Do you know the quality of the school you are attending?

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1 Do you know the quality of the school you are attending? Champions School of Real Estate s Awards 2009 National PaceSetter Award, RealtyU 2008 National PaceSetter Award, RealtyU 2007 National Pinnacle Award, RealtyU The National Pinnacle Award is given in recognition of the school that provides the highest performance and lasting contribution to real estate education National Pinnacle Award, RealtyU 2005 National Pinnacle Award, RealtyU 2004 National PaceSetter Award, RealtyU 2003 National Chairman s Award, RealtyU 2002 National PaceSetter Award, RealtyU 2001 National PaceSetter Award, RealtyU 2009 ActiveRain.com - 25 most influential women in Real Estate - Rita Santamaria 2008 Texas WCR Business Woman of the Year - Rita Santamaria 2004 and 2002 Sue Ikeler REBAC, RealtyU, Instructor of the Year 2003 NAR REBAC Realtor Hall of Fame Rita Santamaria 2002 WCR Texas Chapter Champions School of Real Estate Affiliate of the Year Champions School of Real Estate had a Top 10 Finalist in Every Season of the Real Estate Apprentice Program Join Us on Facebook v1 RE PREP

2 State Exam Study Guide By: Kristin Wilson TABLE OF CONTENTS General Test Information 4 NATIONAL TEST SECTION Chapter 1 Property Ownership 6 Chapter 2 Land Use Controls and Regulations 11 Chapter 3 Valuation and Market Analysis 14 Chapter 4 Financing 18 Chapter 5 Laws of Agency 24 Chapter 6 Mandated Disclosures 28 Chapter 7 Contracts 31 Chapter 8 Transfer of Property 35 Chapter 9 Practices of Real Estate 40 Chapter 10 Specialty Areas 43 Chapter 11 Math 47 STATE TEST SECTION Chapter 1 Commission Duties and Powers 54 Chapter 2 Licensing 56 Chapter 3 Standards of Conduct 59 Chapter 4 Agency/Brokerage 61 Chapter 5 Contracts 63 Chapter 6 Special Topics 65 National review questions 70 State review questions 88 Take Home Test 92 Fair Housing Act 106 All rights reserved. No part of this publication may be produced in any form or by any means without the permission of Champions School of Real Estate. Copyright 2012.

3 Prep Classroom Policies The following is an outline of how the PREP-101 is conducted. 1. Classes start promptly at 8:30 am and will end around 4:45 pm. 2. This is a two (2) day REVIEW of what you have learned in Real Estate School. It is not a Question and Answer session. 3. The material will be presented in a lecture format with emphasis being placed on the definitions, vocabulary and legal usage of the Real Estate terminology. 4. The National Test consists of 80 questions. A score of 56 correct (70%) is required to pass the Salesman National Test. A score of 60 correct (75%) is required to pass the Broker National Test. 5. The Salesman State Test consists of 30 questions. A score of 21 correct (70%) is required to pass. The Broker State Test consists of 40 questions. A score of 30 correct (75%) is required to pass. 6. Breaks will be provided during the day. 7. You are allowed to come and go as you desire. Please remember the students that remain behind. Please come and go quietly. 8. You may bring food and drink into the classroom. 9. The National portion of the material will be presented the first full day. 10. The State will be presented from 8:30 am until 11:00 am the second day. 11. The remainder of the National and the Math Review will be conducted on the second day from 11:00 am until 12:30 pm. 12. The mock test will be given on the second day at 1:30 pm until 3:45 pm. 13. The mock test is broken down into two parts. The first part is the National Test with 80 questions; followed by the State Test with 30 questions for sales, or 40 for brokers. 14. You will receive two Scantrons. One for the National Test and one for the State Test. Please write your name, date, number of your test on each scantron and whether you are taking the National or State test. Brokers remember to indicate you are National-B and State-B. 15. You may check your Scantrons against your test. (YOU MAY NOT COPY THE QUES- TIONS FROM THE TEST; REMOVE THE TEST OR THE SCANTRON FROM THE CLASSROOM). 16. All tests and scantrons must be accounted for prior to your being dismissed. 17. During Class all phones and electronic devices must be turned OFF. THANK YOU FOR CHOOSING TO BE A CHAMPION! GOOD LUCK!

