NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

55
1 TEXAS NATIONAL STUDY GUIDE (Revised May 2017) Table of Contents: Real Property Characteristics, Definitions, Ownership, Restrictions and Transfers Page 1 Property Valuation and Appraisal Page 13 Contracts and Relationships with Buyers and Sellers Page 16 Property Conditions and Disclosures Page 24 Federal Laws Governing Real Estate Activities Page 27 Financing the Transaction and Settlement Page 31 Leases, Rents, and Property Management Page 37 Brokerage Operations Page 39 Ethical and Legal Business Practices Page 41 Risk Management Page 45 Real Estate Calculations Page 48 National Association of Realtors Code of EthicsQuick Reference Page 54 Note: Math calculations will be approximately 10% of the exam and may be in any category of the exam Real Property Characteristics, Definitions, Ownership, Restrictions and Transfers Broker (9 questions) Salespersons (12 questions) A. Definitions, descriptions, and ways to hold title 1. Elements of real and personal property 2. Property description and area calculations 3. Estates in real property 4. Forms of ownership, rights, interests, and obligations B. Land use controls and restrictions 1. Government controls 2. Private controls non-monetary 3. Private controls mortgage (deed of trust) and liens C. Transfer/alienation of title to real property 1. Voluntary 2. Involuntary 3. Protections 4. Partition/severance (voluntary or involuntary) 5. Deeds and warranties: validity, types, and covenants 6. Title and title insurance

Transcript of NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

Page 1: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

1

TEXAS NATIONAL STUDY GUIDE (Revised May 2017)

Table of Contents: Real Property Characteristics, Definitions, Ownership, Restrictions and Transfers Page 1

Property Valuation and Appraisal Page 13

Contracts and Relationships with Buyers and Sellers Page 16 Property Conditions and Disclosures Page 24

Federal Laws Governing Real Estate Activities Page 27

Financing the Transaction and Settlement Page 31

Leases, Rents, and Property Management Page 37

Brokerage Operations Page 39

Ethical and Legal Business Practices Page 41

Risk Management Page 45

Real Estate Calculations Page 48

National Association of Realtors – Code of Ethics– Quick Reference Page 54

Note: Math calculations will be approximately 10% of the exam and may be in any

category of the exam

Real Property Characteristics, Definitions, Ownership, Restrictions and Transfers Broker (9 questions) Salespersons (12 questions)

A. Definitions, descriptions, and ways to hold title 1. Elements of real and personal property 2. Property description and area calculations 3. Estates in real property 4. Forms of ownership, rights, interests, and obligations

B. Land use controls and restrictions 1. Government controls 2. Private controls – non-monetary 3. Private controls – mortgage (deed of trust) and liens

C. Transfer/alienation of title to real property 1. Voluntary 2. Involuntary 3. Protections 4. Partition/severance (voluntary or involuntary) 5. Deeds and warranties: validity, types, and covenants 6. Title and title insurance

Page 2: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

2

Land is everything from the center of the earth upward. It includes the subsurface, surface and the air above the earth. It does not include anything made by man.

Real Estate is land plus the improvements made by man including buildings, highways, and utilities.

Real Property is land plus the improvements made by man plus the legal rights to the land. This includes the right to sale, exchange, and mortgage, give it away, and leave it in your will to another and ECT.

Bundle of Rights is the description of all the rights held by a property owner of real property. However no owner ever enjoys the full bundle of rights. There are always restrictions placed on these rights by governments that have jurisdiction over the property

Possession – To occupy the property and/or use as your own

Control (Not Absolute) Subject to the rights of taxation, police power, eminent domain etc. – All property

is subject to taxation, the right of the government to “take” the property at a fair price for the betterment of

the general population (eminent domain), and the right to control the use of the property for legal

purposes,

Enjoyment (Quiet) – That no one has a superior claim on the property

Disposition - Sell it, lease it, vacate it, mortgage it, cultivate it, gift it, etc.

Exclusion (Make it private) – The right to privacy, to stop others from entering your property without your

permission

Allodial System of Title is used in the United States to descript real property ownership. The owner has

complete and absolute control of the real estate. The government has no claim to any ownership rights of

privately owned real estate and the owner has no obligations to the government

Land Characteristics: Ownership of land can be laterally severed into subsurface rights, surface rights, and air rights. The owner of the surface rights does not always control the subsurface or air rights to the property. The two broad categories of land are physical characteristics, those features that all land possesses, and economic characteristics, those features that contribute to the value of any given parcel of land.

Physical: Land is immobile (geographic location is fixed—can never change), indestructible, and unique or nonhomogeneous (all parcels differ geographically and each has its own location), no two parcels are identical.

Economic: Scarcity (although there is a substantial amount of unused land, supply in a given location can be limited) – such as a downtown area; Improvements (placement of an improvement affects value and use) – a property with a view may be worth more than a property with no view; Permanence of Investment (improvements represent a large fixed investment) – a property with a large custom home will be more valuable than a property with a mobile home. See Situs as the most important.

Situs: This is also referred to as area preference, people’s choice and preferences for a given area. Location, location, as areas change, people’s desire to be in a given location can change. This is the most important economic characteristic of land.

Chattel: Referred to as personal property. It’s basically movable. Examples: Furniture, appliances, and ETC.

Page 3: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

3

Bill of Sale: Used to transfer personal property. Fixture: Personal property, which has been converted to real property by method of attachment, character and adaptation, or contractual intent of the parties. Examples: Blinds, ceiling fans, and curtain rods.

Appurtenances: To land is anything used with the land for the benefit of its owners. Examples: roadways, easements and condominium parking areas

Emblements: Cultivated crops are call emblements. They are considered part of the land until time that they are harvested and then they become personal property

Trade Fixtures: Articles installed by a tenant and removable by the tenant before the lease term expires. If not removed, they become the real property of the building owner by accession. Examples: Store shelves, bowling alleys, restaurant equipment

Encumbrances: Any claim, lien, charge, or liability attached to and binding on real property, is an encumbrance. Encumbrances limit or affect the use and/or title but do not prevent alienation (transfer of ownership). There are two general classifications of encumbrances: (1) liens that affect the title, such as judgments, mortgages, mechanics' liens, and other liens which are charges on property used to secure a debt or obligation; and (2) encumbrances that affect the physical condition of the property such as restrictions, encroachments, and easements.

Easement: Non-possessory interest in land. An easement is classified as an interest in real estate but is NOT an estate in land. The party that owns the property still has full ownership; the party that uses the easement only has the right to pass over or use the other party’s land. Easements are classified as either appurtenant or in gross.

An easement appurtenant is an easement that is annexed to the ownership of another’s parcel of land and runs with the land. When land is transferred from one owner to another, the new owner takes ownership subject to the easement. There must be two adjacent tracts of land owned by different parties. The tract that benefits from the easement is the dominant estate (tenement). The tract on which the easement exists and is burdened by it is the serviant estate or tenement. The party that benefits from the use of the easement (dominant estate) must maintain the easement.

An easement by necessity is created when an owner sells a property that has no access to a street or public right-of-way except over the seller’s remaining parcel of land. All owners have right to ingress to and egress from their land and cannot be landlocked. It would be necessary for the seller to provide an easement whereby the buyer can ingress and egress from the land.

An easement by prescription (also called a prescriptive easement) is when someone has used another’s land for a certain time. The use must be open (not secretive), visible, notorious, and without the owner’s approval but where the owner readily could learn of it.

A license is a personal privilege to enter land and can be given orally or informally. Usually a license is given rather than a personal easement in gross. A license is permission and can be given and can be canceled by the property owner. Example: Permission to park in a neighbor’s driveway.

An easement in gross is personal in nature and does not pass with the land. Common examples are power line easements, billboard site easements, and the like. Commercial easements in gross may be assigned or conveyed and may be inherited. However, personal easements in gross usually are not assignable and terminate on the death of the easement owner.

Page 4: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

4

How may an easement be created? By express grant (written document) or in a deed, necessity,

express reservation, implied grant, implied reservation (implied is created when actions and conduct

demonstrate intent), prescription, condemnation, by the sale of land with reference to a plat, or by

estoppel (the owner of the servient tenement orally promises passage then subsequently changes his

mind and refuses access, thereby damaging the owner of the dominant tenement).

How may easements be terminated? They may be terminated when the purpose for which they were

created ceases, by merger, by release (dominant tenement releases servient tenement), or by abandonment (discontinued use coupled with the intent to never use again).

Restrictions: Limits the use of the property such as deed restrictions or restrictive covenants.

Deed restrictions and restrictive covenants have basically the same meaning

Encroachment: A fixture or structure which invades a portion of a property belonging to another. To

determine an encroachment, a survey should be done.

Open Beach Law: The public is to have perpetual right (granted through prescription, dedication or

presumption) to use public beaches. Even though fee simple title to a lot belongs to an individual

Riparian Rights: Permits owner of land adjacent to a non-navigable stream, ownership of the land

under the stream or river to the exact center of the waterway. You also have the unrestricted right to the

water for limited domestic purposes. Owners of land adjacent to navigable streams or rivers own only up

to the mean vegetation line and the remainder belongs to the public.

Littoral Rights: Permits the owner of land on lakes and bays ownership to the mean vegetation line.

You have the unrestricted right to enjoy the available water for domestic purposes but own the land

adjacent to the water only up to the mean vegetation line. All land below this point is owned by the

government or other public authority.

Appropriation Water Rights: Water use is decided by the State rather than the adjacent owner. The

owner of land adjacent to a water source enjoys use of the water for limited domestic purposes. If

he/she wishes to use the water for another purpose such as irrigating their rice field, they must apply for

and get the appropriate permit from the State. Priority of water rights is established by the date the

permit was recorded. If the property was patented (granted) into private ownership after December 19,

1914, this rule applies.

Underground Water Rights: Owners have a right of correlative use of the water under their land.

They may retrieve only the water for which they have a beneficial use for on their own property. .

Liens: A charge or claim which one person has upon the property of another as security for a debt or

obligation. A lien is created by agreement of the parties, like a mortgage, or by operation of law, like a tax lien. A lien may be general or specific. A lien may be voluntary or involuntary. A voluntary lien

is created when someone takes out a mortgage loan. An involuntary lien is created by law or statute.

Liens are appurtenant and stay with the property and can bind successive buyers if not cleared at

closing. Title insurance will not protect against unrecorded liens as part of the standard coverage.

Involuntary Liens: While a voluntary lien is created by an action on the part of the lienee such as

taking out a mortgage loan to finance the purchase or a home improvement loan; An involuntary lien

takes no action on the part of the lienee and is created by statute, an operation of law, or the decision of courts of equity. An involuntary lien can either be statutory or equitable. Statutory liens are created by

state law such as the right of the assessing entity (local municipalities, counties, and school districts) to

charge tax to property owners to pay for the costs of operating the governments and public schools.

Page 5: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

5

Equitable Liens: Equitable liens arise out of fairness or what is equitable and is based on common

law. A vendor lien (seller’s claim) would be entitled to a seller who transfers ownership to a buyer by

deed and then the buyer does not pay for the property as agreed. The seller would be entitled to place a lien on the property for damages suffered. A vendee (buyer’s claim) lien would be entitled to a buyer

who pays the purchase price for the property then the seller fails to transfer legal title to the buyer. Both

liens arise based on equity or fairness (custom) and not by specific statute of state law.

General Liens: Attach to all property not exempt from forced sale (homestead is exempt). Usually

effects all of the debtor’s property, both real and personal, to include judgments, estate and inheritance

taxes, debts of a deceased person, IRS taxes, and federal judgment liens

Specific Liens: Attach to one or more listed properties. In other words, specific liens usually are

secured by a particular parcel of real estate and affect only that property. These include mechanic’s

liens, mortgages, taxes, special assessments, vendors’ liens, vendees’ liens, surety bail bond liens, and

attachments.

Mechanic’s Lien (also called “mechanics and materialman”): A claim for the purpose of

priority payment for work and/or materials furnished in erecting or repairing a building (M&M Lien).

A type of specific, involuntary, statutory lien. The lien is filed against the land AND improvements.

A mechanic’s lien is granted by statute; no such lien existed under common law.

Tax Lien: A statutory lien imposed against real property for nonpayment of taxes. A tax lien remains on

the property, until paid, even if the real estate is conveyed to another.

Tenancy in Severalty: If the ownership of a property is held by one entity, the estate is said to be a

tenancy in severalty or ownership in severalty. The rights of all others have been severed away. The

sole owner could be a person, partnership, corporation or any other business form but still, one owner.

More Than One Owner: There are two forms of ownership by more than one owner. With either

form, each owner has the right to full access and use of the property.

Tenancy In Common: Ownership by two or more without rights of survivorship. With tenancy in

common, each tenant in common may have a different percentage of ownership in the property. If an

owner dies, his interest is disposed of according to his will to his devisees or to his heirs under the

statutes of decent and distribution, not the other owner as with joint tenancy. If the deed conveying the

property conveys to two or more with nothing else being stated, we know the ownership is tenancy in

common because the creation of joint tenancy must be specifically stated in the deed of conveyance,

that all agree to take ownership as joint tenants.

Tenancy in common with a separate agreement for use is a time share. Individual owners will use

the property for a specified amount of time for a specified number of years.

Joint Tenancy: Ownership of real property by two or more persons, each of whom has an undivided,

equal, ownership interest WITH the right of survivorship. If one dies, the remaining joint owners equally

share the portion previously held by the joint tenant who died. To establish joint tenancy the deed must

specifically state the intent to take ownership as joint tenants. As joint tenants die, the last remaining

survivor will take ownership in severalty and becomes the sole owner.

Tenancy by the Entirety: Ownership by a husband and wife with rights of survivorship.

Community Property: All property acquired by a husband and wife after marriage is community

property unless it is acquired by gift, will, or inheritance. Upon the death of one’s spouse, the surviving

spouse retains one half of the community property. The decedent’s half will pass by devise or if the

decedent is intestate, their one half of the community property and all separate property will pass by the

Page 6: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

6

Statutes of Decent and Distribution. When community property is sold or mortgaged, both spouses must

sign the documents. Both signatures are required to convey homestead rights as well. The interest a

widow has in her deceased husband’s estate would be dower rights. Courtesy rights would be the

husband’s rights.

Ownership of the land can be by one owner or the land may be divided into surface, subsurface, and air rights with a different owner owning each.

Homestead: A homestead is a life estate in a family home. The homestead is protected from forced sale by general creditors. The homestead may be selected from separate property of either spouse or from their community property. The homestead may be sold for liens against the property including: mortgages, taxes, mechanic/materialman liens, equity liens, refinance of purchase money lien, or failure to pay HOA mandatory assessments. Homestead rights may end upon death of the owners, sale of the property, or abandonment by the owners. Homestead rights do not terminate on the death of the spouse and extend to minor children until they reach the age of 18. Both husband and wife must sign to sell the property.

Freehold Estates: Estates of indeterminable length, existing for a lifetime or forever. These include:

Fee Simple Estate: Absolute ownership with all the rights associated with ownership of real property.

