Real Estate Broker Practice Test

The law of agency will inevitably require that the agent educate the client about material facts and about the art of negotiating to ensure a strong negotiating position. The idea that an agent can avoid discovery for fear that discovering facts will increase the burden of disclosure, and increase the agent's obligation to educate the client is not correct. The duty of agency requires discovery; and the duty of disclosure requires that the agent educate the client about all known facts; or all facts the agent should have discovered.

Like all businesses, brokerages need income and cash flow. Many people believe brokerages encounter financial problems only when interest rates rise or when there is increased competition. This is not the case. Brokerages are not profit centers. A brokerage is nothing more than a funnel--the medium through which commissions are paid to the salespersons and brokers affiliated with the brokerage. A brokerage that is poorly run will encounter financial difficulty even in the friendliest real estate climate. To say that the broker should take advantage of all products designed to promote real estate sales is not correct. A brokerage should use such products only after the brokerage has evaluated its financial position, and planned for the advertising costs.

A person authorized by his principal to execute a particular deed, or to sign a particular contract, or to procure a purchaser for certain real estate, is a special agent. Listing agents are special agents. If an agent has several listings with one seller, that agent is a special agent several times. Several listings with one client do not constitute a general agency.

Specific agency (or special agency) means that a licensee may act on a principal's behalf only in limited ways for a limited time; generally for only one transaction. General agency is an agency whereby the agent is given authorization to act as agent for a range of activities. Universal agency is unlimited rights to act on the principal's behalf. A limited power of attorney grants authority to act on the principal's behalf, but limits the authorization to only those acts that are named.

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.
 

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.

If the scope of authority of a real estate broker is limited to just producing a buyer, the broker does not have the authority to collect an earnest deposit on behalf of the seller. When an agent does collect a deposit in this case, the agent is acting as agent for the buyer (offeror) and not the seller.

Severance is the act of removing or cutting off a part of the real property that is attached to the land. Since the lender is foreclosing on the real property, and the fixtures are considered real property, the lender is entitled to receive the home with all of the fixtures intact. Removal of the fixtures from the home in the manner described in the scenario is a tort violation against the lender, and is subject to civil action, although in most cases it is not financially prudent for the lender to pursue such action because the litigation costs can be greater than the lenders financial loss from the damages.

Riparian rights are the rights of an abutting owner to his/her fair share of water flowing past the land. A waterfront owner does not own the water, and does not own the land under the water. The landowner simply owns a right to access to the water.

In states where water is scarce, a form of prior appropriation applies. Also known as first in time is first in right, the doctrine grants water rights to divert a specific amount of water from a specific source to irrigate a specific piece of property. Those rights are then assigned a priority based on when the right was first used or applied for. In periods of peak demand, the person or entity whose claim is the oldest is given the first right to the water.

Although the living arrangements and the structure of the buildings might look similar, the only thing a lessee of an apartment and the owner of a condominium have in common is that they each have an estate in real property. A condo owner has a fee interest (which is a freehold estate). The lessee has a less-than-freehold estate. Depending on how the condo owner holds title, his estate might also be an estate of inheritance.

Estates that can be "defeated" are called fee simple defeasible estates. CC&Rs are called "conditions subsequent", which means that they are conditions that must be met subsequent to taking title. Evan and Camelia's agent acted correctly when she warned them about the consequences of non-compliance before they signed the contract.

Severalty ownership is ownership by a single person. There is only one person or entity's name on the deed. There is no right of survivorship with a severalty ownership, because a person with right of survivorship must be named on the deed. For a survivor of a severalty owner to obtain title upon the death of the severalty owner, the severalty owner must devise the property to the survivor in a will.

A conveyance to two or more persons is presumed to create a tenancy in common unless a contrary intention is shown. Each tenant holds an individual undivided ownership in the property, which means that each owner has absolute rights over his/her share; and can alienate, or transfer the ownership of, her ownership interest without the consent of the other parties.

The prospective purchase of the property by a person related to the licensee by blood or marriage must be disclosed to all parties to the transaction. In this case, the listing broker and the listing salesperson are not parties to the lease option transaction. The lease option is a contract that is between the lessee/optionee and the lessor/optionor. Failure to make this disclosure would be considered a violation of the agent's duty to disclose all material facts. Although the disclosure that is made to the lessor/optionor will certainly be seen by the listing salesperson's and listing broker's eyes, the disclosure is not directed specifically at the listing agents.