4 General Test Information 1. Submit your education and inactive salesperson application to TREC in the My License system on the Texas Real Estate Commission s website at ($153.) If you have college credit or a college degree, you will need to scan and send in your education documents along with a digital copy of the application electronically to education@trec.texas.gov. Or you may fax copies of them to Upon acceptance of your application, TREC will notify you that you will be receiving a Candidate Information Brochure from PSI. (You can download the brochure from the PSI web site: ). 3. Upon receiving the CIB follow the directions for making an appointment to take the state exam at a convenient PSI testing center. Addresses and directions will be found in the brochure. 4. Tests are given two or three times a day, five or six days a week, depending on the location. Most appointments can be scheduled within a week. 5. Check in upon arrival. 30 minutes early is recommended. Late candidates will not be allowed to test. The name on your photo ID must exactly match the name on your TREC application. You will need a second ID Credit or Debit card will be accepted. General Test Information 6. Test centers are equipped with one-way mirrors, and monitored by cameras and a sound system to prevent cheating. Proctors are vigilant about this and any cases of cheating or suspected cheating will be reported to TREC. 7. Candidates must sign a security agreement before testing. 8. The test is administered on a computer with a special color-coded keyboard. You may use the keyboard or the mouse. You may bring a simple calculator into the testing room. 9. A ten-minute tutorial is provided along with some sample questions to allow you to practice. 10. You will take two exams. The state exam is given first. Salesmen have 30 questions and brokers have 40. You have 45 minutes to complete this exam. Once you finish it and submit your answers, you cannot go back to it. The national exam is second. Salesmen and brokers both have 80 questions and 105 minutes. You must score at least 70% on each test to pass the sales exam and at least 75% on each test to pass the broker exam. Exam questions are generated randomly different questions each time you test. (NOTE: On all exams you may have 10 additional unscored questions scattered throughout your test. PSI tries out new questions this way. They do not count and do not use up testing time.) 11. If you pass one exam, you will not have to retake it. You may not schedule retakes at the test centers. You may not retake on the same day. NO WALK-INS. 12. The fee is $61 for both tests, and $61 to retake both or either test. 13. You must submit fingerprints to TREC. Go to the TREC web site for instructions. ($44.50) GOOD LUCK! 4

5 National Test Section Champions School of Real Estate

6 Chapter 1: Property Ownership Sales Exam 6 Broker Exam 5 CLASSES OF PROPERTY 1. Real Property - land, improvements attached to the land, and the rights to use them. 2. Personal property - a right or interest in things of a temporary or movable nature; anything not classed as real property - Chattel, Personalty. Ownership is transferred by a Bill of Sale. 3. Fixture - Personal property that has been attached in such a way as to make it real property. The word installed often indicates a permanent attachment. The process of attaching may also be called annexation. The process of real property becoming personal will be described by the term severed, or severance. Improvements to rental property by tenants generally become fixtures, or part of the property, and remain at the end of the lease. 4. Trade Fixtures - required to carry out a business, they may be removed from leased property prior to the termination of the lease. If trade fixtures are not removed prior to the termination of the lease, they become real property and pass to the landlord. Acquiring property in this way is called accession. Chapter 1 Property Ownership LAND DESCRIPTIONS AND CHARACTERISTICS Land has three physical characteristics: 1. nonhomogeneity - no two pieces are exactly alike 2. immobility - land cannot be moved - a person must go to the land 3. indestructibility - durability - it will always be there Land has four economic characteristics: 1. scarcity - in short supply where demand is great (a lot in Manhattan is more valuable than a lot in upstate New York.) Scarcity is usually based on geographic considerations. 2. modification - land use and value are greatly influenced by improvements made by man to land and to surrounding parcels of land. 3. fixity - land and buildings and other improvements to land are considered fixed or permanent investments they are not liquid assets. 4. situs - location preference, or location from an economic rather than a geographic standpoint. (This can change over time as people change.) LEGAL DESCRIPTIONS: 6 A legal description is created and determined by a surveyor. It is a necessary part of a contract or conveyance (deed, listing, sales contract, etc.) in order for that document to be enforceable. It is one of such certainty and accuracy that one can go to the ground and identify the land. The following methods of land description are legal:

7 Metes and bounds - terminal points and angles, always has a p.o.b. (point of beginning) This method uses compass directions, degrees, and minutes. The point of beginning is also the end, so that the land described is completely defined. This description might include the use of street names. This is the oldest and most common method of land description and was used in the thirteen original colonies. Lot, block, and subdivision - recorded map - or plat - this is the most common description in residential listing agreements. Monuments - permanent surveyors markers a property is described as being a certain distance and direction from the marker. Monuments are rarely used alone to describe property. Monuments are often the starting point for a metes and bounds description, and can be essential to the accuracy of that description. Monuments can be man-made - an iron pipe, or natural - a stand of timber, an old oak tree, etc. Rectangular Survey System, also know as the Government Survey System, it takes into consideration base lines, and meridians, townships and sections. Townships and Sections are located in Ranges. One township contains 36 sections. Each section contains 640 acres, which is 1 square mile. Each acre contains 43,560 square feet. This system is not used in the thirteen original colonies. Example: S7 T3 R2 means Section 7 Township 3 Range 2. A street address is not a legal description. A plat is a map of a town, section or subdivision. A plot is a map or layout of improvements on a property site. The property site is also called a lot or parcel. Physical descriptions of property specify land and building size, and types of construction. Chapter 1 Property Ownership Land and building area are measured by square feet, acres, square miles, townships, sections, ranges, rods, chains and links. Construction types include onsite construction and offsite construction consisting of manufactured, modular and prefabricated buildings. Materials include brick, stone, wood manmade siding and stucco. ENCUMBRANCES An encumbrance is a limitation on your rights. It may also be a cloud on the title. Examples include liens, reservations, encroachments, leases, easements, deed restrictions, licenses and adverse possession. The legal method of removing an encumbrance is to release it, or get a release. 1. A lien is a charge against property as security for a debt. A voluntary lien is created by the lienee s or borrower s actions, like taking out a mortgage or home improvement loan. Filing or recording the mortgage creates a lien. A mortgage is not effective or enforceable until it is recorded. When the mortgage is recorded, if it is the first recorded claim, it will be the first priority lien. An involuntary lien is created by law and can be statutory or equitable. (NOTE: Statutory law always takes precedence over common law.) Examples of statutory liens include federal tax liens, ad valorem (according to value) tax liens, judgment liens, and mechanics and materialmens (m&m) liens. (Note: An m&m lien can be placed on a property when materials have been delivered or work has begun.) Equitable liens come from common law and include seller (vendor) or buyer (vendee) liens. 7