Best kind of ownership but still subject to certain limitations. Highest type of ownership interest recognized by law

Life Estate: The three parties to life estate are the Grantor (the fee simple owner who gives the life

estate to the grantee), Grantee (Life Tenant) and the Remainderman (who receives the reversionary or

remainder interest when the life estate ends). A conventional life estate is a freehold estate limited in

duration to the life of the grantee. The life tenant (grantee) enjoys just as a fee simple. They pay taxes,

maintenance, and insurance and enjoy that ownership as long as they live. A pur autre vie life estate is

based on the life of a third party rather than the life of the grantee and therefore ends on the death of

that party rather than on the death of the grantee. Unlike other freehold estates, a life estate is not

inheritable. It passes to future owners according to the provisions of the life estate and always ends on

the death of the party whose life it is vested in. When the life tenant (or third party) dies, the estate ends

and ownership passes to another individual or returns to the previous owner, regardless, the final owner,

when the life estate comes to an end, is known as the remainderman. While the life tenant enjoys all

the benefits of ownership he/she cannot waste the land or infringe on the remainderman’s rights.

Defeasible Fee Estate: The holder of the estate has fee simple title that may end when an event does

or does not occur. When the deed conveyed the property from the grantor to the grantee, a condition

was specified in the deed that would cause the estate to terminate and return to the original grantor or his

heirs or devisees. There are two types of defeasible fee estates. The determinable fee terminates when

the event occurs; the property automatically reverts ownership back to the original grantor or his heirs or

devisees. The second type is fee simple subject to condition subsequent. The only difference

between the two is that when the condition is violated, it is necessary for the original fee simple owner or

his heirs go to court to exercise his right to regain ownership.

Leasehold Estate: Conveys rights of possession but not rights of ownership. A lease conveys

possession for an amount of time for consideration (usually rent). There is always a lessor and a lessee

(landlord/tenant). Leaseholds are the other broad classification of estates in land. It is an interest in the

property of another. Those who lease property for owners or help tenants secure property to lease must

have a real estate license.

Rule against Perpetuities is designed to put a time limit on the vesting of estates. In general it stops

someone from willing away parts of an estate to future generation of unborn heirs. Example: Let’s say

the time limit is 15 years and you leave part of your estate to an unborn child. 15 years pass

Page 7: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

7

from your death and that child has not been born yet. That part of the estate will be declared

void and the courts will decide how that part of the estate will be vested.

Valid Legal Descriptions: Legal descriptions should only be prepared by a surveyor or a title

attorney.

Metes and Bounds: (terminal points and angles) or (angles or compass points) the description generally starts with a benchmark (permanent reference mark) and must return to the point of beginning (POB). In a metes and bounds description, the surveyor sets out to describe the perimeter of the property in terms of feet, distance, direction, degrees, and compass points. The survey fails to close if not returning to the point of beginning, therefore it would not completely encircle a parcel of real estate.

Lot, block, and subdivision (recorded plat).

Rectangular survey system or U.S. government survey (Longitudes and latitudes, meridians and baselines), township tiers, and township squares (36 sections in a township).

Monuments: Physical markers, either man-made or naturally occurring, that mark the corners of the property. Natural monuments take precedent over linear measurements.

Description on a previously recorded document

Description sufficient enough in depth to clearly locate the property

Complete legal descriptions can be obtained from: (1) title companies (2) recorded deeds (3)

recorded deeds of trust (4) recorded mortgage.

Survey: The physical limits to where the property rights extend.

Datum: A marker used in the survey of elevations.

Government Rights in Land: Individual ownership rights are subject to certain powers, or rights, held

by federal, state, and local governments intended to promote the general welfare of the community.

Taxation: A property owner must pay ad valorem taxes on an annual basis for all real estate. AD

VALOREM means “according to value”. The appraisal district in which the property is located sets

the value of all property in the district. This charge is to raise funds to meet public needs of the

government. When an improvement is necessary (highway widening) a special assessment tax may

be levied against all those that benefit from the improvement. When either of these taxes is not paid,

they become the primary lien on the property.

Tax Protest: If a property owner feels that their property is assessed incorrectly they may protest the

value though the Appraisal Review Board in the county where the property is located. If the property

owned has protest through the Appraisal Review Board and is still not satisfied with the outcome, they

may appeal to District Court in the county where the property is located

Highest priority lien are when taxes are unpaid, they become an automatic lien and move to first

position regardless of the recorded liens. The property is then sold to satisfy the liens.

Taxes create an encumbrance (financial cloud on title).

Page 8: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

8

Tax Abatement: Eliminates or reduces taxes to new companies moving into an area.

Building Codes: City ordinances require construction standards are met when are being built or

remolded. These standards refer to the requirements for kinds of materials used, electrical wiring, fire prevention standards, and the like. The city inspector inspects at different stages of construction to

determine the improvement is being built according to code. On final inspection and approval, the

inspector will issue a certificate of occupancy to the owner. No one can live in the improvement until the

certificate of occupancy is granted by the city.

Zoning: Zoning is used by cities to help conform areas of the city. It divides the cities into residential

and business areas. It also helps with traffic congestion and with fire protection by using setbacks. It

controls building height and size. Designed to protect the public in terms of health, safety, welfare, social issues, and esthetics

Variance: The introduction of a new use that varies from the current zoning. Variances are usually

granted when strict compliances with the zoning ordinance or code would cause undue hardship.

Non-Conforming Use: The continuation of a use that was permissible prior to the recent zoning change.

It can be “grandfathered-in” as non-conforming. When the use to which the property has been put was in existence before the zoning law was enacted.

Buffer Zones: A transitional area between two areas of different predominant land uses. An example of

a buffer zone would be placing an apartment complex between an area zoned single-family residences and an area zoned for commercial use.

Other Controls: Other public controls include subdivision regulations (municipality’s control

over subdivision development), building codes and environmental protection laws.

Private Controls: A deed restriction is usually placed on a property by the developer of the property.

These restrictions can refer to:

Residential or commercial use

Number of buildings on each lot

Height, square footage and type of construction material

Type of construction material

Open Beach Law: The public to have perpetual right (granted through prescription) to use public

beaches. There are no private beaches on the mainland of the coast.

Riparian Rights: Permits owner of land adjacent to a non-navigable stream, ownership of the land

under the stream to its midpoint. They also have the unrestricted rights to the water for limited

domestic purposes (fishing, swimming, watering the lawn).

Littoral Rights: Permits the owner of land on large lakes or open bodies of water such as the coast

ownership to the mean vegetation line. They have the unrestricted right to enjoy the available water for

domestic purposes but owns the land adjacent to the water only up to the mean vegetation line. All land

below this point is owned by the government or other public authority.

Accretion: Land increase caused when water’s movement causes soil deposits and increases the

land. The owner is entitled to additional land so created under riparian accretion.

Reliction: New land acquired if water recedes.

Page 9: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

9

Erosion: Slow loss of land caused by wearing a way of land by wind, rain, or other natural causes.

Land lost in this way is lost along with ownership (a form of involuntary alienation).

Avulsion: Sudden loss of land caused by act of nature such as an earthquake. Ownership of land

lost in such ways continues but the use may be lost.

Doctrine of Prior Appropriation: Water use is decided by the state. Allocated to users who have

permits

Title Insurance: A Policy of Title Insurance is a comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances thereon and/or loss from some occurrence that has already happened, such as a forged deed somewhere in the chain of title. They insure “good and indefeasible title” (Title that cannot be defeated by a superior claim, set aside or made void.) Remember: Chain of Title is found in the policy of title insurance and is a history of ownership and lists the grantor, grantee indexes from the sovereignty of the soil into private ownership (patented), up to where the seller has derived his title. The seller should be the grantee in the last recorded index.

Owner’s Title Policy: A title insurance policy to protect the owner of the property (the buyer).

Mortgagee’s Title Policy: A title insurance policy to protect a lender.

Right of Subrogation: When a title company makes a payment to settle a claim covered by a policy, the company acquires all the rights and remedies of the insured party against anyone responsible for the settled claim.

Abstract of Title: A condensed history of all the instruments affecting a particular parcel of land or a historical summary of all documents ever recorded concerning a specific property.

ALTA stands for the American Land Title Association. An ALTA title policy of title insurance policy that covers more risks than a standard title insurance policy would. These covers risks such as unrecorded mechanic’s liens, unrecorded easements, water and mineral rights, facts that may be found in a survey and the rights of parties in possession of the property but is unrecorded or undocumented.

Deeds: A deed is a written instrument which conveys title to real property when it is delivered to the buyer. All deeds must be in writing in accordance with the Statue of Frauds.

Grantor: The owner who sells or gives the land.

Grantee: The purchaser who acquires the title to the land.

The deed is executed (or signed) by the grantor. The grantee’s signature is NOT required.

Recording is NOT a requirement of a valid deed; however, when a deed is recorded, recording gives statutory and constructive notice to the world of ownership. Recording protects ownership and safeguards against fraudulent sale.

Requirements of a Valid Deed: Competent parties (Grantor and Grantee)

Consideration

Conveyance (Written instrument that evidences transfer of some interest in property from one person to another, called a granting clause)

Page 10: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

10

Execution (Signing and acknowledgement of the Grantor’s signature)

Legal description

Delivery and acceptance Types of Deeds: Remember, an instrument that conveys title to real property. Deeds and wills can convey real property. Title insurance is evidence of title but does not convey any ownership!

General Warranty Deed: Guarantees and protects against defects in title. Warrants title to be good

from the separation of the soil. Covenant of Seisin: The grantor warrants that he/she is the owner of

the property and has the authority and the right to convey title to it. (5 implied covenants).

Special Warranty Deed: Warrants title against every person lawfully claiming by, through, or under the

current grantor. The grantor has ownership and the authority to sell and has done nothing to damage

the title during the time he has held ownership but doesn’t warrant back to the time the soil was patented into private ownership.

Quitclaim Deed: A quitclaim deed transfers whatever, if any, interest the person giving the deed has in

the property. Used to cure a “defect” in the title. It provides NO guarantees or warranties.

Remember: quitclaim is one word! Quit claim would not be correct!

Sheriff's Deed: Given by a court to effect the sale of property to satisfy a judgment.

Bargain and Sale Deed: Sometimes called a deed without warranty. Uses the words “grant, bargain

and sell” in the granting clause. It contains no warranties against encumbrances; however, it does

imply that the grantor holds title and possession of the property. Because the warranty is not

specifically stated, the grantee has little legal recourse if defects later appear in the title.

Master Deed: An instrument used by a condo developer to convert a single property to a scheme of

individually owned units in a multi-unit building that share an undivided ownership in the common areas

Methods of Transfer:

Voluntary Alienation:

Exchange: The consideration is other property, rather than money. Gift: Consideration is love and affection.

Sale: Usually by deed.

Devise: Last will and testament, person who inherits is a devisee.

Assignment: By an attorney-in-fact, meaning a principle may appoint someone to sign on their behalf with

a power of attorney document. Deeds cannot be assigned.

Public Dedication: Private land can be transferred for public use or ownership deed, common-law

dedication or statutory dedication

By Deed: Transfer of fee simple ownership

Common-law Dedication: When an owner devotes land to public use

Statutory Dedication: Generally transfers an easement for public use

Page 11: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

11

Involuntary Alienation:

Foreclosure: Property is sold to satisfy a mortgage lien, tax lien, or mechanic’s lien.

Condemnation: The process of acquiring property under the power of eminent domain.

Adverse Possession: Open, continuous, hostile for the statutory period. There are 3,5,10, and 25 year

statutes.

Action to Quiet Title: Forces others that might have a claim on a property to prove the claim or have

the claim ruled invalid by the courts.

Partition Action: is brought by a co-owner of a property to force the severance of the co-owners. The

property is divided, if possible, or sold and the proceeds are divided by the owners.

Acknowledgment: A declaration made by a person to a notary public or other public official authorized

to take acknowledgments, that the instrument was executed by him/her and that it was his/her free and

voluntary act.

Chain of Title: Shows a history of ownership of the property and establishes a complete line of free title

from the original grant from the sovereignty of the state to the most current property owner.

Exception vs. Reservation: Exception withholds from the operation of the deed title to a part of the

land such as conveying surface rights but not mineral (subsurface) rights. A reservation is the creation

by the deed of a new right in favor of the grantor such as reserving a life estate, or easement).

Habendum Clause: The “To Have and to Hold” clause that defines or limits the quantity of the estate

granted in the premises of the deed. If the language reads the seller will grant and warrant forever then

it is a general warranty deed. If it reads by and through me, it is conveying by special warranty deed.

This clause always follows the granting clause. If there is a discrepancy the granting clause is followed.

Doctrine of Relation Back: When a seller deposits his deed in escrow and the sale is completed and

escrow is finished, the deed passes title to the buyer as of the date it was delivered to the escrow agent.

The title relates back to the date on which the deed was deposited in escrow. Settlement Procedures: Title Companies: A third party that, for a fee, gives certain guarantees of title. A title company handles the funds for the closing. Title companies also issue mortgagee’s (lender’s) title insurance policies for the benefit of the lender.

Title: Ownership in property, supported by evidence of ownership, such as a title insurance policy or an abstract with an attorney’s opinion attached. While the deed conveys ownership, the title policy or abstract gives evidence and to the type or quality of that ownership and the rights being conveyed.

Marketable Title: Title that is free from reasonable doubt as to who the owner is.

Good and Indefeasible Title: A title that cannot be defeated by a superior claim, set aside or made void. It guarantees against defects in the public records, forged documents, incompetent grantors, and more.

Equitable Title: The right to demand that title is conveyed upon payment of the purchase price. You have equitable title when both parties sign the agreement.

Escrow: The term escrow has two meanings in real estate. The purpose of title escrow is so a

disinterested third party holds the money and/or documents until the terms of the contract are met. The

Page 12: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

12

holder (usually a title company) is the special and impartial agent for both parties and acts in accordance with the instructions given by both. An escrow account is established on a new loan to

collect taxes and insurance reserve and any interest due from the buyer. The mortgage company will

then pay the taxes and insurance, when due, on the buyer’s behalf.

Legal vs. Equitable Title:

Legal Title: Title that is complete and perfect in regard to the apparent right of ownership and

possession enforceable in a court of law. Doctrine of Equitable Conversion: A doctrine of law that gives title to property to a buyer under an executory contract in certain situations before legal title has been transferred to the buyer. Upon creation of a binding contract, the seller holds legal title as security for the purchase price for the buyer, who has equitable title.

Equitable Title: The beneficial interest of one person in real property although legal title is vested in

another, acquired when an offer to purchase becomes binding upon the parties.

Special Processes (e.g. Probate, Foreclosure):

Probate: The legal process to determine the validity of a will and establishes the assets of a decedent.

Probate proceedings must take place in the county where the real estate is located. If the will is upheld,

the property is distributed according to the will’s provisions.

