1.
With regard to the general operation of a real estate brokerage, which of the following activities of ABC Brokerage, Inc. is illegal under federal law? Statement #1: ABC Brokerage, Inc. advertises that, at the close of escrow, it will refund $500 of the commission to every buyer and seller the firm represents. Statement #2: While golfing together, the managing licensees at ABC Brokerage, Inc. and DEF Brokerage, Inc. divide up a particular geographic area between themselves. Statement #3: ABC Brokerage, Inc. lays off a long-term licensee who, because of illness, performed poorly during the last two fiscal quarters.
a. Statement #1
b. Statement #2
c. Statement #3
d. Statements #1 and #2
Dividing up territories with another brokerage would be considered collusion, a violation of the federal Sherman Antitrust Act. The Sherman Antitrust Act was enacted by the federal government in 1890 as consumer protection legislation designed to encourage competition. Dividing up geographic territories, fixing commission rates or fees, or boycotting brokerage firms with cut-rate commissions would all be considered brokerage business activities that violate this federal law. A is legal. As long as it is properly disclosed, refunding a portion of the commission to clients at the close of escrow is not in violation of federal law. C is legal. A brokerage firm is a business, and laying off unproductive staff is a necessary part of any ongoing business operation.
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6.
A legally-competent, wealthy investor is selling a large commercial property. The 35-year-old investor is represented by a one of the busiest, most successful brokerage firms in the state. The closing date for the transaction coincides with an important overseas business trip the investor cannot postpone or cancel. Prior to leaving on the business trip, the investor executes a document authorizing a trusted friend to sign all documents related to the sale of the commercial property. After accepting the appointment, the investor's friend owes fiduciary duties to the investor. Of the following choices, what is the name of the document executed by the investor?
a. Listing Agreement
b. Purchase and Sale Agreement
c. Power of Attorney
d. Conservatorship (or guardianship)
The document the investor executed was a Power of Attorney (POA). A properly executed POA authorizes an agent (called an attorney-in-fact) to act in place of the principal. An attorney-in-fact owes fiduciary duties (e.g., duty of disclosure, duty of obedience, duty of confidentiality, duty of care, etc.) to the principal. Here, the principal is the wealthy investor and the attorney-in-fact is the trusted friend. Note: An attorney-in-fact does not need to be an attorney. A is incorrect. A listing agreement is a contract between a licensee and the seller of a parcel of real estate. This agreement authorizes the licensee to act on behalf of the seller to sell the property. The wealthy investor would have entered into a listing agreement with the brokerage firm. Test-Taking Tip: Note the difference between what an agent can do under a listing agreement and what an attorney-in-fact can do under a POA. The agent under a listing agreement acts "on behalf" of the seller to sell the property, and the agent does that in expectation of a commission or fee. Listing Agent activities might include things like marketing the property, staging the property, and soliciting offers for the property. However, the agent's authority would not typically include an activity like accepting an offer for the property and binding the principal. In contrast, an attorney-in-fact acts "in place" of the principal, and rarely expects any type of compensation or fee. So, provided the POA authorizes the activity, the attorney-in-fact could accept an offer, bind the principal, and sign all the documents related to the transfer of the property. B is incorrect. A Purchase and Sale Agreement is the contract the seller would enter into with a buyer for the purchase of the property. D is incorrect. A conservatorship (in some states this is called a "guardianship") is created through the legal system when an individual is unable to manage his or her healthcare decisions and/or financial affairs. The judge appoints--and monitors--a person selected to act on behalf of the incompetent individual.
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7.
Which of the following lists the essential elements of an enforceable real estate contract?
a. acceptance, consideration, performance, lawful object
b. lawful object, competency, offer and acceptance, consideration
c. tender, consideration, deposit, performance
d. signatures, consideration, mutuality, competence
An enforceable contract is a voluntary agreement between competent parties to do something legal. Any party bringing an action for breach of contract must provide evidence that an offer was made, that it was accepted and that both parties offered consideration. The terms "mutuality", or "mutual consent" are synonymous with offer and acceptance. Although signatures are required on all contracts for the sale and purchase of real estate according to the statute of frauds, they are not required on all real estate contracts. An exception to the statute of frauds requirement is leases for a period of one year or less.