8 Liens may be specific or general. A specific lien attaches to one or more specific or named properties. (Example: a mortgage) A general lien attaches to all the property of the debtor, not exempt from forced sale. (Example: a judgment or IRS lien) Recording is required for a judgment to become a lien. If a party wins a judgment and is unable to collect, he can secure a writ of execution from the courts to enforce payment. 2. A reservation withholds title to a part of the land described in the deed. (Example: an easement or mineral rights) It is imposed by the Grantor. 3. When a structure or improvement overlaps onto another s property it is an encroachment. Encroachments must be disclosed. The determination of an encroachment requires a survey. Note: A listing agent discloses an encroachment, a buyer s agent recommends a survey. 4. An easement allows limited use or enjoyment of another s land. It is a right in land and should be created in writing and recorded. Easements can be created by express (written or verbal) or implied (by actions or evidence) grant, agreement, reservation, limitation or prescription, necessity, or condemnation. The government will take an easement by condemnation for itself, the utilities or the railroads. Easements can be terminated by merger (acquiring the adjacent property), release, or abandonment. Chapter 1 Property Ownership Dominant and Servient Estates - If you have two parcels of land with a road across one parcel, the owner who crosses over the other s land is dominant. The dominant estate would be landlocked without the easement, in most cases. The property with the road is servient to the dominant estate. The dominant estate benefits from the easement, while the servient estate is encumbered. The most common reason for this type of easement is entry and exit from the property. This easement is called an Easement Appurtenant. It goes with the land, and whoever owns the land owns the easement. An Easement in Gross belongs to a person or corporation - such as a utility easement. No matter who owns the land, the easement still belongs to the utility company. It does not go with the land. 5. A license is permission to do a particular act upon the land or property of another. A theater ticket or sports event ticket is a license. It grants use of one seat for one performance. A license is similar to an easement but of much more limited duration. It is not a right in land. It is often given verbally and easily revoked. 6. Adverse Possession (squatter s rights) occurs when property is acquired from the rightful owner through the Statute Of Limitations. Occupancy must be hostile, visible, actual, continuous, and distinct for the statutory period. This differs from state to state, and can be a minimum of 3 years and a maximum of 25 years depending on circumstances and state. It is 10 years in Texas. TYPES OF ESTATES An estate is an interest in real property. A freehold estate is ownership. All the legal rights that attach to the ownership of real property including but not limited to the right to sell, lease, encumber, use, enjoy, exclude,will to heirs, etc. are called the Bundle of Rights. Ownership with the greatest bundle of rights - the best type of ownership - is called Fee Simple or Fee Simple Absolute - the owner has all the available rights to the property and can always pass it to his heirs. 8

9 A freehold estate is of indeterminate length (it has no termination date), as opposed to a non-freehold estate (lease-hold) which has a termination date. Defeasible Fee or Conditional Fee is ownership with conditions or terms which if violated could cause the ownership interest to be defeated or terminated. This is also called qualified fee or even qualified defeasible fee. A life estate is ownership for the duration of someone s life. The owner is called the life tenant. He has all the rights and duties of an owner except the right to choose who will get the property upon his death. The person who gets the property after the life estate is ended is the remainderman. The remainderman gets fee simple. If the life estate is based on the life of someone other than the life tenant, this is called a life estate pur autre vie. If the life tenant leases the property and then dies, the lease expires. If the life tenant sells his interest in the property, this has no effect on the remainderman. In other words the buyer of the life estate would have to vacate the property upon the death of the original life tenant and would not receive a refund of his purchase price. If a life estate is set up so that at the end of the life estate the property goes back to the original owner, this is called a life estate with reversion. TYPES OF OWNERSHIP a) Ownership by one person is called an estate in severalty or sole ownership. Corporations or Partnerships often hold title this way. (NOTE: In a general partnership, all partners share responsibility and liability. In a limited partnership, limited partners have limited liability and usually are not involved in the day-to-day operation of the partnership.) If only one signature is required to sell a piece of property, then there is only one owner. b) Ownership by two or more without rights of survivorship is called tenancy in common. This is the most common type of joint ownership. It is an estate of inheritance. A condominium is multi-unit housing with individual ownership of apartments and tenancy in common ownership of the common areas. Upon your death, your share goes to your heirs, at probate. Unequal shares are permitted. You may sell your share without the permission of the other owners. In the absence of any other instructions, the title company will always assume tenancy in common with equal shares. Chapter 1 Property Ownership c) Ownership by two or more with rights of survivorship is called joint tenancy. Upon your death, your share goes to surviving co-owners, immediately. This is sometimes called a poor man s will as it eliminates the need for a will. Joint tenancy overrides a will. This is not an estate of inheritance. To prevent any accidental cases of joint tenancy, there are four unities required for this type of ownership time, title, interest and possession. All owners acquire thier interest at the same time, from the same legal document. Their shares are equal and undivided - eachs owns a % of the whole rather than a piece of the whole. Partition is a procedure to divide the cotenant s interests in real property. It can be a court or voluntary action. Partition would divide the property into pieces and end the joint tenancy. d) If a property is held by one party for the benefit of another then the property is held in trust. e) When two or more parties join together to create and operate a real estate investment we call this a syndicate. f ) Tenancy by the Entirety is a specific type of joint tenancy where the co-owners are husband and wife. One advantage of this type of ownership is that it avoids probate. (This is also true of joint tenancy.) 9