Last Will and Testament: An instrument made by an owner to voluntarily convey title to the owner’s

property after his/her death. Title to any real estate passes immediately to the devisee upon the death

of the testator.

Foreclosure: A legal procedure used to sell property when the buyer is in default in payment of the

mortgage note or default of other terms in the mortgage document.

1031 Tax-Deferred Exchange: Under section 1031 of the IRS Code, real estate investors can defer

taxation of capital gains by making a property exchange. The tax is deferred rather than eliminated. Properties must be of like kind—income, investment, or residence. Additional capital or personal

property included in a transaction to even out the exchange is called boot. The boot is taxed at the time

of the exchange.

Intestate: Legal designation of a person who has died without leaving a valid will.

Testate: Person who has died, leaving a valid will. That person is a testator.

Administrator/Administratrix: A man/woman appointed by a court to settle the estate of a deceased

person when there is no will.

Executor/Executrix: The man/woman appointed and approved by the court, in a will to carry out the requests of the will.

Hereditaments: Things both personal and real that is capable of being inherited.

Deficiency Judgment: A personal judgment against a borrower if the foreclosure sale does not bring

enough to pay the balance owed.

Title by Descent: Transfer of title to real or personal property through descent (heirs). No will.

Page 13: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

13

Descent Distribution (Intestate Succession): The title to real estate and personal property of an

intestate decedent passes to his/her heirs. Separate Property: Deceased owner who died without a

will (intestate), spouse and children receive property. Community Property: Without a will, to surviving

spouse if all children are common to both; otherwise, surviving spouse receives half and all the children

of the decedent equally receive half.

Devise: The gift of real property by will. A person who receives property by will is a devisee.

Bequest: A gift of personal property is known as a legacy or bequest. The person receiving the

personal property is known as a legatee.

Property Valuation and Appraisal

Broker (9 questions) Salesperson (7 questions)

A. Principles, types, and estimates of property value

1. Valuation definition, purpose, and process

2. Characteristics

3. Valuation principles

4. Approaches to value

5. Depreciation/obsolescence

6. Appraisals and fair market value

7. Math calculations

8. Influences on property value

9. Competitive Market Analysis (CMA)

B. Investment analysis

1. Application of principles

2. Math calculations

Value: The economic and physical characteristics of real estate form the underlying basis for the

determination of value. Value is the amount of goods or services offered in the marketplace in exchange

for any given product. To have value in the real estate market, a property must have the following four characteristics: Note: remember the term (DUST) to remember the characteristics

Demand: Is there a need or desire for possession or ownership?

Utility: How is the property used?

Scarcity: How many are available?

Transferability: How and can ownership be transferred from one person to another?

Market Value: The price at which a willing seller would sell and a willing buyer would buy, neither

being under abnormal pressure or duress.

Buyer’s Market is when market conditions favor the buyer. The supply of properties on the market is

much greater than the demand for those properties. This normally will drive prices down

Page 14: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

14

Seller’s Market is when the market conditions favor the seller. There is a large demand for properties in

a given area and few properties on the market. This normally will increase the market value of a

property Capitalization Rate: A factor, which if applied to an income stream, will convert that income into an

indication of value. The higher the “cap” rate, the lower the sales price.

Comparables: Properties listed in an appraisal report generally equivalent to the subject property.

Economic Life: Period during which a building earns enough income to justify its continued existence.

Economic Rent: Rent a property will produce when employed to its optimum efficiency. (100%

occupied)

Externalities: Influences outside a property that have a positive or negative effect on its value.

Residual Value: What is remaining after the economic life of a property is gone.

Regression: Properties that suffer loss because of declining values of surrounding properties.

Progression: The worth of a lesser property tends to increase if it is located among better properties.

Gross Rent Multiplier: A number that is multiplied by a property’s gross rent to produce an estimate of the property’s worth; or sales price divided by monthly rental income = GRM.

Highest & Best Use: That use which gives the greatest return in money and/or amenities.

Marginal Real Estate: Barely pays cost of existence.

Plottage Value: Combining and consolidating two adjacent lots into one increases utility and value. The amount of the increase in value is called plottage value. The act of combining the two adjacent lots to result in a higher value is called assemblage.

Unearned Increment: Value added to land due to increased development and demand, none of which

the owner is responsible for.

Principle of Conformity: Appraisal theory that affirms that the maximum value is realized if the use of

land conforms to existing neighborhood standards.

Principle of Contribution: The value of any component of property is determined by how much value

the improvement contributes to the value of the whole property.

Principle of Competition: This principle states that excess profit always attracts more competition.

Examples occur when a hamburger chain opens on a busy corner; it follows a competing hamburger

chain will soon open on a nearby site.

Principle of Increasing & Diminishing Returns: Improvements to the property eventually will reach a

point at which they no longer add any value to the property.

Principle of Substitution: Maximum value of a property will not be above an equally desirable and

valuable substitute property.

PRINCIPLE OF SUBSTITUTION = MARKET DATA APPROACH

Page 15: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

15

Methods of Estimating Value/Appraisal Process:

Appraisal: An appraisal is an estimate of value. The accuracy of the appraisal depends on the

integrity and competency of the appraiser. Appraising is an art, not a science. It is one person's

opinion of value and it may be disputed.

Three Appraisal Approaches:

Market Data Approach: Comparison with known sales of other comparable properties. The principle is substitution. No one will pay more if the same thing is available for less money.

Income Approach: Capitalization of net income (i.e. value based on income). Used on commercial and investment properties that produce income

Cost Approach: The only approach that uses depreciation. Sometimes called “appraisal by summation” b a s e d on the property’s reproduction or replacement cost.

Reproduction: To reproduce an exact replica.

Replacement: To replace using modern materials this eliminates functional obsolescence. The replacement cost tend to set the upper limit of value because no one will pay more for something if the same is available new for less money.

Principal Steps in Appraisal Process:

Define problem and accumulate data.

Apply approaches.

Process of reconciliation (also called correlation) and verification.

Final value estimate

Reporting the appraisal

Essentials to Appraisal Report:

Date

Statement of purpose

Opinion of value

Legal description of property

Signature of appraiser

Reconciliation: The final step in an appraisal process, in which the appraiser reconciles the

estimates of value received from the market data, cost, and income approaches to arrive at a final

estimate of market value for the subject property.

Factors that Cause Depreciation: Any condition that adversely diminishes the value of the improvements to real property

Physical Deterioration: A loss in value because the building is old and weathered. It may also suffer from lack of maintenance or even vandalism. Can usually be curable

Page 16: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

16

Functional Obsolescence: Caused by relative loss of a building’s utility (outdated). Could be curable but more often is incurable such as an office building that will not accommodate central heat or air.

Economic Obsolescence: Sometimes called “external obsolescence”. This is brought about by social, environmental, or economic factors outside the property, such as changing neighborhoods, noise, and pollution. Usually incurable because there is nothing the existing owner can do to remove the negative element as it is not on his property.

Competitive Market Analysis:

The Competitive Market Analysis (CMA) is a written report prepared by a real estate agent to assist sellers and buyers with the determination of listing prices and offering prices. A CMA should include: Homes that have sold within the last few months

Homes currently on the market for sale that would be the competition for the subject property

Homes currently pending a sale. These homes had acceptable offers on them.

Analysis of expired listings. These homes never got an acceptable offer and the listing expired. The CMA ranges of value will show the seller the probable sales price and help the agent decide whether to accept a listing.

Transactions Requiring Formal Appraisal In 1989, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) began requiring that a licensed or certified appraiser be used to do any appraisal in connection with a federally related transaction of $250,000 or above.

Straight-Line Depreciation: This is a method used by accountants to depreciate investment properties for IRS purposes. The IRS sets the economic life of structures depending on what they are.

To determine annual depreciation: take the replacement cost of a building and divide it by the economic

life of that building. A property with a replacement cost of $200,000 and an economic life of 50 years

would have an annual depreciation of $4,000. Multiply the annual depreciation by the age of the building

for the total amount of depreciation. If this building were 15 years old, the total depreciation would be

$60,000.

Contracts and Relationships with Buyers and Sellers Broker (17 questions) Salespersons (14 questions)

A. Contract elements

1. Validity

2. Void/voidable

3. Enforceable/unenforceable (Statute of Frauds)

4. Executory/executed

B. Listing contracts

1. General purpose/definition of listing

2. Types

3. Required elements

4. Establishing listing price

5. Responsibilities

6. Compensation arrangement

C. Buyer Representation Agreements

Page 17: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

17

1. General purpose

2. Types

3. Required elements

4. Responsibilities

5. Compensation arrangement

D. Sales contracts

1. Terminology

2. Procedures

3. Standard parts

4. Contingencies and misc. provisions

5. Contractual rights and obligations

6. Disputes and dispute resolution terms

7. Delivery and acceptance

E. Option contracts

F. Agency relationships and responsibilities

1. Types of relationships – definitions

2. Relationship powers and obligations

Contract: An agreement between parties to perform or refrain from performing an act. The parties must

be legally competent and the act must be legal. It also must be supported by legal consideration.

Expressed Contract: The parties state the terms and show their intentions in words May be oral or

written

Implied Contract: The agreement of the parties is demonstrated by their actions or conduct and words.

Bilateral Contract: Both parties to the contract must promise to do something. A sales contract is a

bilateral contract because both the buyer and seller make a promise. The buyer promises to buy and the

seller promises to sell. One promise is given in exchange for another.

Unilateral Contract: A one-sided agreement. Only one party makes a promise. The second party does

not have to act, but if they do, the first party must keep the promise. If you offer a reward for a lost pet

and someone brings the pet home you must pay the reward. An option contract is also a unilateral

contract.

Executed Contract: Both parties have fulfilled their promises and performed on the contract

Executory Contract: The contract is not executed. Something remains to be done by one or both

parties.

Lis Pendens: A recorded document that creates constructive notice that a legal action relating to a

specific property is being filed in a court. Latin for “litigation pending”. It is a means of clouding a title to

prevent a transfer prior to a lawsuit being filed and a writ of attachment obtained.

Writ of Attachment: When the court takes jurisdiction over a defendant’s property till a lawsuit can be

settled.

Valid Contract: A binding and enforceable contract.

Page 18: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

18

Void Contract: Has no legal force or effect because it does not meet the essential elements of a

contract. Contracts executed by a person who has been judged or adjudicated incompetent by a court

have lost their ability to contract. Any document they sign such as a deed or will is void. A contract

conveying property to a fictitious person or company is void.

Voidable Contract: A valid contract that may be terminated or rescinded by one of the parties.

Example: A contract entered into with a minor or one in which fraud or duress can be proven is usually

voidable. An option contract is also a voidable contract if the party who has the option terminates the

agreement within a prescribed time frame.

Unenforceable Contract: An oral contract.

Contingency in a Contract is anything that limits the validity of the contract. The contract is usually

voidable until or unless the specified condition is met. Example: The contract is contingent upon the

buyer being able to obtain financing for the property

Essential Elements of a Valid Contract:

Competent Parties (Legal entities—legal age and mentally competent)

Offer and Acceptance (Also called “mutual assent” meaning a “meeting of the minds”.)

Consideration (Consideration is something of legal value, usually one party suffering a legal detriment, bargained for and given in exchange for a promise or an act. Any return promise to perform that has been bargained for and exchanged is legally sufficient to satisfy the consideration element.)

Legality of Object (It is for a legal purpose or not against public policy.)

Reduced to Writing and Signed (Enforceable when in writing and agreed to by signature of all the parties.)

Time is of the Essence: The contract must be performed within the time limits specified and that any party who has not performed on time is liable for breach of contract.

Computing Time: The act occurs on day zero. Day one starts on the next day after the act. The last day of the count ends at midnight on the last day of the period. Calendar days, not business days, are used.

Assignment of a Contract: Transfer of the rights and/or duties from one principal to another.

Novation: Substitution of a new contract for an existing agreement with the intent of getting rid of the old contract or substituting one party for another.

Reformation: At some point during the contract one party may realize that a mistake has been made in the contract terms are that certain information should be made a part of the contract. If this occurs it may be possible to bring about a reformation of the contract

Discharge of Contract: A contract may be discharged in these ways:

When completely performed, with all the terms carried out.

Partial performance of the terms along with a written acceptance

Page 19: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

19

Substantial performance, in which one party has substantially performed but all the details have not been performed exactly as the contract requires.

Impossibility of performance, it is illegal to perform the act required by the contract

Mutual agreement of the parties to cancel

Operation of law, as in the voiding of a contract by a minor, or as a result of fraud or duress.

Default: A breach of contract is a violation of any of the terms or conditions of a contract without legal excuse.

If the seller defaults, the buyer has three alternatives: Rescind, or cancel the contract and recover the earnest money as liquidated damages.

File a court suit for specific performance to force the seller to perform the contract.

Sue the seller for compensatory damages. If the buyer defaults, the seller has four alternatives: Declare the contract forfeited. Retain the earnest money.

Rescind the contract (terminate). Return the earnest money. (Probably not going to happen)

Sue for specific performance.

Sue the buyer for compensatory damages.

Law, Definition, and Nature of Agency Relationships, Type of Agencies, and Agents:

Law of Agency: A body of laws that govern the relationship between a principal and his/her agent. It

defines the rights and duties of the parties in a real estate transaction. These laws are based on

common law.

Definition: Agency is the relationship between a principal and an agent who acts for the principal within

the specified authority granted by the principal. The principal is entitled to rely on the agent, who places

the principal’s interests above those of his own.

Single Agency: The practice of representing either the buyer or the seller, but never both in the same

transaction.

Dual Agency: The practice of representing both the buyer and the seller in the same transaction.

Discouraged in many states

Types of Agency: Real estate agents generally are appointed “special” agents to buyers and sellers.

Property managers are generally called “general” agents. “Universal” agent – can conduct all business

the owner himself can conduct. Real estate agents do no act as universal agents for their clients.

Nature of Agency Relationships:

Page 20: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

20

Expressed Agency: An agency created by specific agreement, whether written or oral, between

principal and agent. Those specific agreements are the listing agreement and the buyer representation

agreement.

Implied Agency: An agency created by conduct, words, and acts of the agent. It is not an expressed

agency (in writing), but leaves the assumption is that the agent is working for the principal.

Ostensible Agency: An agency created when a principal gives a third party reason to believe that

another person is his agent. Think of ostensible as meaning “for all appearances”.

Agency by Ratification: An agency relationship that is established after the fact.

Gratuitous Agency: This type of agency can be created when an agent offers free advice usually to

friends or family. If the person acts on that advice and is damaged, the agent could be liable.

Agents: An agent is one who acts or has the power to act for another.

Licensee: A real estate broker or real estate salesperson.

Buyer Agent/Buyer Broker: A real estate agent or firm who is employed by and works for a buyer in a

real estate transaction. A buyer agent owes fiduciary duties to the buyer.

