What Is Equitable Title in Real Estate?

Every equitable title question, answered

Every question above with its correct answer and the reasoning behind it. Read the explanations for the ones you answered correctly too. A lucky guess and knowing the rule look identical on a score report. These are sample questions from our larger bank.

1. 1. An unlicensed Kentucky investor advertises an equitable interest in a real-property purchase contract for sale. What restriction applies?

   • AOnly recorded deeds can be covered by license law
   • BAdvertising is unrestricted if the investor never visits the property
   • CThe statute prohibits unlicensed advertising of that equitable interestcorrect
   • DEvery contract assignment is exempt from licensing advertising rules

   Why: KRS 324.020(1)(b) prohibits an unlicensed person from advertising for sale an equitable interest in a real-property purchase contract.

   Practice of real estate

2. 2. A buyer and seller sign an enforceable purchase agreement on May 1 and will close on June 12. During that interval the buyer holds:

   • Aa leasehold interest in the property.
   • Bequitable title to the property.correct
   • Clegal title, subject to a lien retained by the seller.
   • Dno interest in the property whatsoever.

   Why: Under equitable conversion, a signed and enforceable contract gives the buyer equitable title while the seller keeps legal title until the deed is delivered. The buyer has a real, protectable interest during that period rather than a mere expectation.

   Contracts

3. 3. Under a land contract, also called a contract for deed, during the payment period:

   • Aneither party holds any interest until the final payment is made.
   • Bthe seller keeps legal title while the buyer takes possession and equitable title.correct
   • Ctitle is held by a neutral trustee until the contract is paid in full.
   • Dthe buyer holds legal title and the seller holds a mortgage lien.

   Why: The seller retains legal title as security and delivers the deed only when the price is paid, while the buyer takes possession and holds equitable title meanwhile. That split is what distinguishes a land contract from a mortgage, where the buyer takes legal title at closing.

   Contracts

4. 4. A vendee under a contract for deed should record the contract in the public records in order to:

   • Atransfer legal title from the vendor to the vendee immediately.
   • Bsatisfy a requirement that installment payments be publicly reported.
   • Cconvert the contract into a recorded first mortgage.
   • Dgive constructive notice of the interest of the vendee to later parties.correct

   Why: Recording puts the world on constructive notice and protects the equitable interest of the vendee against later purchasers and lienholders claiming through the vendor. Recording never moves legal title; only delivery of a deed accomplishes that.

   Contracts

5. 5. Which statement describes title theory?

   • ALegal title vests permanently in a trustee for both parties
   • BThe borrower holds legal title subject only to the lender’s lien
   • CLegal title is divided evenly between borrower and lender
   • DThe lender holds legal title while the borrower holds equitable titlecorrect

   Why: Under title theory the lender takes legal title and the borrower keeps equitable title plus possession, regaining legal title at payoff. The description of a borrower holding legal title subject to a lien is lien theory.

   Financing

6. 6. Under an installment land contract, during the contract term:

   • ANeither party holds any interest until the final payment
   • BThe vendee holds legal title and the vendor holds equitable title
   • CThe vendor keeps legal title while the vendee holds equitable title and possessioncorrect
   • DBoth parties hold legal title as joint tenants

   Why: The vendor (seller) retains legal title as security and delivers a deed only when the contract is paid, while the vendee (buyer) takes possession and equitable title. Reversing the two roles is the standard trap on this item.

   Financing

7. 7. In a land contract, also called a contract for deed, during the payment period the buyer typically holds:

   • AEquitable title, with the seller retaining legal title until the price is paidcorrect
   • BLegal title, with the seller holding equitable title
   • CA leasehold estate only
   • DNo interest at all in the property until the final installment payment has been made

   Why: The buyer holds equitable title, with the seller retaining legal title until the price is paid, which is the defining feature of a contract for deed. Reversing this to legal title, with the seller holding equitable title describes no recognized arrangement in an installment land sale.

   Contracts

8. 8. Which statement best describes when legal title passes under a properly performed contract for deed?

   • AWhen the contract for deed is first recorded in the county's public records
   • BWhen the contract is signed by both parties
   • CWhen the vendee takes possession of the property
   • DWhen the vendor delivers the deed after the vendee completes the paymentscorrect

   Why: Legal title passes when the vendor delivers the deed after the vendee completes the payments, which is the culmination of the installment arrangement. Title does not pass when the contract is signed by both parties; at that point the vendee acquires only equitable title.

   Contracts