10 It is important for licensees to understand types of ownership so they will know what signatures are required on the documents they use (contract forms, listings, etc.). NOTE: the word tenants can indicate owners, as in joint tenants and tenants in common. Leasing agreements create the leasehold estate. There are four leasehold estates and each gives possession without ownership. 1. An estate for years is a lease with a specific starting and ending date. This lease survives death and/or the sale of the property. No notice is required to terminate. 2. A periodic tenancy is a lease with a fixed period that is automatically renewed unless the tenant or landlord acts to terminate it. A month - to - month lease is this type. Notice to terminate is usually required. Typically 30 days notice is required to terminate. 3. An estate at will or tenancy at will is a lease that can be terminated by either party at will without notice. 4. A tenancy at sufferance occurs when a lease expires and the tenant refuses to move out. The landlord is not receiving rent. This holdover tenant has no right to be there. If the holdover tenant pays rent and the landlord accepts that rent, a holdover tenancy is created. A Statutory Estate is one created by law. These will differ from state to state. Community Property is a statutory estate in Texas. Chapter 1 Property Ownership Homestead is also a statutory estate in Texas. 10

11 Chapter 2: Land Use and Regulation Sales Exam 5 Broker Exam 5 GOVERNMENT RESTRICTIONS - GOVERNMENTAL RIGHTS IN LAND (PETE) Police Power - Power given to a municipality to regulate and control the character and use of property for the health, safety and general welfare of the public. Zoning is the most common example of police power. Zoning regulations are local laws to control land use. Zoning can include master planning. A master plan is a comprehensive guideline for the long-term physical development of a particular area. Mixed land use is designed to meet the needs of future residents. Master planning is a process and zoning can be used to implement the plan. A change in zoning may result in a non-conforming use. This use was permissible under former rules, but new rules prohibit it. A non-conforming use is allowed to continue as it is considered grandfathered. The non-conforming use is automatic, no hearing or application process is required. A non-conforming use cannot be altered or expanded without permission, but it can be sold to a party who wishes to continue the existing use. If the property is destroyed, the non-conforming use may not be rebuilt without permission. Example of non-conforming use 6-unit apartment building in a neighborhood zoned R-1(residential-1 family). (Note there is no violation of zoning here.) If your property violates zoning you may request a variance. A variance may also be requested prior to construction. Adding on to the front of a building would usually require a variance. The process to obtain a variance is to apply to the zoning committee. A hearing will be scheduled and all neighborhood property owners will be invited to the hearing to voice any objections they might have to the variance. Chapter 2 Land Use Controls and Regulations In order for zoning rules to be changed, public hearings must be held but the ultimate decision rests with the zoning committee. A buffer zone is an area of land separating one land use from another, such as residential from commercial. The buffer zone is located between incompatible uses. The buffer zone is a transitional use. Example: single family, apartments, retail. The apartments are the buffer zone. Police power provides the government with the right to establish building codes. Specific construction requirements are set by building codes. (plumbing, electrical, etc.) For government projects, an EIS will be done. An Environmental Impact Statement (E.I.S.) is done to determine the effect of a project on the community. The report includes a detailed description of the proposed project. Police power gives the government the right to regulate special land types for the public good including coastal properties, floodplains and wetlands. It also allows for regulation of environmental hazards as discussed in Chapter 6. Eminent Domain - The right of the government to take private property for public use through the action of condemnation. This is the only time the government must compensate property owners. (No compensation for down-zoning). 11