Listing Agent/Listing Broker: A real estate agent who markets the seller's property and represents the

seller during the sale of the seller's property. Also known as the seller's agent

Subagent: A licensee who represents a principal through cooperation with and consent of a broker

representing the principal and who is not sponsored by or associated with the principal's broker. If you do

not have an agreement to represent the buyer, you are representing the seller as a subagent. Anytime

you represent the client of another broker other than your sponsoring broker, you act as a subagent in the

transaction.

Creation of Agency and Agency Agreements: Agency is always created at the broker level, never at

the salesperson level. All the salespersons sponsored by the broker owe the same duties as the broker.

The broker-seller relationship is created by the listing agreement and the broker-buyer relationship is

created by the buyer representation agreement. These agreements are employment agreements.

Responsibilities of Agent to Seller/Buyer as Principal:

Fiduciary Responsibilities: The creation of the agency relationship creates a duty between a licensee

and a principal called a fiduciary duty. The fiduciary duty is a relationship of trust and confidence

between principal and agent. The law imposes on the agent duties of obedience, loyalty, disclosure,

confidentiality, accounting, and reasonable care and diligence, (REMEMBER—“OLD CAR”). A real

estate agent owes complete fiduciary duties to the principal and must act in the best interests of the

principal (the client) while also being competent and treat all parties honestly and fairly (whether the seller

or the buyer).

Client: A buyer or seller who forms an agency relationship with a real estate broker; also called a

principal.

Page 21: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

21

Customer: A buyer who is assisted by an agent who represents the seller or a seller who is assisted by

an agent who represents the buyer. A buyer who represents him/herself but is assisted by the seller’s

agent (sub-agent).

Termination of Agency: An agency may be terminated by the acts of the parties or by operation of law

for any of the following reasons:

Closing of the sale of the property

Destruction of the property

Expiration of the term of the agency

Mutual agreement to terminate the agency (must be written).

Renunciation by the broker (firing the principal) or revocation by the principal (firing the broker)

Bankruptcy of the owner if title transferred to receiver

Death or incapacity of either party (Broker or Principle)

Commission and Fees: The broker’s compensation is specified in the listing agreement and the buyer

representation agreement. The payment is usually a percentage of the selling price of the property or it

may a flat fee. It is earned once the broker has performed the work for which they were hired. It is paid

at closing or upon default of the principals after the commission was earned.

Subagent Commissions: A subagent is a licensee who represents a principal through cooperation

with and consent of a broker representing the principal and who is not sponsored by or associated with the principal’s broker. The subagent is a special agent representing a seller rather than a buyer. The

commission to be paid or not to be paid is specified in one of the agreements either the Listing

Agreement or Buyers Representation Agreement

Referral Fees: Fees can be paid between brokers for business referrals. Such fees can be paid for

broker to broker referrals as well as referrals from relocation companies and financial institutions.

Listing Agreements:

The listing agreement is an employment between a broker and a seller. It creates a special agency relationship between the two. It must be in writing to be enforceable.

Listing agreements give complete information concerning a tract of land and the authority to offer it for sale.

All listings are taken in the name of the broker and become his/her personal property.

The amount of commission is by agreement of the parties.

No matter how many brokers share in a listing or assist in the sales, the seller only pays one commission, which is agreed upon at the time of the listing being signed. The broker that lists the property may share his/her commission with another broker who assist in the sale of the property. The listing broker is the one that listed the property for sale and the broker work either for or with the buyer would be referred to as the selling broker

In order to maintain a claim for a commission, the broker must:

Page 22: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

22

Be procuring cause for the sale (listing agent) or produce a purchaser who is ready, willing, and able to buy (selling agent).

Have the listing contract in writing.

Be licensed as an agent at the time of the sale.

Advise the purchaser in writing to have an abstract of title examined by an attorney of their choice or be furnished with or purchase title insurance. (Remember: This is also cause to have a license suspended or revoked and/or precludes the payment of any commission to be paid on the sale.)

Types of Listings:

Open Listing: The owner reserves the right to list with as many brokers as they choose; the one that

sells is the one that gets the commission.

Net Listing: An agreed upon price between the owner and the broker, the broker receives any money

over that price as the commission. This type of listing is discouraged and requires that the seller be

familiar with value, require the net listing, and the agents puts a ceiling on the amount they can earn

under the net approach.

Exclusive Agency Listing: The broker is the exclusive agent, and receives the commission unless the owner sells the property themselves.

Exclusive Right-to-Sell Listing: The broker is the exclusive agent, and receives the commission even if the owner sells the property themselves. The most common type of listing that MLS registers. Also gives the greatest protection to the broker.

Multiple Listing Service (MLS): A service providing an arrangement in which brokers share their listings with other brokers in exchange for a share of the compensation generated by a transaction.

Expiration of Listing Period: All listings must specify a definite period during which the broker is to be employed and must have a definite termination date.

Buyer-Broker Agreements: These agreements, known as Buyer Representation Agreements, establish a special agency relationship between the broker and the buyer for services provided by the broker. The agreement must be signed by the buyer. It sets the period of the agreement, the market area being considered, the fee being paid by whom, and other agreements between the broker and the buyer.

Offers/Purchase Agreements: The sales contract sets forth all details of the agreement between a buyer and a seller and establishes their legal rights and obligations. It dictates the provisions of the deed.

An offer is made when a prospective buyer signs a contract form and it is presented by the broker to the seller. If the seller agrees to the offer exactly as it was made and signs the contract, the offer has been accepted. The seller has three rights when receiving an offer; accept, counter, or reject.

An offer is not considered to be accepted until the person making the offer has been notified of the other party’s acceptance. Notification to a broker/agent is considered notification to their principal even if the agent never tells the principle.

Licensees must present all offers unless directed not to do so in writing by the seller.

The effective date of a contract is the date that all the parties agree to everything in the contract and have initialed all changes made and agreed to. The agent that has the contract in his/her

Page 23: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

23

possession at the time of final acceptance is the agent that places the effective date on the contract.

Notifications between parties after contract acceptance must be in writing and are effective when mailed, hand delivered, or transmitted by fax.

If a broker accepts earnest money and acts as an escrow agent, he/she must deposit the funds in a custodial (bank) account set up for that purpose within 48 hours or the close of business the second business day (best answer!).

Contract for Deed: Under this form of contract, the seller retains legal title until the terms of the contract have been satisfied and the buyer pays the debt in full. The buyer has equitable title during the life of the contract. Also may be referred to as a “land contract”.

Counteroffers/Multiple Counteroffers: Any change by the seller to the terms proposed by the buyer creates a counteroffer. A counteroffer constitutes a rejection of the original offer proposed by the buyer. The buyer can accept, reject, or counter the counteroffer.

Amendment: A form used to change the language in either the listing agreement or the purchase contract. Not effective until all the parties agree to the change.

Addendum: A format to add additional terms and conditions to the approved forms, thus incorporating them into the legal document.

An offer or counteroffer may be withdrawn at any time prior to notification of acceptance by the other party. This is called rescission.

Options:

An option is a contract in which a seller gives a potential buyer the right to buy the property at a fixed price within a stated period of time. The optionee (buyer) must pay a fee for this option right.

The optionee has no obligation to buy. He may decide to either exercise the option right and buy or allow the option right to expire.

Only the optionee may enforce the option.

An option contract is not a sales contract. It merely gives that the optionee the right to buy. The owner will be obligated to sell if the optionee decides to exercise the option.

The option fee is non-refundable to the optionee. If so stated in the contract, the seller may refund the option fee to the buyer at the closing of the sale.

An option in a lease grants the lessee the privilege of renewing the lease but requires notice on or before a certain date of intent to exercise the option. Some leases grant the lessee the option of purchasing the leased property.

Rescission and Cancellation Agreements: An offer or counteroffer can be withdrawn at any time before acceptance by the principal making the offer or counteroffer. This is called rescission. Both the Listing Agreement and the Buyer Representation Agreement may be cancelled by the respective client with an approved cancellation notice.

Broker/Salesperson Agreements:

A real estate salesperson is licensed to perform real estate activities on behalf of a licensed, sponsoring real estate broker. The broker is responsible for all the occupational acts of the agents licensed under him/her.

Page 24: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

24

All compensation to the salesperson must be paid through the sponsoring broker. The compensation is specified in the “agreements prior”—the Listing Agreement and the Buyer Representation Agreement.

The Independent Contractor Agreement (ICA) is the employment agreement between the broker and an agent under his/her brokerage. It specifies that the salesperson is an independent contractor. The independent contractor salesperson operates more freely than an employee. The broker may control what the independent contractor does, but not how it is done. It also establishes a general agency relationship between the broker and the sponsored agent. The agent will be performing a number of duties such as working with buyers, sellers, tenants, and landlords in the broker’s name.

Property Conditions and Disclosures Broker (8 questions) Salespersons (9 questions)

A. Federal environmental regulations

1. Lead-based paint

2. CERCLA

3. Asbestos

4. Wetlands and flood plains

B. Environmental issues

1. Mold 2. Radon

3. Protected species

4. Other

C. Material and other property disclosures

Property Condition Disclosure Forms:

Latent Defects: Courts have ruled that a seller is responsible for revealing to a buyer any hidden, or

latent, defects in a property. A latent defect is one that is known to the seller but not to the buyer and that

is not discoverable by ordinary inspection. All buyers have the right to know the condition of the property

they are seeking to buy as well as all material facts related to the property, regardless of representation.

Lead-Based Paint: Federal rules require disclosure of any knowledge of the presence of lead-based

paint hazards in any property built prior to 1978. There are a few exceptions.

Environmental Hazards and Endangered Species: Sellers must provide information related to these

issues, giving the buyer the right to inspect the property to be satisfied with the property condition.

Aluminum Wiring: Many home built in the mid 1960’s and early 1970 have aluminum wiring. The main

issue with the aluminum wiring is that over time the connections may oxidase and loosen to a point that

they short or spark and could start a fire

Polychlorinated Biphenyl (PCB): Is present in many products and materials produced before 1979.

These include, among other items, transformers and capacitors, fluorescent light bulbs, caulking, tape

and adhesives. PCB has been ban in the United States since 1979

Septic Systems: These systems usually treat the effluent in some manner or create an artificial drain and filtration system. These systems can be quite complicated. Permits are required to install any septic system, modify any septic system, and to renew any septic system. It is recommended that homeowners try to avoid any obstructions that may clog the drain lines. Solid waste settles naturally to

Page 25: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

25

the bottom of the septic tank. Therefore, it is recommended that the tank be pumped out every 3-5 years, depending on the amount of waste from the household and the number of people living there.

Material Fact: A material fact is anything a reasonable person would find important in making a decision

to contract. Anything related to the condition of the property or the condition of the title is a material

fact and must be disclosed to buyers.

Need for Inspection: Buyers have the right to inspect any property they contract for sale. Licensees

should encourage such inspections. Using a licensed or certified inspector, the buyer should be satisfied

with the condition of the property since the seller does not warrant the condition of the property.

Obtaining/Verifying Information:

The buyer should inspect the property to determine the interests of any party in possession or other

interests that cannot be determined from inspecting the public record.

In a final walk-through of the property, the buyer can check that all the fixtures included in the contract are

present, that no damage has been done, and that any repairs have been properly completed.

Material Facts: As an agent of the seller, a real estate broker is responsible for all the disclosure of any

material facts regarding the property. The many material facts to be disclosed are varied. Some of them

include but not limited to structural defects, working condition of appliances and fixtures, systems or

equipment in need of repair, previous inspections available, recent repairs done on the property,

obligations related to membership in property owners associations, potential annexation, and more.

Common Interest Ownership Properties:

Cooperative Ownership: Title to the land and improvements is held by the cooperative, which is a

type of corporation. Each purchaser receives stock in the cooperative thus becoming a stock-holder. The purchaser receives a proprietary lease in the unit for the life of the cooperative. Owners control

the property through their stock ownership. Ownership of stock and not ownership of real property.

Condominium Ownership: The owner of a unit holds fee simple title to his/her unit and also a

specified share of the indivisible parts of the building and land, known as the common elements. The individual unit owners own these common elements as tenants in common.

Time-Shared Ownership: Multiple purchasers buy undivided interests in real estate with a right to use

the facility for a fixed time period. Maintenance and other common expenses are prorated among the

unit owners.

Commercial Property/Income Property: Real Estate investment involves purchasing real estate that

will show a return of appreciation or income, greater than the original purchase price, considering the

expenses related to it.

Appreciation: Property held for a period of time that is expected to increase in value and show a profit

when it is sold.

Income: The amount of money an investor receives from income producing properties. Cash flow is

the amount of money remaining after all expenditures have been paid, including taxes, operating costs, and mortgage payments.

Leverage: The use of borrowed money to finance the bulk of an investment.

Page 26: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

26

Equity Buildup: That portion of the payment directed toward the principal rather than the interest, plus

any gain in property value due to appreciation.

Capital Gains: The difference between net selling price and adjusted basis of property.

Boot: Money or property given to make up any difference in value or equity between two properties in

an exchange. A term used in conjunction with the IRS tax laws.

Risk: Investors seek to minimize risk by spreading their capital in more than one investment.

Consumer Price Index (CPI): The most common index used to evaluate future lease rates

Alternative Minimum Tax: A type of flat-rate tax that applies to taxpayers who have certain types of

income. A 26% or 28% rate applies to broadly based income of individuals. A 20% rate applies to corporations. If this tax exceeds the regular income tax, then the alternative minimum tax is to be paid

instead of the regular income tax.

Depreciation: Is an allowable expense to reduce taxable income, therefore it is an expense - not a straight deduction. Land is not depreciated. Depreciation can only occur on improved property.

Recapture: To recover the tax benefit of a deduction or a credit previously taken.

Business Opportunities: The sale and leasing of real estate provides many opportunities to develop a

successful business.

Brokerage: The business of bringing people together who are interested in making a real estate

transaction.

Appraisal: The process of estimating the value of a parcel of real estate.

Property Management: The business of caring for a property for an owner.

Apartment Locating: The matching of landlords and tenants.

Financing: The business of providing the funds necessary to complete real estate transactions

Property Inspection: The business of giving an opinion as to the condition of a property.

Property Development: Includes the work of land developers and sub dividers, who purchase raw

land, divide it into lots, build roads, and install utilities.

Counseling: One who helps clients choose among the various alternatives involved in purchasing,

using, or investing in real estate.

Education: The process of providing instruction and training to people involved in the real estate

business.

Title and Abstract: Insuring that good title is transferred to the buyer and overseeing the entire

process of closing a transaction.

Business Sales: Business sales are regulated by the Uniform Commercial Code (UCC) when personal

property is used as security for a loan.

Page 27: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

27

Agricultural Property: Agricultural property generally is classified as farms, ranches, timberland,

pastureland, and orchards.

Exception: As used in the conveyance of real estate, the exclusion of some part of the property

conveyed, with the title of that excepted part remaining with the grantor.

Reservation: A right retained by the seller in a real estate transaction.

Value of Agricultural Real Estate: Value is affected by climatic conditions, management expertise,

and productivity.