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23.
Housing Plus, Inc. operates in multiple states and specializes in construction of Accessory Dwelling Units (ADU) as permitted by state or local law. The company primarily assists those owners of dwellings in existing subdivisions that are sufficiently spacious to qualify for the addition of an ADU. Home owners typically add an ADU for the enhanced rental potential the units add to residential real estate. But Housing Plus, Inc. also occasionally assists public entities that respond to local housing needs by building on small plots of underdeveloped land in established subdivisions. Which of the following describes the work of Housing Plus, Inc.?
a. Infill development
b. Greenfield development
c. Brownfield development
d. Commercial development
The work of Housing Plus, Inc. can best be described as infill development. Infill typically refers to improvements built on underdeveloped land or in between existing improvements. Infill development, as it pertains to residential properties, is frequently referred to as either housing infill (e.g., adding additional residential units to existing lots, or dividing existing dwellings into multiple units) or suburban infill (e.g., building on any remaining unimproved land in existing subdivisions). Test-Taking Tip: Urban infill development (aka "land recycling") is a term used to describe redevelopment of blighted city areas through either construction on vacant land or reconstruction of obsolete improvements. B is incorrect. Greenfield development is growth on the periphery of an established subdivision that develops land previously dedicated to open space or agriculture. C is incorrect. Brownfield development is redevelopment on a site previously polluted by a prior, usually industrial, use. D is incorrect. Commercial development typically refers to real estate developed specifically to produce income (e.g., offices, apartment buildings, shopping centers, etc.).
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24.
Mr. Carpenter, a single man age 50, sells his personal residence for $600,000. He originally purchased it 9 years ago for $550,000. What portion of the sales proceeds is taxable?
a. 600,000.
b. 550,000.
c. 50,000.
d. None.
Mr. Carpenter can realize a profit of up to $250,000 and not pay tax on the profit. The exemption is $250,000 for single persons and $500,000 for married people who file joint returns. The exemption requires that the property must be the seller's primary residence for two of the last five years.
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26.
Two people, an investor and a business property owner, want to sell their properties to each other in a 1031 exchange. The investor owns a 10 acre parcel improved with an office building. The business property owner owns a parcel of real estate improved with an apartment building. Here is the government survey system legal description for the realty owned by the business property owner: "The Northeast Quarter of the Northwest Quarter of the Southwest Quarter of Section 10..." The area described in this legal description is standard for the government survey system. Both properties have the same value, and neither property is encumbered with liens. Which of the following is a correct statement?
a. The 1031 like-kind exchange cannot be used to exchange an office building for an apartment building.
b.Because the investor's parcel is smaller than the parcel owned by the business property owner, the investor will owe the business property owner "boot."
c. Provided a personal residence has sufficient market value, it can be used in a 1031 exchange.
d. The 1031 exchange will defer payment of a capital gains tax until the new property is sold.
Section 1031 of the United States Internal Revenue Code states that realized gain from real estate will not be recognized at the time of the exchange. The 1031 exchange (aka "1031 like-kind exchange") allows owners of business or investment real property to defer capital gains taxes on the properties being exchanged. This is a tax deferral, not a tax foregiveness: The capital gains taxes owed will typically be due when the new property is sold. A is incorrect. A like-kind exchange is real property used for business, trade, or investment purposes. The exchange of an office building for an apartment building falls within this category. B is incorrect for two reasons. First, both properties are the same size (i.e., 10 acres). Secondly, boot is owed, not if one property is smaller than the other, but if one property is less valuable than the other. The test question stated that both properties have the same value and are not encumbered. Therefore, no boot will be owed. Test-Taking Tip: "Boot" is what the owner of the less valuable property pays the owner of the more valuable property in order to make the exchange even. Boot is taxable to the person receiving it, and in the year received. C is incorrect. A personal residence cannot be used in a 1031 tax-deferred exchange, no matter how high its market value.
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33.