12 When an individual forces the government to buy his property, this is called inverse condemnation. Taxation Property taxes are the highest priority lien on real property. Property taxes are ad valorem taxes, or according to value. Unpaid taxes create an automatic lien on property. At foreclosure, property taxes are always paid first. Assessed value is the value of your property for tax purposes. The tax rate times the assessed value will tell you the yearly taxes. Lists of assessed values for all the properties in a taxing district are found in the assessment rolls. These can be used for comparison purposes. Tax rates are often expressed as dollars per hundred dollar of valuation. In that case a tax rate of $2.50 means the property owner will pay $2.50 of tax for every $100 of taxable value. In some cases a mill rate is used. This is a tax rate per thousand. Therefore, a rate of 25 mills means the property owner will pay $25 dollars of tax for every $1000 of taxable value. Some states have a property sales tax usually paid by the seller of real property at closing. It can be called a transfer tax or a deed tax. It can be expressed as mills or as a rate per hundred. If the local government is providing a benefit to a limited number of property owners such as curbs or sidewalks in a neighborhood, a special assessment tax may be levied against only those property owners who benefit from the improvement. In a real estate sale with an unpaid balance on a special assessment, the special assessment is usually paid by the seller, but could be prorated at closing. Chapter 2 Land Use Controls and Regulations If property is located in a municipal improvement district, the property owner will receive a tax bill, similar to a special assessment, until the improvement is paid for, or the improvement district designation is removed. In other words, this can be temporary or permanent. Local governments use property taxes to cover their expenses because real property is an asset that cannot be hidden. Escheat - Property reverts to the state when someone dies leaving no will and no heirs or no kindred. Escheat can also be used if property is abandoned. The purpose of escheat is to ensure that no land remains unowned. WATER RIGHTS Riparian rights refer to the right to use water from a river or stream that borders property. Littoral rights refer to the same right for large navigable lakes or oceans. The water may be used for domestic purposes, and may not be contaminated. The flow of the water may not be interrupted. Riparian and littoral rights are transferred by deed, or conveyance. The state might refuse to grant riparian rights to a landowner if there is a scarcity of water. For non-navigable water, landowners may own to the middle of the body of water. For navigable water, landowners own to the vegetation line. Building piers will not extend your property line. The state owns all navigable water. Generally, all water in rivers, creeks or streams belongs to the state. Prior Appropriation is a theory of water law based on the idea that first in time is first in right. The first landowner to claim riparian rights has the exclusive right to take all the water for specific beneficial uses. Subsequent owners of nearby properties cannot claim water rights. 12 The terms riparian, littoral and appropriative all refer to water rights.

13 PRIVATE CONTROL OF LAND The most common private controls of land use are C,C&R s -deed covenants, conditions and restrictions. C,C&R s are commonly referred to as Deed Restrictions, or Deed Covenants. HOA (Home Owner Association) regulations are like deed restrictions but usually apply to condominium complexes. Deed Restrictions are imposed to control land use, development and methods and materials for construction. Style and appearance requirements can also be enforced. (garages facing the rear of the property etc.) They are found in a recorded document called a Declaration of Restrictions. They are imposed by the Grantor. Violation can result in civil court action brought by other property owners who are bound by the same deed restrictions. The court will issue an injunction to enforce the restrictions. In some cases, deed restrictions and zoning can both exist. If this is true, whichever is most restrictive or limiting must be obeyed. Deed restrictions are permanent in most cases and do not expire. They control present and future owners and tenants. Chapter 2 Land Use Controls and Regulations 13

14 Chapter 3: Valuation and Market Analysis Sales Exam 8 Broker Exam 7 Market value is considered to be the price a willing seller will sell for, and the price a willing buyer will pay, when neither is acting under exceptional pressure. Market value is also defined as the most probable price. Value is an estimate of the future benefits to be derived from the property. Price is generally what one must pay for a property. Cost is an estimate of past expenditures. There are four basic characteristics of value: (DUST) Demand there must be a demand for the item and purchasing power to acquire it Utility the item must be needed or wanted Scarcity there must be a limited supply Transferability the item must be able to be sold ownership rights must be transferable CMA Comparative Market Analysis a tool used by licensees to help sellers determine a realistic price for their property a CMA compares a subject property to current listings, recent sales, and even expired listings of unsold properties. The information from expired listings is the least important part of the CMA. The result of a CMA is a range of value for a property rather than an exact price. It is not an appraisal. This is also called a competitive market analysis. Chapter 3 Valuation and Market Analysis A BOV or a Broker s Opinion of Value, also called the Brokers Price Opinion (BPO) is similar to a CMA but used by a relocation firm, or commissioned by a bank or an attorney handling a divorce or estate problem. The broker is usually paid for the BOV as opposed to the CMA, which is usually offered for free. An appraisal is an opinion. It is an estimate of value. The accuracy of the appraisal depends on the integrity and competency of the appraiser and the availability of the needed information. 1. There are three basic approaches to appraisal: market data or sales comparison, income or capitalization method, and replacement or reproduction cost approach. The market data approach is used primarily in residential appraisals. It involves comparisons with known sales in the same area. An appraiser should have 3-5 sales no more than six months old. In using this approach, the appraiser will add to the value of comparables when the subject property has more amenities, and deduct from the comparables when the subject property has less In choosing comparables, the best choice will be the one with the least number of adjustments, regardless of cost. Example: An appraiser has been asked to determine the market value of a residential property. The house is two years old and has a $1500 porch. The only available comparable is brand new and does not have a porch. It has been determined that being new adds $ to the value. The comparable is valued at $169,500. The appraiser will increase the comparable by $1,500 for the porch, and decrease it by $2,000 for age. This will demonstrate the value of a two year old house with a porch The income approach is used for income producing properties. The conversion of an income stream into an indication of value is known as capitalization.