Federal Laws Governing Real Estate Activities Broker (7 questions) Salespersons (9 questions)

A. Anti-Discrimination/Fair Housing Acts

1. Protected Classes

2. Advertising

3. Enforcement/penalties

B. Americans with Disabilities Act (ADA)

C. Restraint of Trade (Sherman Act, etc.)

D. Lending (Regulation Z, etc.)

E. Privacy (Privacy Act, etc.)

F. Marketing

1. Real Estate Settlement Procedures Act (RESPA)

2. Do Not Call

G. Other regulations that apply

Fair Housing Laws:

1866 Civil Rights Law: Prohibited discrimination based on race only for buyers, sellers, landlords, and tenants. There are no exceptions anywhere that would allow for racial discrimination. Any violations of the 1866 law go directly to federal court.

Title VIII of the Civil Rights Act of 1968: Created the Fair Housing Act or Law and forbids discrimination

and discriminatory practices in connection with the selling or renting of residential real estate not only

by owners but also by lenders, investors, builders, brokers (in residential real estate) and real estate

organizations and services. The law prohibited discrimination on the basis of race, color, religion

and national origin.

Community Development Act of 1974: Sex added as a protected class.

Fair Housing Amendments Act of 1988: Prohibits discrimination in housing based on handicap

(disabled, AIDS-HIV) or familial status. (Single mother or a single father with children under age of 18).

Included are pregnant women.

Protected Classes Include: Race, color, religion, sex, national origin, physical handicap, or

familial status. These same guidelines pertain to advertising.

Under the Fair Housing Act or Law, the Following is NOT Allowed:

Altering terms, conditions, or services

Refusing to negotiate, sell, or rent.

Page 28: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

28

Advertising that excludes certain groups.

Denying the right to inspect or view property.

Americans with Disabilities Act (ADA): Applies to employers with 15 or more employees or any

business that is open to the general public regardless of how many employees. All real estate

brokers who operate a storefront (not brokers with home office) are included. Must make

reasonable accommodations or modifications for people with disabilities. ADA includes all of the

following requirements: work site accessibility, modifying equipment, designated parking, curb ramps,

elevators, and restrooms.

The first time violation of Fair Housing is a maximum penalty of $10,000, not exceeding $25,000 if

another offense within past five years, or not exceeding $50,000 if two or more violations in the past seven years.

Magan’s Law was enacted in 1996 allowing the public information regarding convicted sex offenders.

This law basically requires that convicted sex offenders’ subject by law to notify the local police department of any change of address and requires or allows the police to then notify schools, parents

and ECT. Some states require that sellers or lessors inform buyers or lessees on where they can find

this information

Steering: Directing or channeling a minority to or away from an area to maintain or change the

character of the neighborhood.

Reverse Steering: Directing or channeling a white person to an all-white neighborhood.

Blockbusting: Using scare tactics (panic selling), (panic peddling) to induce people to sell their

property by telling them that minorities are moving into the neighborhood and their property values are

going to drop.

Financing/Credit Laws:

Equal Credit Opportunity Act: Prohibits creditors from discriminating against credit applicants on the

basis of race, color, religion, national origin, sex, marital status, age or dependency on public

assistance. Lenders are required to make loans to all who are qualified regardless of the source of their

income as long as it is legal and verifiable.

Community Reinvestment Act: Ensures that financial institutions fulfill their responsibilities in servicing

the credit needs of every member of the community. If they take money, they must loan money. It

requires that lenders do business in the community where they derive their deposits/charters.

Sherman Anti-Trust Act: The most common anti-trust violations that can occur in real estate are price

fixing, boycotting competitors, and allocating customers or markets. Violators of this act may be found

guilty of a misdemeanor or a felony, depending on the severity of the violation, punishable by a

maximum of $100,000 fine and three years’ imprisonment. For a corporation, the penalty may be as

high as $1,000,000. In a civil suit, a person who suffered a loss because of anti-trust activities may

recover triple damages plus attorney’s fees.

Redlining: This is the illegal practice of refusing to originate mortgage loans in certain geographic

areas. NOT based on individuals. Lenders would draw red lines around certain areas on a map and

refuse to make loans to anyone desiring to purchase or rehab homes in that area (usually highly ethnic

areas) thus contributing to the further and rapid decline of an already distressed neighborhood. The Home Mortgage Disclosure Act is the law that prohibits redlining.

Page 29: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

30

Regulation Z (Truth in Lending): Developed by the Federal Reserve System and administered by the

Federal Trade Commission, commonly referred to as the Truth-in-Lending Act, requires that credit

institutions inform borrowers of the true cost of obtaining credit so they can compare the costs of various

lenders and avoid the uninformed use of credit. Regulation Z must provide a Truth-In-Lending Statement

to the buyer that includes the annual percentage rate (APR), the name of the lender, the total

payment, and the late payment charges.

Regulation Z (Advertising): Requires that in real estate advertising, if one of the following terms is

used, the other terms must also be disclosed:

The amount or percentage of the down payment

The terms of repayment (number, amount, and due date)

The annual percentage rate (APR).

The amount of loan or cash price

(Do not have to disclose closing costs, taxes or insurance here.) Disclosure of closing costs and

settlement will be covered under RESPA (Real Estate Settlement and Procedures Act).

Three-day Right of Rescission: With most consumer credit transactions covered by Regulation Z, the

borrower has three days in which to rescind the transaction by merely notifying the lender. However, this

right of rescission does NOT apply to residential first mortgage loans. It DOES apply to refinanced

second lien loans and home equity loans

Real Estate Settlement Procedures Act (R.E.S.P.A.): Created to ensure the buyer and seller have

knowledge of all the settlement costs before closing. All first lien loans on residential property (from one to four families) that are federally related are required to be settled under the RESPA provision.

“Federally related” means any loan made from federally insured deposits; guaranteed or insured

by the Federal Government; or is intended by the originating lender to be sold to FNMA, GNMA,

or FHLMC.

The Four Primary Aims of RESPA are: To eliminate “kickbacks”, fee splitting, or referral fees that tend to add to the cost of settlement

services.

To provide more effective advance disclosure to home buyers and sellers of settlement costs.

To reduce the amounts homebuyers are required to place in escrow to ensure payment of taxes

and insurance.

To reform and modernize the local record keeping of land title information

Under RESPA, the lender is required to furnish the buyer with:

Copy of the booklet “Settlement Costs & You”.

A good faith estimate of settlement costs.

Must be done within three business days from loan application

Closing expenses must be prepared on a Uniform Settlement Statement (HUD-1).

Page 30: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

30

Subdivisions:

Subdivides vs. Developers: sub dividers buy undeveloped land and divide it into smaller lots for sale.

Developers improve land, construct buildings on land, and sell them.

Regulation of Land Development: The land development plan must comply with a municipality’s

comprehensive plan, zoning regulations, and environmental regulations. The plat map will illustrate the

geographic boundaries of specific lots. The plat must present restrictive covenants and engineering data established by deeds, declarations, etc. The subdivision plans will define lot sizes (generally

regulated by local zoning ordinances) and will provide for water, sewer, and utility easements.

Federal Interstate Land Sales Full Disclosure Act: The objective is to avoid fraudulent marketing

schemes and regulates unimproved parcels sold through an interstate sale. Law requires developers to

file reports with HUD prior to offering unimproved lots in interstate commerce. The law does not cover

subdivisions with fewer than 25 lots or lots of 20 acres or more.

Taxpayer Relief Act of 1997: Married homeowners who file jointly are able to exclude $500,000 of

capital gains realized on the sale or exchange of a principal residence. Single homeowners--

$250,000. Must have lived in the house two years of the last five years prior to the sale. There is no age requirement. If one of the married couples has used their exclusion within the past two

years they are still able to use the remainder of the exclusion, or $250,000. A first time

homebuyer (one that has not owned a personal resident in the past three years) can withdraw up

to $10,000 penalty free from IRA or tax deferred accounts.

For income tax purposes, homeowners can deduct from their gross income:

Mortgage interest on first and second homes

Real estate taxes, but not penalties for late payments.

Certain loan origination fees

Certain loan discount points can be deducted in the year of the purchase.

Prepayment penalties on loans paid off early.

Police Power: The right of the government to place reasonable restrictions on privately held land.

Examples of police power exercised are zoning ordinances, building codes, environmental laws.

Eminent Domain: The right of government to take private property for public use, with just

compensation paid to the owner. If the owner and condemning entity cannot agree as to fair market value then a condemnation suit is filed and the courts decide on fair value. Inverse condemnation

occurs when the improvement may not take the property but causes the subject property to suffer a loss

in value of 25% or more then the condemning entity must pay the owner for that loss.

Condemnation: The PROCESS or ACT of taking property under the right of eminent domain.

Escheat: Property reverts to the state when someone dies leaving NO WILL and NOHEIRS. This is to

prevent property from becoming ownerless such as when an owner who dies intestate with no heirs.

Police Powers: Under the police powers granted by the Fourteenth Amendment to the U.S.

Constitution, each state, and in turn its counties and municipalities, has the authority to adopt

regulations necessary to protect the public health, safety, and promote the general welfare.

Lead-Based Paint: Disclosure of lead based paint is required on all properties built before 1978. Both

sellers and landlords must disclose. The federal rules do not require testing, removal, or abatement— just disclosure.

Page 31: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

31

Federal Environmental Legislation has provided laws to protect air quality, water quality, protect

endangered species, and disposal of hazardous and solid waste.

Foreign Investment and Real Property Tax Act: A federal law aimed at ensuring that nonresident

aliens and foreign corporations pay U.S. income tax based on gains from the disposition of U.S. real property interest. The transferee (buyer) must withhold a tax equal to 10 percent of the amount realized

by the foreign transferor (seller) on the disposition of the property.

Financing the Transaction and Settlement Broker (9 questions) Salespersons (8 questions)

A. Financing components

1. Financing instruments

2. Financing sources (primary and secondary mortgage markets, seller financing)

3. Types of loans

4. Financing clauses, terminology, and cost of money (calculation)

5. Lending issues

B. Lender requirements and obligations

1. Private mortgage insurance (PMI)

2. FHA requirements

3. VA requirements

4. Escrow/impound account

5. Credit report

6. Assumption requirements

7. Appraisal requirements

8. Hazard and flood insurance

9. Federal financing and credit regulation

C. Settlement/Closing

1. Procedures and forms

2. Closing costs and calculations

3. Documents, title, and recording

Financing Instruments:

Promissory Note: Actual promise to repay a loan. The note is evidence of the debt. The note creates

the debt. It is a negotiable instrument and is considered personal property.

Mortgage: A document that creates the lien and conveys the property to the mortgagee as security for

the debt. The pledge of property is security for the note and sets up collateral that the lender can sell if the note is not paid. A mortgage is a two-party instrument allowing for judicial foreclosure (going to

court). The mortgagor borrows money and gives the mortgage to the mortgagee as security for the

debt.

Hypothecate: Pledging of property as security for a loan. Possession of the property is not given up.

Loan Qualification: A lender's decision to make a home loan is based on the borrower's income,

payments required on outstanding debts, assets, and credit history. A borrower is required to have

adequate cash to pay the down payment, closing costs, prepaid expenses provided for in the purchase

contract, and an adequate reserve.

A Deed of Trust is a three party instrument:

Lender (Beneficiary)

Page 32: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

32

Borrower (Trustor) Retains equitable title to the property.

Trustee: A Bank Officer is commonly appointed as the trustee and the lender can substitute trustees at will. If a trustee dies, the property can still be immediately distributed.

The duties of the trustee are to release the lien upon satisfaction of the debt or foreclose after default.

The deed of trust allows for non-judicial foreclosure under the power of sale clause contained in the

document (the lender does not have to go to court). If the borrower defaults the beneficiary (lender)

directs the trustee to offer the property for sale to extinguish the debt.

The deed of trust also has a deficiency clause that allows the lender to seek an additional judgment

against a borrower who defaults if the liquidation foreclosure sale fails to extinguish the debt. The

addition of the power of sale and deficiency clauses is the primary difference between the deed

of trust mortgage and the two party mortgages.

Three giants of the secondary market: Federal National Mortgage Association (FNMA),

Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation

(FHLMC). The primary responsibility of the secondary market is to maintain an active market for

mortgages. Secondary lenders consist of investors who purchase pre-existing mortgages. FNMA

exchanges mortgage- backed securities for pools or blocks of mortgages.

Acceleration Clause: A provision in a written mortgage or note that in the event of default, the whole

amount becomes due and payable immediately. This helps the lender move quickly to foreclosure.

Alienation Clause: "Due on Sale" clause. In other words, the note is called due when the property sells; therefore the buyer cannot assume the existing loan. The lender requires the loan to be paid off at the sale of the property.

Amortization: Liquidation of a debt by installment payments consisting of principal and interest.

Annual Percentage Rate (APR): The “effective interest rate” or the “effect yield” the lender makes when giving the loan to the borrower. The APR is comprised of all the fees the lender makes in addition to the interest rate; these are loan origination fees, discount fees or points and closing costs.

Construction Loans: Generally short-term or interim loan to finance construction of improvements.

Default: Non-performance of a duty arising under a contract or a loan agreement.

Defeasance Clause: Clause in a mortgage stating that when the debt has been paid a satisfaction of mortgage is given by the mortgagee to the mortgagor showing the lien has been paid.

Escalation Clause: Raises the existing interest rate.

Foreclosure: Legal process instituted by a mortgagee or lien creditor after a debtor's default.

Judicial Foreclosure: A foreclosure proceeding where the lender must file a suit in a court of law to obtain a judgment ordering foreclosure of the lien.

Non-judicial Foreclosure: Foreclosure procedures through the power-of-sale clause contained in the deed of trust allowing the trustee to satisfy the debt without going through court proceedings.

Interest: Fee lenders charge for the use of their money. (Simple interest is computed on principal only, while compound interest is based on both principal and accrued interest).

Page 33: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

33

Imputed Interest: Interest charged regardless of periodic payments made.

Leverage: Obtaining maximum financing with minimum cash (utilizing borrowed funds).

Lien Theory: Mortgagor holds interest in the title while the mortgagee holds the lien.

Prepayment Clause: Allows the purchaser to prepay a portion of the loan without penalty.

Seasoned Mortgage: A mortgage that has maturity or has been in existence for a number of years.

Usury: Charging an interest rate higher than is allowed by law. Also called illegal interest

Types of Loans: Conventional: A loan that is not underwritten by a federal agency. Lenders rely on their own appraisal of the security and their own credit reports and information concerning the credit history of the borrower. Conventional loans may be “conforming” or “non-conforming”.

Conforming loans are those that meet FNMA or FHLMC guidelines so they can be sold in the secondary market.

Non-conforming loans can be made by any lender to be held in its own portfolio or sold to private mortgage packagers that specialize in areas not serviced by FNMA or FHLMC or GNMC

Types of Payment Plans and Special Types of Loans:

Fixed Rate Payment: Known as an “amortized loan” payment, the mortgagor pays a constant amount, usually monthly, for a set period of time. Payment credited first to interest rate, then applied to the loan balance.