With regard to lien theory versus title theory, which of the following statements is FALSE? Statement #1: In some states, the borrower who finances the purchase of property hypothecates title to a property and does not actually keep title to the property during the term of the loan. States that employ this custom are lien theory states. Statement #2: In some states, the borrower who finances the purchase of property holds both actual title and equitable title to a property during the term of the loan, and the lender's interest is secured with a deed of trust. These states are title theory states. Statement #3: In some states, the seller gives title to the buyer, and the buyer/borrower then signs a deed of trust which conveys only naked title to a trustee; and the lender is the beneficiary in the deed of trust. These states are lien theory states.
a. Statement #1 and #2 are false.
b. Statement #2 and #3 are false.
c. Statement #1 and #3 are false.
d. Statements #1, #2, and #3 are false.
Statement #1 describes the arrangement for title theory states. Statement #2 describes the arrangement for lien theory states. In lien theory states, the buyer owns the property and has all real property rights therein; and the lender has a lien. In title theory states, the borrower hypothecates to the lender. (In other words the buyer/borrower makes his/her title hypothetical.) It is the lender that holds actual title during the term of the loan.
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35.
Mr. James Abioye and Mrs. Catherine Abioye have been married for 30 years. James just turned 63-years-old, and recently retired because of health issues. Catherine is 59-years-old, and is still working as a Surgical RN. Several decades ago, they jointly purchased—and currently own—a single parcel of real estate, their primary residence. There is a substantial amount of equity in the home, and it is free and clear of all liens, except current year taxes. Now that Catherine is the only spouse still working, the married couple is looking for real estate financing that will allow them to remain in their home and support their lifestyle. The Abioyes found one loan product that would support their goals, but were warned by the lender that the loan amount would be lower than they anticipated because of Catherine's age. When, if ever, is this accurate advice on the part of a lender?
a. Under federal rules related to senior housing.
b. Under the federal Equal Credit Opportunity Act.
c. Under federal rules related to reverse mortgages.
d. Never.
Per federal law, a reverse mortgage is only available to home owners who are 62-years-old or older, and who have substantial equity in their homes. The reverse mortgage (aka the “senior reverse mortgage” or the “reverse annuity mortgage”) converts the equity in the home into a liquid asset so that borrowers are able to remain in their homes, while paying their expenses. The loan product is called a “reverse” mortgage because repayment is not required until a specific event occurs. Specific events include, for example, the death of the borrower, the borrower going to live in an assisted living facility, or the property being sold. Because there is no repayment until one of these events occur, unpaid interest is added to the principal and the loan debt grows (i.e., negative amortization). Here, because Catherine Abioye is only 59-years-old, she is too young for a reverse mortgage. Provided she qualifies in other ways, however, she will be considered a non-borrowing spouse and the reverse mortgage loan amount available to the Abiuoyes will be based upon her age. A is incorrect. Senior housing is unrelated to reverse mortgage, age-related loan limits. Note: There are two types of senior housing recognized under federal law. While there are other policies and procedures which must be satisfied, age-related criteria for senior housing are as follows: There is a “62+ exemption” and a “55+ exemption.” For the 62+ exemption, all residents must be 62 years of age or older. Certain caregivers and maintenance staff are excepted from this rule. For the 55+ exemption, 80% of the housing units must be occupied by at least one person who is 55-years-old or older. B is incorrect. Under the federal Equal Credit Opportunity Act, it is unlawful to discriminate against a legally and mentally competent credit applicant on the basis of age. Here, however Catherine Abioye is not a credit applicant because she is too young, per federal rules, to apply for a reverse mortgage. D is incorrect. Per federal law, reverse mortgage borrowers must be 62-years-old or older. A younger, non-borrowing spouse will lower the loan maximum available to borrow.
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37.
Seller sold buyer a single-family residence for a purchase price of $1,000,000. Buyer made a down payment of $100,000, and financed the rest of the purchase with an $800,000 purchase money mortgage from a major institutional lender, and a $100,000 seller carryback. One month after the close of escrow, buyer took out a third loan, a home equity line of credit (HELOC), for $10,000. Several years later, buyer decided to refinance the $800,000 purchase money mortgage, and found a different lender willing to refinance the property on better terms. Buyer does not want to pay off either of the two junior liens on the property (i.e., the $100,000 seller carryback and the $10,000 HELOC). There is a boilerplate clause in the recorded HELOC stating the lender's consent to remain in junior position should the primary mortgage ever be refinanced. However, there is no comparable language in the $100,000 seller carryback mortgage. What is the name of the document needed to protect the lien priority of the refinance lender, and who is required to sign this document?
a. A Subordination Agreement signed by the buyer and the $800,000 lender.
b. A Subordination Agreement signed by the seller.
c. A Subordination Agreement signed by the $10,000 HELOC lender.
d. A Seniority Preservation Agreement signed by the seller.