15 net annual income cap rate/rate of return market value Generally, if a property has rent, then use the income approach. The capitalization rate, or rate of return, and market value have an inverse relationship. An increase in one results in a decrease in the other. So, when rates of return are high, a small investment gives a good return, but when rates are low, a larger investment is needed to get a good return. There are two simple backup procedures (they give the appraiser a starting point, rather than a result) to the income approach: a. The first is used for residential properties and is called the Gross Rent Multiplier, or GRM. The GRM is a factor based on location and rent a price per rent. This number, when multiplied by the monthly rent gives an estimate of value for the property. (GRM x rent = price) For example, if the GRM is 150 and monthly rent on a single-family house is $1, then the value of the house is 150 x $1,000 = $150,000. A GRM is calculated by taking the property value and dividing it by monthly rent. (Price / rent = GRM) If a property in a neighborhood is valued at $175,000 and charges $1,000 in monthly rent, then the GRM on that property is $175,000 divided by $1,000 = 175. b. The other backup is referred to as a Gross Income Multiplier or GIM and is used for commercial properties. The GIM is based on the annual rent for the property. It works exactly like the GRM. Chapter 3 Valuation and Market Analysis 3. The cost approach is used for unique properties, such as churches or government buildings. It is also used when there are no comparables for a particular property. Land Value + Building Reproduction Cost Depreciation = Value or Land Value + Building Replacement Cost - Depreciation = Value Reproduction cost would be the cost to exactly duplicate a building. Replacement cost is the cost to build a building of similar size and usefulness using today s methods and materials. When using the cost approach, the appraiser uses the market data approach to place a value on the land, because the value of the land is heavily dependent on location. The cost approach is most accurate for new construction. The appraiser considers three types of depreciation in the cost approach - physical deterioration, functional obsolescence and economic or external obsolescence. 1. Physical deterioration is ordinary wear and tear. It is curable. This has the least impact on the appraisal because all buildings have it. (chipped paint, worn flooring) 2. Functional obsolescence is brought about by factors in the property. It is often or mostly curable. (inferior materials to cut costs, curb appeal, not enough baths/bedrooms) 15

16 3. Economic obsolescence is a loss of value due to outside factors. This is also called external obsolescence. It is incurable. (zoning, air pollution, noise, traffic, jobs, etc.) It is also called environmental obsolescence. Appraisers use principles of value to help them arrive at their final opinion. These principles of value include: 1. Highest and Best Use - the legal use that gives the greatest return in money and/or amenities. (example: commercial parking is more valuable than residential parking) 2. Principle of Substitution - Sets an upper limit on price. No person is justified in paying more for a property when a similar substitute property can be purchased for less money, with similar risks and yield. 3. Principle of Conformity - States that maximum value is found when there is a reasonable degree of similarity or sameness. Properties in the same neighborhood tend to conform in price. 4. Principle of Increasing and Decreasing Returns - Invest in property whenever each dollar invested will return a dollar or more of increased value and stop when each dollar invested returns less than a dollar in value. Do not over-improve a property. 5. Principle of Contribution -the value of a part is determined by its contribution to the total value of the property rather than by its cost. Chapter 3 Valuation and Market Analysis 6. The Principle of Regression - the presence of lower valued properties in the neighborhood leads to a decline in the value of your property. Conversely, the presence of higher valued properties will increase the value of your property and this is called progression. 7. The Principle of Competition an increase in competition will result in decreased profits for current providers. The more competition, the lower the price. 8. The Principle of Change Change is constant and is reflected in values. Appraisers must make adjustments for changes in market conditions, and for time. An appraisal is only considered to be good for six months. 9. The Principle of Anticipation purchase price is affected by the expectation of future appeal and benefits. In addition to the principles of value an appraiser must be aware of the other factors that can affect value including market cycles, political actions, economic forces, physical or environmental forces and sociological forces. Combining several parcels of land into one is called assemblage or plottage. The result is usually increased usability and value of land. Although assemblage and plottage mean the same thing, assemblage is more often used to describe the action while plottage is used to describe the increased usability and price. The steps in the appraisal process are: State the purpose of the appraisal. 2. Collect and verify information about the property. 3. Estimate value using all three approaches, or as many approaches as needed to get the best result.

17 4. Reconcile the estimates by determining weighted averages. This step is necessary because the third step will result in up to three different values. Reconciliation completes the process of determining an exact number rather than a range of value. 5. Prepare the report. It may be oral, in a letter, on a form, or a narrative report. Although there is no USPAP (Uniform Standards of Professional Appraisal Practice) requirement for the use of a particular form for an appraisal, lenders will require the Fannie Mae appraisal form if the purpose of the appraisal is to secure residential financing. Additional concepts: Chronological age is the age of the property in years. Effective age tells the condition of the property. Deferred Maintenance is a type of physical depreciation (ordinary wear and tear) that results from postponing maintenance on the property. The life cycle of a neighborhood is defined as the stages of growth and development of a neighborhood grow, stabilize, decline, revitalize. An up and coming neighborhood is in the revitalization stage. Square footage appraisers measure the exterior walls, and never include unfinished space. Price per square foot is the property sale price divided by the square footage. Gross area the total area of a building measured from the exterior walls excluding uncovered areas such as patios and courtyards. The area under the roof, including unfinished spaces such as the attic and garages. Setback the amount of space required between the lot line and the building line. The setback can be determined by zoning or deed restrictions. Chapter 3 Valuation and Market Analysis Straight line method - a method of depreciation of equal annual installment amounts. For example: $100,000 depreciated over 10 years would be $10,000 per year. Using this method, you can calculate the depreciation of a property (depreciation is gone), or the depreciated value of a property (depreciated value remains after depreciation is deducted). Module or modular housing refers to prefabricated housing. Lenders require an appraisal to demonstrate collateral or security. An ethical conflict would arise if the appraiser based his fee on the appraised value of the property. Instead, a flat fee or hourly fee will be charged. In addition, an appraiser should not have any personal interest, either present or future, in the property to be appraised. Finally, an appraiser should only reveal information to his client. If the purpose of an appraisal is to secure financing, the lender is the client, not the buyer. MAI is a designation that means Member, Appraisal Institute. Transactions requiring an appraisal include those involving financing and those involving the courts. For example, cases being heard to settle the estate of the deceased when there is a challenge to the will, or cases to challenge Eminent Domain offers to property owners. A licensed appraiser is required for any property valued at $250,000. or more. 17