Straight Payment: Also known as a “term loan”, the mortgagor pays periodic payments of interest, with the principal paid in full at the end of the loan term. This is an interest only loan.

Flexible Payment: The mortgagor makes low payments at the beginning of the loan. Larger payments are made for the remainder of the term. There are many different flexible payment loans such as ARMS.

Balloon Payment: The loan is partially amortized. Payments are made for a few years and then the full amount balloons and is due. At that time the loan must be paid in full or refinanced

. Adjustable-Rate Mortgages: Loans that are originated at one rate of interest, with the rate fluctuating up or down during the loan term based on a certain economic indicator. The movement of an index, such as Treasury notes or bills, governs the amount of interest-rate adjustment. ARMs have adjustment period caps, periodic rate caps, and aggregate rate caps.

Buydown Mortgages: The interest rate at the beginning is very low. The lender charges prepaid interest and this buys the interest rate down for a short time. After this time is up the interest rate goes up to the set rate and remains the same for the remainder of the loan. Also known as a graduated payment mortgage

Purchase Money Mortgage: Is used where the seller of the property is willing to carry back the loan for the purchaser. Also called “seller financing”

Equity Loans: The owner borrows money against the equity in his home.

Reverse-Annuity Mortgages: Equity loans for persons aged 62 or older. The person can receive periodic payments to help them remain in their home.

Page 34: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

34

Package Mortgage: Includes items of a personal nature (i.e. appliances/ washer-dryer) as part of the realty.

Blanket Mortgage: A loan that covers several houses or a number of lots

Participation Mortgage: When two or more parties or lenders are involved in a mortgage.

Wraparound Mortgage: A method of refinancing that preserves the current interest rate. New lender assumes payment of the existing loan and gives the borrower a new increased loan.

Open-End Mortgage: (Also called deed of trust loan.) A mortgage that is expandable by increments up to a maximum dollar amount, the full loan being secured by the same original mortgage. In other words, you can add on to the mortgage (add-on mortgage).

An Annuity is any amount of money received at certain fixed intervals or payments that are expected to be received in the future. A mortgage is an annuity to the lender because the lender will receives payments at fixed intervals

Contract for Deed: A loan where the title to the property does not transfer to the purchaser until the loan has been paid in full. The buyer acquires equitable title, makes payments to the seller, lives in the property, and pays taxes, insurance, and maintenance. The seller remains in legal title until the debt is paid in full then transfers legal title to the buyer. Also called a “land contract”

Penal Sum is an amount above the amount of a mortgage that the borrower is responsible for. In order to protect the lender in case the borrower defaults on the loan

Sources: Savings and Loan Associations

Banks and trust companies

Trust funds

Life insurance companies

Endowed institutions

Individuals

Mortgage Bankers (Service the loans they originate.) They loan their own money. They may then sell the note, keep it in their own portfolio, or sell the note but retain the servicing rights. Buyers will only know where the servicing rights are because that is where they make the payment.

Mortgage Brokers (Do not service the loans they originate.) They bring together buyers and lenders but do not loan their money, simply put, they broker the deal.

Credit Unions

Government Programs:

FHA: Federal Housing Administration.

Primary purpose is to insure loans for qualified buyers.

FHA insurance may be paid in cash by the borrower or the seller or financed with the loan.

Page 35: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

35

Purchaser obtains financing through qualified lending institutions.

Mortgaged properties must be appraised by an FHA approved appraiser.

FHA 203b is the standard fixed rate loan. FHA 203k is a rehabilitation loan.

FHA does not allow a prepayment penalty.

VA: Veteran's Administration.

VA guarantees loans for eligible veterans with little or no down payment.

VA does not allow a prepayment penalty.

Mortgaged properties must be appraised by VA approved appraisers. They give a Certificate of

Reasonable Value to the lender and buyer which is what a VA appraisal is called.

VA sets limit on the loan amount of up to four times the veteran’s entitlement.

Farm Service Agency: The FSA is for farmers who cannot obtain other loans for buying farms and

loans to operate their farms.

Mortgages: A mortgage loan creates the lien and conveys the property to the mortgagee as security

for the debt. The pledge of property is security for the note and sets up collateral that the lender can sell if the note is not paid. A mortgage is a two-party instrument allowing for judicial foreclosure

(going to court). The mortgagor borrows money and gives the mortgage to the mortgagee as

security for the debt.

Rules of Contract Law as they apply to mortgages: The mortgage must be in writing.

Name the parties.

Legally describe the property being mortgaged.

State the consideration.

Contain a mortgaging clause. These are the words of conveyance of the property to the mortgagee as security for the debt.

State the debt.

Signed by the Borrower (Mortgagor) and acknowledged. (Notarized)

Remember: No redemption period for non-payment of a mortgage.

Assignment: A note is a negotiable instrument. It may be sold to a third party. When the note is sold, the holder of the note signs it over to the third party. The deed of trust must also be assigned to the third party. It must be recorded. When the loan is paid in full, the assignee holding the note and deed of trust is required to sign the release of lien. In the event of a foreclosure, the assignee (not the original mortgagee) is required to file the suit.

Assumption: When the buyer not only purchases the property but assumes and agrees to pay the seller’s debt, the buyer becomes personally obligated for the payment of the entire debt. The buyer agrees to assume the sellers existing loan with the lender’s permission and agreement. The original

Page 36: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

36

borrower (seller) is released from liability and the new buyer becomes responsible for the remaining balance of the loan.

Subject To: When the property is sold subject to the mortgage (a form of assumption), the purchaser is not personally obligated to pay the debt in full. On default, the original borrower is still liable. Most mortgages contain an alienation clause that would prevent this.

First and Second Mortgages: Mortgages and other liens have priority in the order in which they have been recorded. The first lien on a property has the first claim on a property. If a second lien is placed on the property it will be called a second lien and will have a lower priority.

Recording: Although normally recorded, the mortgage does not have to be recorded to be valid. However, recording does give constructive notice to the world of the borrower’s obligations and establishes the lien’s priority. Priority is determined by the date the document was recorded. First in time is first in line. In the event of a default and foreclosure, the first lien would be the first to be paid, then the second and continuing until all liens are paid. If there were to be remaining monies, it would be the owner’s remaining equity. Only acknowledged (notarized) documents may be recorded.

Deed in Lieu of Foreclosure: A borrower who is about to be foreclosed on may negotiate with the lender to transfer the title of the property to the lender. This will avoid a deficiency judgment.

Deficiency Judgment: If the foreclosure sale of real estate securing a deed of trust does not produce enough money to repay the loan plus all penalties and interest, the lender may file a personal judgment against the borrower for the balance.

Equitable Right of Redemption: If, after default but before the foreclosure sale, the borrower pays the lender or taxing authority the amount in default, plus costs, the debt will be reinstated and the property will be pulled off of the foreclosure list.

Subordination Clause or Agreements: Changing the priority of a lien. The first lien holder goes to a second position and the new lien holder becomes first in priority

Discount Point: One discount point equals 1% of the LOAN amount. Increases the investors yield. Can be deducted in the year of the purchase

Discount Rate: Set by the Federal Reserve. It is the interest rate charged by the district banks for the member banks to borrow money from the Federal Reserve district banks. Closely tied to prime. Prime is what lenders give their most credit worthy borrowers.

Federal Reserve Bank System: Created in 1913 to serve as the central bank of the United States. The Fed regulates the flow of money and the cost of credit to help stabilize the market

Equity: Difference between market value and the sum of all the liens on the property.

Loan-To-Value Ratio: Amount lender is willing to lend in relationship to the appraised value (expressed

as %).

Origination Fee: The fee lenders charge to process the loan (Usually 1% of loan amount).

Warehousing: Temporary placement of a loan prior to permanent placement with a lender

Page 37: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

37

Leasing, Rents, and Property Management Broker (7 questions) Salespersons (5 questions)

A. Types and elements of leases 1. Leasehold estates 2. Types of leases 3. Lease clauses and provisions

B. Lessor and lessee rights, responsibilities, liabilities, and recourse 1. Owned and leased inclusions 2. Reversionary rights of owners 3. Unit-related disclosures 4. Effect of sale/transfer/foreclosure 5. Evictions 6. Tenant improvements 7. Termination of a lease 8. Breach

C. Property management contracts and obligations of parties 1. Contracts and contractual relationships 2. Manager’s obligations, duties, and liabilities 3. Owner’s obligations, duties, and liabilities 4. Management/owner math calculations

Leases as Contracts: A lease is a contract in which the owner, Lessor (Landlord) agrees to give possession of certain real estate to another Lessee (Tenant) for a specified time period in exchange for a rental fee. The lease provides rights of possession, not ownership.

Leasehold Estate: An interest one has in a lease to occupy a property for the duration of the agreement.

Estate for Years: (Also called Tenancy for Years) A leasehold estate that continues for a “definite

period of time”. It can be for days, weeks or years. It always has a specific starting and ending date.

and it does not automatically renew at the end of the lease. Must be created by “express agreement” (in

writing). An oral lease for less than one year might be enforceable and is the only exception to the

Statute of Frauds requiring any conveyance of any interest in property to be in writing to be enforceable.

Periodic Tenancy: A month-to-month lease agreement. A landlord and tenant enter into an agreement that continues for an indefinite length of time without an expiration date. It automatically renews upon payment of rent.

Requirements of a Valid Lease: Competent Lessor (Landlord) and Lessee (Tenant)

Let and take agreement.

Adequate consideration

Adequate description

Execution

Term (time period)

Delivery

Leases Terminate By: Expiration (The term ends.)

Page 38: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

38

Rescission (Agreement between the parties) Eviction (Landlord must file an action of forcible detainer to evict)

Property Management and Landlord/Tenant:

Property management involves leasing, managing, marketing, and overall maintenance of real estate owned by others. A property manager is usually considered a general agent. They are charged with some of the same fiduciary duties as the listing broker - care, obedience, accounting, loyalty, and disclosure.

The management agreement creates an agency relationship between the owner and the property manager. The management agreement should:

Describe the property.

Set the time period of the agreement.

Define the property manager’s responsibilities.

State the owner’s purpose, i.e. maximize net income and increase the value of the investment.

Describe the manager’s authority.

State the reporting requirements to the owner.

Set the management fee.

Allocate the costs to the manager or the owner. The property manager should develop an operating budget based on anticipated revenues and expenses and reflecting the long-term goals of the owner.

Tenancy at Sufferance: One who fails to move out when the lease expires (holdover tenant) without the consent of the landlord.

Tenancy at Will: Is a leasehold estate that exists for as long as both the lessor and lessee desire it to

last. It may be created by express agreement or by operation of the law (including the payment of rent at regular intervals). The term of tenancy at will is indefinite. Creates a holdover tenant with consent of

the landlord.

Right of Forcible Entry and Detainer: Also called ACTUAL EVICTION. The landlord’s right to regain

possession of the property when a tenant breaks a lease or improperly retains possession of the leased

premises.

Constructive Eviction: A tenant terminates the lease if the tenant can prove the premises have

become uninhabitable because of neglect of the landlord. The tenant must vacate to claim constructive

eviction; not remain and wrongfully withhold rent.

Assignment vs. Subletting: Assignment transfers all rights and liabilities whereas subletting transfers only partial rights and no liabilities to the lessor.

Page 39: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

39

Percentage Lease: Lease in which all or part of rental is specified percentage of gross income from total sales made upon the premises.

Graduated Lease: Provides for rent increase at set future dates

Gross Lease: Flat rental amount for a specified period

Index Lease: Allows rent increases or decreases periodically based on an agreed index such as the

change in the cost of living index.

Triple Net Lease: Flat rental amount plus expenses, i.e., taxes, insurance, maintenance.

Brokerage Operations Broker (14 questions) Salespersons (6 questions)

A. Trust Accounts

1. Earnest money

2. Commingling

3. Conversion of funds

B. Advertising

C. Forms of business ownership

1. Corporation

2. Partnership (general and limited)

3. Limited liability company

4. Sole proprietorship

D. Independent contractors vs. employee

Trust Accounts

Earnest Money: An amount of money, deposited by a prospective buyer as evidence of good faith

under the terms of the contract, that is to be forfeited if the buyer defaults but is applied to the purchase

price if the sale is closed. The amount of earnest money is set by agreement of the parties. Earnest

money is a non-judicial remedy. If earnest money is liquidated or returned then neither party can file a

lawsuit. If either party wants to sue the other for default, the earnest money stays on deposit in an

escrow account until the lawsuit is settled. It takes the signature of the buyer and seller to liquidate

earnest money.

Commingling

This is the placing money of other parties in the brokers business or personal account. All money

collected and being held by the broker must be in a separate account designed only for holding the

money of others. This would be earnest money held, deposits held, and owner’s money held if you are

doing property management. If earnest money is collected and will be held by the title company, this

money should be received by the title company within 48 hours or within two business days after the

signing of a contract or other agreement.

Conversion of Funds

Conversion refers to using money that is being held by the broker or agent that is being held by the

broker for another party. By depositing other person money into the business or personal account and

commingling the money and then writing a check from that account to pay a business expenses

(although there was more than enough to reimburse the other parties money) you have committed

conversion.

Page 40: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

40

Advertising Printed or published advertisements of property cannot include language that indicates a preference,

limitation, or discrimination of any protected class, such as “adult community, Catholic, no

wheelchairs, integrated”.

References to a location can imply discrimination such as “near temple”.

Pictorial representations using human models that depict one segment of the population while not

including others is discriminatory.

The media used for promoting property cannot target one population to the exclusion of others.

Forms of Business Ownership

In Trust: Ownership by a third person for the benefit of another. The Trustor covey’s property to a trust,

the trustee holds and manages the trust for the benefit of the beneficiary. The trustee is a fiduciary to

the beneficiary and must act in the beneficiary’s best interest. If the Trustor coveys real property to a

trust it is a Deed in Trust. Don’t confuse this term with a Deed of Trust

Partnership: An association of two or more people who operate a business as co-owners and share in the business profits and losses.

Limited Partnership: One party (the general partner) organizes, operates and is responsible for the entire syndicate. The other members of the partnership are passive investors with no voice in the organization and direction of the organization (limited partners). Each limited partner stands to lose only as much as he/she invested. The general partner is totally responsible for any excess losses incurred by the investment.

General Partnerships: All partners participate in the operation of the business and may be held personally liable for business losses and obligations.

Limited Liability Company: Not a corporation, partnership, or limited partnership. Neither, members or managers are liable for company debts, obligations, or liabilities. Regarding licensure, a limited liability company must designate one of its managers to act for it. The designated manager must (as with the corporation) be a licensed broker as shown in the records of the commission.

Independent Contractor vs. Employee

IRS Regulations: Independent Contractor—under the “qualified real estate agent” category in the

IRS Code, meeting three requirements can establish independent contractor status: Individual must have a current real estate license.

Individual must have a written contract with the broker that contains the following clause: “The salesperson will not be treated as an employee with respect to the services performed by such

salesperson as a real estate agent for federal tax purposes.”