Abatement of a nuisance means the elimination, whether by the party injured, or through suit instituted by him, of that which endangers life or health, or interferes with the use and enjoyment of the property. The law allows an injured party to remove or destroy the nuisance personally, providing he does so without unnecessary destruction or breach of the peace. Although abatement must be done in an environmentally friendly manner, no special court order is necessary before abatement can ensue.

The metes and bounds method of legal description is the primary method of legal description in many states. In states where it is not the primary system, it is used to supplement the prevailing description method. Typically the metes and bounds system uses physical features of the property (called monuments), to identify aspects of the topography; and it uses directions and distances, to define the boundaries of the parcel. The description is written in a running prose style, and works around the parcel in sequence from a point of beginning. It may include references to other adjoining parcels (and their owners), and it, in turn, could also be referred to in later surveys. At the time the description is compiled, it may have been marked on the ground with man-made monuments placed where there were no suitable natural monuments.

The concentric ring model basically consists of zoning classifications in circles, with the central business district in the center. The next circle is the transition zone of mixed residential and commercial uses. Next is the inner city zone or inner suburbs. The better quality (middle class) homes surround the inner city; and the outermost circle is called the commuter zone.

The multiple nuclei model of land development creates other nodes or nuclei in the city in addition to the CBD; thus the name multiple nuclei model. The model originated from the idea that people have greater movement due to increased car ownership. This increase of movement allows for the specialization of regional centers or zoning classifications.

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.).
 

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.

Depreciation cannot be taken on a personal residence. It can be taken only for investment property. The adjusted basis would be cost plus capital improvements. However, for investment property, the adjusted basis would be cost plus improvements minus depreciation.

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.
 

The Sherman Anti-Trust Act prohibits price fixing. Therefore, a state real estate law that sets the maximum commission that a broker may charge for the sale of residential property would be against public policy. All real estate listing commissions must be negotiable between seller and the listing broker, so the commission rate is determined by the broker's contract with his principal.

The essence of the anti-trust laws is that businesses cannot agree to restrain trade. Any statement or agreement that limits consumer choice could be construed as an anti-trust violation. If two separate brokerages agree to divide a market along geographic lines, this is a violation. However, within a brokerage, it is acceptable for a brokerage to assign specific agents to certain geographic areas. This is legal, because the agents within a brokerage are not competitors. They are working on behalf of the brokerage.

An estate for years is an estate with a definite commencement date and a definite termination date. An estate for years does not have to be literally for years; it can be of a duration that is less than one year, such as a six-month lease. Estates for years with a duration of one year or more must be in writing to be enforceable; but estates for years with a duration of less than one year do not need to be in writing to be enforceable.

A statement of purpose in any form or research documentation simply states the reasons for the research; and the type of research conducted. In a Uniform Standards of Professional Appraisal Practice (USPAP), the statement of purpose states the method of appraisal approach. It tells the lender what type of property is being appraised, as well as provides insight as to the purpose of the borrower. For instance, if a single family residence is being sold to a borrower who will use the property for investment purposes, the appraiser will likely use the income approach to value, and the structure of the loan package is based partly on the borrower's purpose. On the other hand, if the same single family residence is being purchased by a borrower who plans to use the home for a primary residence, the appraiser will likely use the sales comparison approach, and the loan package is customized to that borrower's purpose.

The listing price set by the owner usually sets the upper limit of market value under normal market conditions. A prospective buyer's first offer usually sets the lower limit. In some cases, sellers have overinflated expectations about the market value of their home, and want a list price that is way above market value. There are brokers who will sign such an over-priced listing, but such an act is not generally in the broker's best interest because the property is not likely to sell; and a listing is a liability for the broker until it sells.

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.

Loan interest is part of the loan payment. The others types of payments are held by the lender in a reserve account called impounds. The lender pays these bills to the various providers as they become due.

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 exempted 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. 

A borrower refinancing a mortgage with a different lender has a 3-day right of rescission under TILA. Other loans where the borrower typically has a right of rescission include home equity loans and home equity lines of credit. Test-Taking Tip: Frequently, when two choices are so close as Answer Choices "C" and "D," this is what the examiners are testing.
A, B, and C are incorrect. None of these borrowers would have a 3-day right of rescission under TILA.

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.

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.

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.

The buyer usually pays the fees for recordation of the note and deed of trust or mortgage, although this is a negotiation point of the transaction. In a strong buyer's market, sellers might be willing to pay this fee. However, in the absence of an agreement otherwise, the buyer is required to pay this fee as a condition of the loan.