18 Chapter 4: Financing Sales Exam 7 Broker Exam 7 Mortgages, deeds of trust, and their provisions: A mortgage is a pledge of real property as security for a promissory note. The action of pledging real property as security for a debt is called hypothecation. The mortgagor borrows the money and gives the mortgage as a pledge to the lender. The lender is called the mortgagee. The mortgage is recorded, creating the lien. A note, or promissory note, is the instrument for the debt. It is your personal promise to pay. It is not recorded. In Texas we use a Deed of Trust instead of a traditional mortgage. The deed of trust contains a power of sale clause that allows for non-judicial foreclosure. Power of sale results in a quick foreclosure. This non-judicial foreclosure is preferred by lenders. The deed of trust involves three parties: Trustor (Mortgagor) Beneficiary Trustee borrower - buyer lender 3rd party, selected by the beneficiary Chapter 4 Financing The trustee acts in a fiduciary relationship with the beneficiary. The trustee has two functions in accordance with the Deed of Trust. 1. Release the lien when the note is paid. 2. Foreclose in the event of default. Reminder: A Deed of Trust is not a deed, it is a mortgage. The trustor (buyer) must sign the Deed of Trust. He is the only party to sign this. Some clauses that may be found in mortgages include: Acceleration clause - a provision in a written mortgage, or note, stating that in the event of default the whole amount of the principal becomes due and payable. Alienation clause - Due on sale clause states that the balance of the secured debt becomes due if the property is sold by the mortgagor without the mortgagee s approval. Defeasance clause - states that the lien is defeated when the debt is repaid. Escalation clause - allows the lender to raise the existing interest rate. Although an escalation clause is usually used in an Adjustable Rate Mortgage, it can be used to overcome an alienation clause. The lender will permit a loan assumption at an increased interest rate. 18 Prepayment clause - a statement in a mortgage that the mortgagor can pay the entire amount or the stated amount prior to the due date in the note. When a loan is prepaid the borrower is responsible for interest up to and including the date of pay off. A prepayment penalty can be used to protect the lender from loss of interest (Example: in a sub-prime loan). It is generally calculated as a percent of the loan balance.

19 Subordination clause - allows a lender to move to or take a lower lien position. This clause would be found in a second mortgage, a home improvement loan, or a home equity loan. Assumption clause allows a new borrower to take over the payments on an existing loan under specified terms and conditions. 1. In a straight assumption, the new buyer is approved, and takes over payments and liability. This is often called a loan novation. This will not impact the seller s credit rating. 2. In an assumption subject to the buyer takes over payments but is not liable for the loan. The original borrower remains liable.this can have an impact on the seller s credit rating. TYPES OF FINANCING 1. Government loan programs: Both programs require owner occupancy. Both are assumable. FHA - the Federal Housing Administration s primary purpose is to aid in home financing by insuring the loan. The insurance protects the lender. It insures the whole loan amount, not just the lender s risk. It is paid for by the borrower. The loan requires an approved appraisal, is assumable, and may be prepaid without penalty. The insurance on the FHA loan is referred to as MIP mortgage insurance premium. There are two advantages of FHA loans. 1. Qualifying ratios are slightly more lenient (Qualifying or debt ratios state the percent of monthly gross income that can be used to pay the PITI payment on a mortgage loan, and the percent of monthly gross that can be used to cover all debt including the PITI. 28% - 36% would be typical debt ratios for conventional loans.) 2. LTV s (loan to value ratios) are very high, allowing buyers with little money for a down payment to purchase a property. Points on an FHA loan can be paid by either the buyer or seller. VA - The Veterans Administration GUARANTEES repayment of the loan. The guarantee is for the top 25% of the loan. Lenders call this a 75/25 ratio. The guarantee is free to the veteran and protects the lender. Chapter 4 Financing Generally the veteran on a VA loan needs $0 down payment, the loan is assumable, and may be prepaid without penalty. Under VA assumption, the original veteran borrower may remain liable for the loan unless he receives a release of liability from the VA. Release of liability does not result in restoration of entitlement. On an assumption of a VA loan, the new borrower does not have to be a veteran, but does need VA or lender approval. The parents and siblings of a veteran are not eligible for a VA loan. The veteran must obtain a Certificate of Eligibility from the VA. To demonstrate eligibility he may provide his DD 214 his discharge papers- or prove he has served 181 days of active duty and has been honorably discharged. Once eligible the veteran will be issued a certificate based on his ability to pay. (Certificate amount x 4 = approved maximum loan amount) The Certificate of Reasonable Value (CRV or VA appraisal) must meet or exceed the sale price. If not, the veteran can cancel the sale, pay the difference between price and appraisal, or ask the seller to renegotiate. He cannot force the seller to renegotiate. The required funding fee may be paid by the buyer or seller at closing or included in the loan. VA loan interest rates are set by market conditions. 19