Ninety percent or more of the individual’s income must be based on sales production, not the

number of hours worked.

Agent Supervision

It is up to the broker of a real estate office to set effective written policies for the operation: hiring of

employees and salespeople, compensation agreements, direction of staff and sales activities, education

on antitrust and fair housing, and agency procedures to follow.

The broker is responsible for all the occupational acts of the salespeople licensed under him/her.

Page 41: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

41

All compensation to the salespeople is paid through the sponsoring broker. The commission split

between broker and salesperson is agreed upon at the time of hiring the salesperson and specified in the employment agreement (Independent Contractor Agreement).

A broker is required to notify a sponsored salesperson in writing of the scope of the salesperson’s authorized. Unless such scope is limited or not permitted in writing. A broker is responsible for the authorized acts of the broker’s salespersons, but the broker is not required to supervise the salespersons directly. If a broker permits a salesperson to conduct activities beyond the scope authorized by the broker, than the broker is responsible those acts.

A broker is responsible for any property management activity which requires a real estate license that is conducted by the broker’s sponsored salespersons.

A broker may delegate to another license holder the responsibility to assist in administering compliance with the Act and Rules, but the broker may not turn over all responsibility for the supervision of salespersons sponsored by the broker. This delegation must be in writing. A broker is responsible to ensure that a sponsored salesperson’s advertising complies with Act and Rules. Except for records destroyed by an “Act of God” such as a natural disaster or fire not intentionally caused by the broker, the broker must, at a minimum, maintain the following records in a format that is readily available to the Commission for at least four years from the date of closing, termination of the contract, or end of a real estate transaction whichever occurs first:

(1) All disclosures (2) All commission agreements; listing agreements, buyer representation agreements, or other written

agreements (3) All work files (4) All contracts and related addenda (5) All receipts and disbursements of compensation (6) All property management contracts (7) All appraisals, broker price opinions, and comparative market analyses; and (8) All sponsorship agreements between the broker and sponsored salespersons

A broker shall maintain, on a current basis, written policies and procedures to ensure that: (1) Each sponsored salesperson is advised of the scope of the salesperson’s authorized activities and

is competent to conduct such activities. (2) Each sponsored salesperson maintains their license in active status at all times while they are

engaging in real estate activities. (3) Any and all compensation paid to a sponsored salesperson for acts or services paid by, though, or

with the written consent of the sponsoring broker. (4) Each sponsored salesperson is provided on a timely basis, before the effective date of the change,

notice of any change to the Act, Rules, or Commission promulgated contract forms. (5) In addition to completing continuing education requirements, each sponsored salesperson receives

such additional educational instruction the broker may deem necessary to obtain and maintain, on a current basis, competency in the scope of the sponsored salesperson’s practice.

(6) Each sponsored salesperson complies with the Commission’s advertising rules. (7) All trust accounts, including but not limited to property management trust accounts, and other funds received from consumers are maintained by the broker with appropriate controls (8) Records are properly maintained

A broker or supervisor delegated must respond to sponsored salespersons, clients, and license holders representing other parties in real estate transactions within three calendar days. A sponsoring broker or supervisor delegated shall deliver mail and other correspondence from the Commission to their sponsored salespersons within 10 calendar days after receipt. When the broker is a business entity, the designated broker is the person responsible for the broker responsibilities under this section.

This section is not meant to create or require an employer/employee relationship between a broker and a sponsored salesperson.

Page 42: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

42

If an act is performed for the license holder’s own account, that action does not fall under the definition of brokerage. However, TREC may discipline license holders who buy, sell or lease property for their own account under certain circumstances. Specifically, a license holder may not engage in fraud, deceit, or misrepresentation when buying, selling, or leasing property on his or her own account.

Recruiting License Holders from Other Brokerages There is no provision in the Act or the TREC Rules prohibiting a broker from recruiting a salesperson or broker-associate affiliated with another broker. Generally, however, recruitment of a salesperson by a broker is not regulated with the exception that instructors or other persons associated with a school may not recruit or solicit prospective salespersons or brokers in a classroom during class time Leasing Agent Responsibilities Many brokers list homes for lease without providing property management services. Even when the lease form states the broker won’t be providing property management services, landlords and tenants are often confused. The duty of the broker and the sponsored salesperson ends when the lease is signed between the landlord and the tenant. Situations arising after the lease is signed, such as rekeying the home, and tenant walk through should not concern the broker The property management agreement sets out what a broker is authorized and what the broker is expected to do. If the broker exceeds the authorization or fails to fulfill the broker’s duties, TREC could consider that to be negligence and the broker could be subject to discipline.

Under most property management agreements, the duties of and requirements placed on the landlord under the Property Code become the responsibility of the property manager as the landlord’s agent. Brokers engaged in property management or leasing residential properties should become familiar with Texas Property Code Chapter 92. Brokers in commercial property management and leasing should be familiar with Chapter 91.

Any money received on behalf of a landlord must always be deposited into a broker’s trust account. A salesperson may not operate a trust account. A broker is prohibited from commingling trust account funds with the broker’s own funds. Paying operating expenses or making withdrawals from a broker’s trust account for any purpose other than proper disbursement of money held in trust is evidence of commingling

A broker is required to properly account for or remit money received on behalf of another person within a reasonable time

Keeping accurate records is required and in many cases, good documentation helps prove that the broker did not violate the Act or TREC Rules. Documents that should be kept include property management agreements,

lease application forms, executed leases, move-in property condition forms, written move-out notice from tenants, tenants’ written notice to manager of forwarding addresses,

written accounting of security deposit provided by property managers, and copies of checks.

A broker may delegate to another license holder the responsibility to assist in administering

compliance with the Act and Rules, but the broker may not relinquish overall responsibility for the

supervision of salespersons sponsored by the broker. Any such delegation must be in writing.

License holders are required to have a current email address on file with the agency to use it.

Advertising/Assumed Names A broker is responsible to ensure that a sponsored salesperson’s advertising complies with act

An advertisement must clearly contain the name of the broker, either a business entity or an individual. The broker, or a salesperson sponsored by the broker, may use the broker’s assumed name instead of the name in which the broker is licensed, if the assumed name is registered with the commission. An advertisement may not contain an assumed name unless a broker has registered that assumed name with the commission. If the broker’s name or its assumed name includes a salesperson’s name, the advertisement must include another assumed name of the broker that does not include a salesperson’s name, or the designated agent’s name.

Page 43: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

43

Deceptive or misleading advertising includes, but is not limited to, the following: (1) advertising that is inaccurate in any material fact or in any way misrepresents any property, terms, values, services, or policies; (2) advertising a property that is subject to an exclusive listing agreement without the permission of the listing broker and without disclosing the name of the listing broker unless the listing broker has expressly agreed to waive disclosure; (3) failing to remove an advertisement about a listed property within a reasonable time after closing or termination of a listing agreement, unless the status is included in the advertisement; (4) an advertisement by a salesperson which identifies the salesperson as a broker; or (5) advertising a property in a manner that creates a reasonable likelihood of confusion regarding the permitted use of the property.

A broker, shall notify the commission in writing within 30 days after the broker, or a salesperson sponsored by the broker, starts or stops using an assumed name in business other than the name in which the person is licensed. An advertisement placed by a license holder must include a designation such as “agent,” “broker” or a trade association name that serves clearly to identify the advertiser as a real estate agent. A broker or salesperson may not place an advertisement that implies that a salesperson is the person responsible for the operation of a real estate brokerage business that person not authorized to conduct real estate brokerage is personally engaged in real estate brokerage.

A real estate license holder placing an advertisement on the Internet, electronic bulletin board, or the like must include on each page on which the license holder’s advertisement appears any informa-tion required by this section

A real estate license holder placing an advertisement by using an electronic communication, including email and email discussion groups, text messages, and social networking websites must include in the communication the information required by this section An advertisement placed where it is likely to attract the attention of passing motorists or pedestrians must contain language that clearly and conspicuously identifies the person publishing the advertisement as a real estate broker or agent. An advertisement containing an offer to rebate a portion of a license holder’s commission must disclose that payment of the rebate is subject to the consent of the party the license holder represents. If payment of the rebate is contingent upon a party’s use of a selected service provider, the advertisement also must contain a disclosure that payment of the rebate is subject to restrictions. If an advertisement offers use of services of a real estate service provider other than the license holder and the license holder expects to receive compensation if a party uses those services, the advertisement must state that the license holder may receive compensation from the service provider.

Safe Harbor Policy

TREC has adopted a safe harbor policy for staff and enforcement to use in directing license holders as to what might be considered clear and conspicuous in advertising. On a sign or other advertising media, the broker’s name or assumed name must be at least 50 percent of the size of the largest item of contact information.

Personal Information

Businesses are required to have procedures to protect against the unlawful use or disclosure of sensitive personal information received in the regular course of business. It requires the business to destroy such records that are not required or needed for business operations. Sensitive personal information includes an individual’s first name or first initial and last name in combination with any one or more of the following:

Social Security number Driver’s license number or government-issued identification number; Credit or debit card number in combination with any required security code, access code, or password that would permit access to an individual’s financial account

Receiving Compensation

A license holder may not receive compensation from someone other than the person whom the client

Page 44: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

44

represents unless the license holder obtains the client’s consent. This does not apply to referral fees between license holders.

Compensation from a Service Provider

If a license holder intends to accept compensation from a service provider, the license holder must also obtain the consent of that person (non-client). As used in this rule, the term “service provider” is not limited to Settlement Service Providers as defined by RESPA. It includes any person who provides a service to a consumer.

A license holder may not enter into a contract with a service provider if the contract is exclusive (prohibits the license holder from offering similar services on behalf of other service providers). The agreement should not be exclusive so as to prohibit the broker from offering those same services to other home warranty companies.

A license holder may not accept compensation from a service provider if the compensation is contingent on a party in the transaction purchasing a contract or service from the service provider.

Compensation from a Residential Service Company

A license holder must use Form RSC-1, Disclosure of Relationship with Residential Service Company if the license holder (or the brokerage firm) will receive compensation from the residential service company.

License Holders Buying or Selling Their Own Property

A broker should maintain a policy related to transactions in which a license holder is involved in buying or selling his or her own property. Items to consider when developing such a policy include

Sharing Fees with Attorneys

The Texas Real Estate License Act prohibits brokers from sharing fees received for services as a real estate agent with anyone not licensed as a real estate broker or salesperson in Texas or any other state.

With such seemingly clear statutory prohibitions, why is this still an issue with many brokers?

It is permissible for listing brokers to reduce their fee agreement with a seller, so that the seller can pay an attorney for his or her services, whether those services are performed for the seller or buyer.

Such a reduction of the listing fee would be a matter of private agreement between the listing broker and the seller. While brokers are not required to forgo their contractual rights to compensation, some circumstances might require brokers to balance their right to a fee against the best interest of their client.

Text and Email Negotiations

Brokers and salespersons need to exercise care to avoid any statements in these communications that may be later construed as “misrepresentations” of any type, including but not limited to misrepresentations about the intentions of the client(s) with respect to making or accepting offers.

Duty to Respond

A supervising broker, perhaps more so than other license holders, has a duty to respond to parties in a transaction. A sponsoring broker must also promptly respond to a sponsored salesperson.

Promptness will be judged on the nature of the request, the time of day and the type of transaction. A supervising broker should be reasonably available to supervised salespersons to provide needed advice and counsel.

Being responsible for the supervised salesperson, the supervising broker should be available during all normal business hours of the brokerage. The supervising broker should monitor transactions handled by salespersons.

Business Entity Requirements If a license holder establishes a business entity, the entity must be licensed in order to be paid commis-sions. The legal entity must designate an individual broker who will be responsible for the actions of the licensed business entity. The designated broker must be

an officer of the corporation, a manager of the limited liability company, a general partner of the partnership. If the designated broker owns less that 10 percent of the business entity, the business entity must obtain and maintain E&O insurance of at least $1 million.

Page 45: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

45

Ethical and Legal Business Practices (Salesperson Only) Salespersons (4 questions)

(A) Misrepresentation Issues

(B) Implied Duty of Good Faith

(C) Due Diligence

(D) Unauthorized Practice of Law

Misrepresentation: A false statement or concealment of a material fact made with the intention of inducing some

action by another party

The items discussed below could be considered misrepresentation by the seller, buyer or agent

and should be avoided

A buyer and agent do not complete the “Addendum for Sale of Other Property by Buyer” knowing that the

buyer cannot pay the down payment or qualify for a specified loan without selling their property first

Misrepresenting the square footage of a house or property provided it causes actual damages to the

purchaser

Implied Duty of Good Faith: In contract law, the implied covenant of good faith and fair dealing is a

general presumption that the parties to a contract will deal with each other honestly, fairly, and in good

faith, so as to not destroy the right of the other party or parties to receive the benefits of the contract

Courts have found that the covenant of good faith and fair dealing calls for parties to a contract to refrain

from doing “anything which will have the effect of destroying or injuring the right of the other party to

receive the benefit of the contract.”

Due Diligence: in part as "making a reasonable effort to provide accurate, complete information."

Unauthorized Practice of Law:

A person, not licensed to practice law, may not charge or receive, either directly or indirectly, any

compensation for all or any part of the preparation of a legal instrument affecting title to real

property, including a deed, deed of trust, note, mortgage, and transfer or release of lien.

(b) This section does not apply to:

(1) an attorney licensed in this state;

(2) a licensed real estate broker or salesperson performing the acts of a real estate

broker pursuant to Chapter 1101, Occupations Code; or

(3) a person performing acts relating to a transaction for the lease, sale, or transfer of

any mineral or mining interest in real property.

Risk Management (Salesperson Only) Salespersons (6 questions)

A. Types of insurance

1. General Liability

2. Errors and Omissions

3. Hazard and Flood

4. Other insurance

B. Record keeping

1. Contracts

2. Accounting

3. Other important documents

C. Privacy, security, and confidentiality

1. Security measures and controls

2. Systems and programs

3. Electronic communication and social media

Page 46: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

46

4. Personal safety

D. Scope of expertise

Types of Insurance:

Errors and Omissions Insurance: Cover professionals for errors or oversights that occur when

providing services. It typically covers the costs of legal defense, judgments and settlements. Although not

normally required except in special cases The National Association of REALTORS® strongly encourages

members to maintain E&O insurance

General Liability Insurance: For real estate professionals is when a third party sustains bodily injuries or

experiences property loss or damage on your business premises.

Homeowner’s insurance Policy: A standardized package insurance policy that covers a residential real

estate owner against financial loss from fire, theft, public liability and other common risks.

Fire and Extend Coverage Insurance Policy: Fire and extended coverage programs are designed for

owner or tenant-occupied one-to-four family dwellings, mobile homes, household contents, related private

structures, miscellaneous structures, farm personal property and farm structures on both owner occupied

and non-owner occupied properties.