The $100,000 seller carryback mortgage turned the seller into a junior lienholder on the property. Because the seller is now a junior lender on the property, and the primary loan is being refinanced, the seller's signature will be required on the Subordination Agreement. Why? A Subordination Agreement is a document in which an existing lender agrees to subordinate (i.e., lower) the priority of an existing loan in favor of a new loan. Lien priority is critical to lenders because, in the event of some type of borrower default like foreclosure, senior liens are paid from sale proceeds before junior liens. Typically, lien priority is determined by the chronological date and time of recording. What a Subordination Agreement does is to adjust lien priority artificially, making a new loan senior to an older loan. Note: A Subordination Agreement (a separate document) or a Subordination Clause (a clause in the boilerplate language of a mortgage) ultimately benefits borrowers, allowing them to refinance senior loans without having to pay off junior loans. A is incorrect for two reasons. Buyers or borrowers do not sign Subordination Agreements. A Subordination Agreement is signed by a senior lienholder, willing to subordinate lien priority to a new lender. Secondly, the $800,000 loan will be paid off during the refinance, and the lien will be removed from title. The refinance lender would not normally be concerned with losing lien priority to this lender. C is incorrect. Per the test question, there is already language in the recorded HELOC mortgage stating that the lender consents to remaining in junior position if the senior mortgage were ever refinanced. There is no need for the HELOC lender to sign another agreement. D is incorrect. There is no "Seniority Preservation Agreement." Test-Taking Tip: It's important to read through a comprehensive, up-to-date real estate glossary prior to your broker's state exam. It will help you identify those instances where the examiners are trying to trick you with made-up terms and expressions.
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38.
The monthly net income on an investment of $315,000, if the rate of return is 12 ½ percent, is _____. (Round your answer to the nearest dollar)
a. 2,520,000
b. 39,375,000
c. 3,937
d. 3,281
The steps in this calculation are as follows: Step One: Calculate the annual net income based on a capitalization rate of 12 ½ percent. Multiply the investment (315,000) by .125 = 39,375 annual income. Step Two: Calculate the monthly income by dividing the annual income by 12: 39,375 ÷ 12 = $3,821 monthly income.
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39.
Donna Trumply, an investor, has approximately one million dollars to invest; and wants to choose an investment with at least a 12% rate of return. Donna's financial advisor tells her that based in the forecasts; she could realize a rate of return of up to 11% if she invests in gold bullion or 9% if she invests in a certain mutual funds. Donna calls real estate broker Ben to discuss the possibility of investing her money in real estate. Broker Ben knows of a 5-unit office building that is listed for $715,000; and generates an annual gross income of $79,680, with an annual operating and maintenance cost of $15,320. Ben believes he can negotiate a purchase price for Donna that, if accepted, will enable Donna to meet her desired 12% rate of return on her money over the next ten years – even if Donna must pay a 4% commission to Ben. The maximum purchase price Ben should negotiate for Donna is _____. (Round all calculations to the nearest penny.)
a. 586,333.33
b. 714,000.00
c. 515,705.13
d. 562,880.00
The steps in this calculation are as follows: Step One: Calculate the annual net income for the property by subtracting the annual operating expenses from the annual gross income: $79,680 - $15,320 = $64,360. Step Two: Calculate the purchase price that Donna should pay based on a 12% rate of return and an annual net income of $64,360: $64,360 ÷ 12% = $536,333.33 Step Three: Calculate the dollar amount Donna should pay if she pays a 4% commission to Ben. Your mathematical question is: What number, when added to 4% of itself would equal 536,333.33? P x 1.04 = $536,333.33 $536333.33 ÷ 1.04 = $ 515,705.13 (rounded) Conclusion: The maximum purchase price Donna can pay to realize a 12% capitalization rate is $515,705.13.
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