net Listing | Broker keeps anything above a set net amount | Illegal in many states; conflict of interest |
Exam Tip: The Exclusive Right-to-Sell is the most common and most tested listing agreement. Know that the broker earns a commission even if the owner finds the buyer without the broker's help.
How Agency Is Created and Terminated
Created By:
- Express agreement — Written contract (listing agreement, buyer rep agreement). This is the most common and safest method.
- Implied agency — Created by actions, not words. Dangerous because it creates fiduciary duties without written documentation.
- Ratification — Principal approves an unauthorized act after the fact.
- Estoppel — Agency created when a third party reasonably relies on the appearance of agency.
Terminated By:
- Completion — The purpose of the agency is fulfilled (property sold)
- Expiration — The agreed-upon term ends
- Mutual agreement — Both parties agree to end the relationship
- Revocation — The principal fires the agent (may result in commission obligation)
- Renunciation — The agent quits (may result in liability)
- Death or incapacity — Of either party
- Bankruptcy — Of either party
- Destruction — Of the property
Part 2: Contracts
The 4 Essential Elements of a Valid Contract
Every valid real estate contract must have these four elements. If any is missing, the contract may be void or voidable:
1. Competent Parties
- Must be of legal age (18 in most states)
- Must be mentally competent (understand the transaction)
- Must not be under duress or undue influence
- Minors: Contracts with minors are voidable (the minor can void them, but the adult cannot)
2. Mutual Consent (Offer and Acceptance)
- Also called "meeting of the minds"
- Offer must be definite, communicated, and made with intent
- Acceptance must mirror the offer exactly (the "mirror image rule")
- A counteroffer kills the original offer — it becomes a new offer
- Acceptance is effective when communicated to the offeror
3. Lawful Object
- The purpose of the contract must be legal
- Cannot involve illegal activities (drug transactions, discrimination)
- Must comply with all applicable laws and regulations
4. Consideration
- Something of value exchanged between parties
- Usually money (earnest money, down payment) or a promise
- Must be real but doesn't have to be adequate (even $1 can be valid consideration)
Types of Contracts
| Type | Description | Example |
|---|---|---|
| Bilateral | Both parties make promises | Purchase agreement (buyer promises to pay, seller promises to convey) |
| Unilateral | One party makes a promise, the other acts | Open listing (broker acts by finding buyer, then seller owes commission) |
| Express | Terms stated explicitly (written or oral) | Written purchase agreement |
| Implied | Created by actions/conduct | Agent showing properties creates implied agency |
| Executed | All terms fully performed | Closed transaction |
| Executory | One or more terms not yet performed | Contract signed, closing pending |
Contract Status: Valid, Void, Voidable, Unenforceable
| Status | Definition | Effect |
|---|---|---|
| Valid | Meets all 4 essential elements | Fully binding and enforceable |
| Void | Missing an essential element or illegal | No legal effect; cannot be enforced by anyone |
| Voidable | Valid but one party has the right to cancel | Binding until the disadvantaged party voids it |
| Unenforceable | Valid but cannot be enforced in court | Usually due to Statute of Frauds violations (not in writing) |
Exam Tip: The difference between void and voidable is critical:
- Void = contract is dead on arrival — it has no legal force
- Voidable = contract is alive but one party can kill it (e.g., minor, fraud, duress)
Contract Remedies
When a party breaches (breaks) a contract, the other party has these options:
| Remedy | Description |
|---|---|
| Specific Performance | Court orders the breaching party to perform (complete the sale). Most common remedy in real estate because each property is unique. |
| Compensatory Damages | Money to cover actual financial losses caused by the breach |
| Liquidated Damages | Pre-agreed amount (usually earnest money) kept as damages |
| Rescission | Cancel the contract and return both parties to their pre-contract positions |
Exam Tip: Specific performance is the most commonly tested remedy for real estate because courts consider each property unique (no substitute), so money damages alone may not make the buyer whole.
The Statute of Frauds
The Statute of Frauds requires certain contracts to be in writing to be enforceable:
Must be in writing:
- Real estate sales contracts
- Leases longer than 1 year
- Listing agreements (in most states)
- Real estate mortgage agreements
Exception: Leases for 1 year or less can be oral.
PIP Exception (Part Performance Doctrine): An oral real estate contract may be enforceable if the buyer has taken significant actions showing the contract exists:
- P — Payment (buyer has made payments)
- I — Improvements (buyer has made improvements to the property)
- P — Possession (buyer has taken possession)
If all three PIP elements are present, a court may enforce even an oral contract despite the Statute of Frauds.
Novation vs. Assignment
This distinction appears frequently on the exam:
| Novation | Assignment | |
|---|---|---|
| What happens | Original contract is replaced with a new one | Rights/duties are transferred to a third party |
| Original party | Completely released from liability | Remains secondarily liable |
| Requires consent | All parties must agree | Generally allowed unless contract prohibits it |
| Effect on contract | Old contract is cancelled | Original contract continues |
Exam Tip: The key difference is liability. In a novation, the original party walks away free. In an assignment, they're still on the hook if the new party fails to perform.
Disclosures (Practice of Real Estate)
The exam tests your knowledge of required disclosures — here are the most important:
| Disclosure | Requirement |
|---|---|
| Agency disclosure | Reveal who you represent before substantive discussions |
| Material defects | Known physical issues affecting the property |
| Lead-based paint | Required for homes built before 1978 |
| Environmental hazards | Asbestos, radon, mold, contaminated soil |
| Stigmatized property | Rules vary by state (murder, haunting, etc.) |
| Dual agency | Written consent from both parties |
Top Exam Mistakes on Contracts & Agency
- Confusing client vs. customer. Clients get OLDCAR. Customers only get honesty and fair dealing.
- Thinking void and voidable are the same. Void = no contract exists. Voidable = contract exists but can be cancelled by one party.
- Not knowing OLDCAR cold. Memorize the mnemonic and practice identifying which duty applies in scenarios.
- Missing the counteroffer rule. A counteroffer kills the original offer. The original offeror can't go back and accept after a counter.
- Confusing listing agreement types. Exclusive right-to-sell = commission always. Exclusive agency = no commission if owner finds buyer.
Start Practicing Contracts & Agency Questions Now
These two topics alone account for nearly 30% of your real estate exam. Make them strengths, not weaknesses:
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