Contents (Renter Insurance) Policy: "Contents insurance" typically refers to coverage for property you

own. It does not cover the dwelling but does covers the personal belongs of the insured

Flood Insurance: Specific insurance coverage against property loss from flooding. To determine risk

factors for specific properties, insurers will often refer to topographical maps that denote lowlands,

floodplains, and floodways that are susceptible to flooding

Record Keeping:

A. Each licensed employing broker shall keep records of all real estate transactions handled by or through

the broker and shall keep employment records, including copies of employment status, for all current and

former employees. The records required by this section shall include copies of earnest money receipts,

confirming that the earnest money has been handled in accordance with the transaction, closing

statements showing all receipts, disbursements and adjustments, sales contracts, leases, property

management agreements and, if applicable, copies of employment agreements. The records shall be

open at all reasonable times for inspection by the commission or the commission's representatives. The

records of each transaction and employment records shall be kept by the broker for a period of at least

four years from the date of the termination of the transaction or employment. The records shall be kept in

the employing broker's principal office or licensed branch office in this state or at an off-site storage

location in this state if the broker provides prior written notification of the street address of the off-site

storage location to the commission.

B. A broker shall specifically state in the real estate purchase contract, lease agreement or receipt for earnest money the type of earnest money received in any real estate transaction, whether it is cash, a check, a promissory note or any other item of value.

C. All licensees shall promptly place all cash, checks or other items of value received as payment in connection with a real estate transaction in the care of the designated broker.

D. The broker shall maintain each real estate purchase contract or lease agreement and the transaction folder is easily accessible by the commission or the commission's representatives.

F. Sales transaction folders shall include:

1. Confirmation that the earnest monies or other monies handled by or through the broker were handled according to instructions given by or agreed to by the parties to the transaction.

Page 47: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

47

2. A complete copy of the sales contract, any escrow account receipt, any closing or settlement statement and, if applicable, a copy of the escrow instructions, listing agreement, employment agreement and release of escrow monies.

G. The broker shall retain all real estate purchase and nonresidential lease contracts and employment agreements, or copies of these documents, in the employing broker's principal office or licensed branch office or at an off-site storage location in this state if the broker provides prior written notification of the street address of the off-site storage location to the department.

I. The broker shall retain an original or copy of any document evidencing a rejected offer to purchase real property as a matter of record for at least one year. In instances that result in binding contracts, the broker shall retain prior rejected offers for at least four years.

Privacy, Security, and Confidentiality: Privacy Confidentiality of information while performing as a fiduciary does not have a termination date unless this duty is released in writing, such as in a conventional listing or buyer representation agreement. Personal Information: When personal information is received by the broker or salesperson they are required to have procedures to protect against the unlawful use or disclosure of sensitive personal information received in the possession you are required to destroy such records that are not required or not needed. Sensitive personal information includes an individual’s first name or first initial and last name in combination with any one or more of the following: Social Security number Driver’s license number or government-issued identification number; Credit or debit card number in combination with any required security code, access code, or password that would permit access to an individual’s financial account

Safety/Security Brokers and real estate agents may wish to gather information to review safety precautions and procedures regarding safety

In the broker’s offices in the agent’s vehicles while showing properties to prospects while hosting open houses when meeting prospective clients for the first time, and at the agent’s home Scope of expertise A broker is required to notify a sponsored salesperson in writing of the scope of the salespersons authorized activities under the Act. Each sponsored salesperson is advised of the scope of the salesperson’s authorized activities subject to the Act and is competent to conduct such activities. A broker is required not only to explicitly tell a salesperson which brokerage activities a salesperson can perform while under the broker’s supervision, but the salesperson is only allowed to perform the activities the broker has authorized salespersons to perform and no other(s) unless that permission is received in writing from their sponsoring broker.

An authorized: almost any act related to buying, selling, or leasing real estate by a license holder, when performed for another, and for or in expectation of receiving valuable consideration, constitutes the practice of brokerage

If an act is performed for the license holder’s own account, that action does not fall under the definition of brokerage. However, TREC may discipline license holders who buy, sell or lease property for their own account under certain circumstances specifically, a license holder may not engage in fraud, deceit, or misrepresentation when buying, selling, or leasing property on his or her own account.

Page 48: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

48

Real Estate Calculations

I. THE FORMULA:

_Part_

Total X Rate

1. If you have the total and rate, you MULTIPLY to get the part. 2. If you have the part and EITHER the rate or total, you DIVIDE. 3. The PART always goes into the calculator first.

II. . FRACTIONS, DECIMALS & PERCENTAGES:

1. To change a fraction to a decimal, divide the numerator (top number) by the denominator (bottom number).

1/4 = 1 4 = .25

2. To change a decimal to a percentage, move the decimal point two places to the

right (or multiply by 100) and add a % sign.

.25 = 25% .06 = 6%

3. To change a percentage to a decimal, move the decimal two places to the left (or divide by 100) and drop the % sign.

25% = .25 6% = .06

III. MATHEMATICS PROBLEMS:

A. AREA

A. Area of rectangular or square area = length x width B. Area of triangular-shaped area = ½ (base x height) C. Dimensions of a square yard = 3 ft. x 3 ft. D. There are 9 square feet in one square yard E. If you have square feet, divide by 9 to get square yards F. If you have square yards, multiply by 9 to get square feet G. Cubic Feet = Length x Width x Height H. Dimensions of a cubic yard = 3 ft. x 3 ft. x 3 ft. I. There are 27 cubic feet in one cubic yard J. If you have cubic feet, divide by 27 to get cubic yards K. If you have cubic yards, multiply by 27 to get cubic feet L. There are 640 acres in one SECTION of land (1 square mile) M. There are 43,560 square feet in One acre of land N. When speaking of “Front” footage it always the first dimension given

B. PROPERTY TAX PART = RATE X TOTAL

Annual Taxes Tax Rate $100 Appraised Value

C. DISCOUNT POINTS PART = RATE X TOTAL

Dollar Amount of Points Points % Loan Amount

(Remember: 1 point = 1% x Loan Amount)

Page 49: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

49

D. EQUITY Simply subtract all mortgage debt from current market value

E. QUALIFYING BUYERS PART = RATE X TOTAL

PITI QUAL. RATIO GROSS MO. INCOME

F. INTEREST PART = RATE X TOTAL

Annual

Interest

Annual Percentage

Rate ("APR")

Loan Amount

Principal

G. COMMISSIONS PART = RATE X TOTAL

Agent or Broker's Portion

or

Commission Split

Total Commission

Total Rate of Sales Price Commission Commission

H. SALE PROCEEDS PART = RATE X TOTAL

Net to Owner 100% - Rate Sales

+ Expenses of Commission Price

I. MONTHLY PAYMENTS

PART = RATE X TOTAL Monthly PI Interest Rate Factor Loan Amount

1. Calculate the area of rectangular lot 105 feet by 128 feet. a. 19,200 sq. ft. c. 19,110 sq. ft. b. 13,440 sq. ft. d. None of the answers are correct

2. Calculate the area of a triangular lot that is 130 feet at the base and 160 feet at its highest point.

a. 10,400 sq. ft. c. 20,400 sq. ft. b. 41,600 sq. ft. d. 5,200 sq. ft.

3. The assessed value of a home is $320,000. If the market value is $300,000 and the

tax rate is $.72 for city, $.48 for the county, and $1.75 for school taxes. What are the

annual taxes?

a. $8,850 c. $9,440

b. $4,425 d. $885

Page 50: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

50

4. A property sold for $280,000, and the purchaser is paying 20% as a down payment,

the seller had agreed to pay 2 points. What is the dollar amount of points the seller is

going to pay?

a. $5,600 c. $4,480

b. $1,120 d. None of the above

5. You bought a house for $260,000 last year. You financed $208,000 at that time. Today

your home is valued at $252,000 and the mortgage balance $206,900. What is the equity

in your home?

a. $52,000 c. $53.100

b. $44,000 d. $45,100

6. Thomas earns $56,000 per year and has found a lender that will qualify him using a 28%

ratio. What is Thomas’ maximum monthly payment?

a. 1,306.67 c. $1,568.00

b. 4,032.00 d. Unknown need more information

7. If you were to borrow $180,000 and received a loan at 6.5% interest only, what would

be your monthly payment and what would be the loan payoff after one year?

a. $975 / $180,000 c. $1,170 / $180,000

b. $975 / $168,300 d. $1,170 / $165,960

E. PRORATIONS

Use the following information when solving proration problems:

*Banker's or Statutory year – 360-day year (assumes all months have 30 days).

*Calendar year – 365-day year (use actual number of days in each month).

*Seller pays through the day of closing, unless stated otherwise.

*Mortgage payments (PI) are paid on the 1st of each month.

*Taxes and insurance are paid annually.

PRORATIONS FOR THE EXAM:

*When you debit the seller, you credit the buyer the SAME AMOUNT.

*When you debit the buyer, you credit the seller the SAME AMOUNT.

*The ONLY time you credit the seller is in an INSURANCE proration.

*To simplify, always think of yourself as the SELLER.

Page 51: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

51

WHAT WE PRORATE AND THE FORMULA TO USE:

Taxes: Appraised Value x Tax Rate % = Ann. Tax divided by 365 (or 360) x #Days =

Interest: Loan Amount x Int. Rate % = Ann. Int. divided by 365 (or 360) x #Days =

Rents: Monthly Rent divided by 31 (or 30 or 28) = Daily Rent x #Days =

8. Melanie purchased a home for $325,000 and financed $292,500. She will getting a

conventional loan at an interest rate of 4.5%. She is closing on October 12. How much

interest would she pay at closing?

a. $801.37 c. $721.23

b. $761.30 d. $685.17

9. You are closing on your home on May 25th. The taxes for last year were $5,822 and were

paid at that time. Taxes will be prorated based on last year’s taxes. What will be the

amount that the buyer will be credited at closing?

a. $3,509.15 c. $2,296.90

b. $3,525.10 d. $2,312.85

10. An investor is purchasing a rental home that leases for $1,850 per month. The investor is

closing on March 10th. What will be the amount that will be prorated to the investor at

closing?

a. $1,253.23 c. $596.77

b. $1,233.33 d. $616.67

11. You just listed a home for $285,000 and it went under contract for $280,000. You listed the

Property at a 6% commission and agreed to by half of that commission to any other broker

That found a buyer for the property. Another broker was responsible for finding the buyer.

What is the amount of commission you will receive if you are on a 80/20 split with your

Broker?

a. $6,840 c. $6,720

b. $8,400 d. $3,360

Page 52: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

52

12. If you sold your property for $455,000 and the existing loan balance was $288,200 with

closing cost of $7,800. The commission charged by the broker was 7%. What would you net from

the sale?

a. $186,276 c. $427,026

b. 127,150 d. $138,826

13. What is the monthly payment for a sales price of $565,000 with 20% down payment?

The interest rate is 4.5% for 30 years and the interest rate factor is 5.65

a. $2,553.80 c. $3,192.25

b. $2,118.75 d. $1,695.00

IV. MATHEMATICS PROBLEMS—ANSWER KEY

1. B 8. C

2. A 9. D

3. C 10. A

4. C 11. C

5. D 12. B

6. A 13. A

7. A

Solutions:

1. 105” x 128’ = 13,440 sq. ft.

2. 130’ x 160’ / 2 = 10,400 sq. ft.

3. Add all the taxes together, .72 + .48 + 1.75 = $2.95

Use the assessed value times the tax rate / 100

$320,000 x $2.95 / 100 = $9,440

Page 53: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

53

4. 280,000 x .80 = $224,000 x .02 = $4,480

5. $252,000 - $206,900 = $45,100

6. $56,000 / 12 = 4,666.67 x .28 = $1,306.67

7. $180,000 x .065 = $11,700 / 12 =$975

The loan amount would still remain at $180,000 because nothing was paid on the principle

8. $292,500 x .045 = $13,162.50 / 365 = $36.061643 per day

31 days in October – 12 days plus add a day (because the mortgage company always charges

Interest including the day of closing) = 20 days

$36.061643 x 20 days = $721.23

9. The number of days from January 1st – May 25 = 145 days

$5,822 / 365 = $15.950684 per day x 145 days = $2,312.85

10. 31 days in March – 10 days = 21 days rent owed the buyer

$1,850 / 31 = $59.677419 per day x 21 days = $1,253.23

11. The commission is split between your broker and the other broker. 6% / 2 = 3% your broker

280,000 x .03 = $8,400 x .80 = $6,720

12. $455,000 x .07 = $31,850 commission

$455,000 - $31,850 – 288,200 - $7,800 = $127,150

13. $565,000 x .80 = $452,000 amount financed

The loan rate factor should be divided by 1000 and then multiply by the loan amount

5.65 / 1000 = .00565

$452,000 x .00565 = $2,553.80

Page 54: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

54

National Association of Realtors – Code of Ethics – Quick Reference

The following is a quick reference guide to the National Association of REALTORS® Code of

Ethics. For exact meanings and interpretations, please refer to the complete Code of Ethics.

Article 1 Protect and Promote Your Client’s Interests, but be Honest with All Parties

Article 2 Avoid Exaggeration, Misrepresentation, and Concealment of Pertinent Facts. Do Not Reveal

Facts that are Confidential under the Scope of Your Agency Relationship

Article 3 Cooperate with Other Real Estate Professionals to Advance Client’s Best Interests

Article 4 When Buying or Selling, Make Your Position in the Transaction or Interest Known

Article 5 Disclose Present or Contemplated Interest in Any Property to All Parties

Article 6 Avoid Side Deals without Client’s Informed Consent

Article 7 Accept Compensation from Only One Party, Except with Full Disclosure and Informed Consent

Article 8 Keep the Funds of Clients and Customers in Escrow. Do Not Comingle Funds

Article 9 Assure, Whenever Possible, that Transactional Details are in Writing

Article 10 Provide Equal Service to All Clients and Customers

Article 11Be knowledgeable and competent in the Fields of Practice in Which Your

Ordinarily Engage. Obtain Assistance or Disclose Lack of Experience if Necessary.

Article 12 Present a True Picture in Your Advertising and Other Public Representations

Article 13 Do Not Engage in the Unauthorized Practice of Law.

Article 14 Be a Willing Participant in Code Enforcement Procedures.

Page 55: NATIONAL STUDY GUIDE - Real Estate Prep Exams | Practice Test

55

Article 15 Ensure that Your Comments about Other Real Estate Professionals are Truthful, and Not Misleading.

Article 16 Respect the Exclusive Representation or Exclusive Brokerage Relationship Agreements that Other

REALTORS® have with their Clients

Article 17 Arbitrate Contractual and Specific Non-Contractual Disputes with Other REALTORS and with

your Clients. While Realestateprepexams.com has used reasonable efforts in collecting and preparing

materials included here, due to the rapidly changing nature of the real estate marketplace

and the law, and our reliance on information provided by outside sources,

Realestateprepexams.com makes no representation, warranty, or guarantee of the accuracy

or reliability of any information provided here or elsewhere on our website, Study Guides,

Questions or Explanations of the Questions. Any legal or other information found here, on

Realestateprepexams.com or at other sites to which we link, should be verified before it is

relied upon.