20 2. Private sector loans (amortized = repaid) Conventional loans- these loans are neither federally insured nor guaranteed. Fixed rate amortized loan - equal regular payments of principal and interest until the loan is repaid. Interest is paid in arrears. A variation of the 30 year fixed rate amortized loan is the bi-weekly loan. One half of a monthly payment is made every 2 weeks. With a bi-weekly loan a 30 year loan will be repaid in as few as 25 years resulting in significant savings of interest and much faster growth of equity. Term loan - interest only until the end of the term, when the entire principal is repaid. This is a zero amortization loan. This is also called a straight loan. Blanket loan - Covers more than one piece of property. (several lots on one note) This loan may contain a release clause allowing the borrower to obtain partial releases of specific lots by making required lump sum payments. Package loan - Includes real property plus personal property. (a furnished condominium) Budget loan - Includes principal, interest, taxes, and insurance in the monthly payment, known as PITI. Many loans including FHA, VA and most amortized fixed rate loans are budget mortgages. Taxes and insurance are placed in the escrow account. (An escrow account can also be called an impound, trust, or reserve account.) It can be a checking account. It would not be a savings account. Chapter 4 Financing Balloon loan - This is a partially amortized loan with a final payment substantially larger than the others. The benefit of this type of loan is a lower interest rate. The main disadvantage is the high cost of refinancing. Participation loan - Two or more lenders own a share. This allows the lenders to share the risk. Another form of participation loan allows the lenders to share in the profitability of the property, in addition to collecting principal and interest on the loan. If a lender collects principal and interest and shares in the profits when the property is sold, this is called a shared appreciation mortgage. Open-end mortgage - Permits additional borrowing on the same note. This is sometimes called a credit card mortgage or a home equity line of credit - HELOC. (The minimum withdrawal from a HELOC is $ in Texas.) ARM - adjustable rate mortgage. A loan with an interest rate subject to change as conditions in the market change. There are two cap rates - annual, and lifetime-limiting the amount of change in the interest rate each year and over the life of the loan. The rate is tied to a readily available index such as treasury bills, and will be stated as the index + a fixed percent. For example: Treasury bills + 2%. The margin on an ARM is the % added to the index. When it is time for the rate to be adjusted the lender must do two calculations: Index + margin, and current rate + cap. The lower result will be the new rate. This loan would be a poor choice for those on a fixed income. Construction loan - short term loan with funds advanced periodically during the stages of construction. This is a term loan interest only. The interest rate on this loan is higher than the rate on a permanent loan. 20

21 Wraparound loan A new mortgage on a property is placed in a secondary lien position. The new mortgage includes both the unpaid balance of the first mortgage, plus additional amounts. The first mortgage is not paid off. GPM graduated payment mortgage payments rise over a period of years, and then usually level off for the remaining term of the loan. This is attractive to those just starting their careers and anticipating an increase in their earnings over the next few years. Sometimes the first year or 2 will result in negative amortization an increase in debt due to payments less than the interest owed. Reverse annuity mortgage allows homeowners 62 years of age or older, for all borrowers involved, to borrow against their equity without making any payments on the amount borrowed. The lender makes periodic payments to the home-owner based on the equity in the property. The loan comes due at a specific date, upon the sale of the property, or the death of the owner. This is the most expensive home equity loan. Sub-prime loans loans with risk based pricing - the rates are not published. Borrowers are rated A-F where a prime borrower has an A rating. A-minus to F borrowers will pay one to five % higher than those with good credit. This loan would be likely to have a prepayment penalty to protect the lender from loss of interest. The primary market is where consumers go to borrow money. It includes: Mortgage Companies most common source of residential financing Savings and Loans Commercial Banks Mutual Savings Banks Life Insurance Companies State Bonds Credit Unions Owner assisted financing least common source of residential financing Chapter 4 Financing The secondary market is where lenders go for money. Three main secondary market warehousing agencies purchase loans, assemble them into packages, and sell them to investors. Loans qualified to be purchased in the secondary market are called conforming loans. A conforming loan is a standardized conventional loan written on uniform documents that meets the purchase requirements of Fannie Mae and Freddie Mac. Both the loan amount and the borrower characteristics are factors in determining whether a loan is conforming or non-conforming. A non-conforming loan does not meet the secondary market guidelines. Included in this category would be sub-prime loans. The secondary market warehousing agencies are Fannie Mae, Freddie Mac and Ginnie Mae. Lenders use Freddie Mac forms to ensure that loans can be sold in the secondary market. The secondary market is funded by investors. 21

22 PERTINENT LAWS AND REGULATIONS TRUTH-IN-LENDING or CONSUMER CREDIT PROTECTION ACT - TIL (Implemented by Regulation Z or Reg. Z ) This Act is administered by the Federal Trade Commission. It covers consumer credit for all real estate loans regardless of value, and for non-real estate loans up to $25,000. The main purpose of the law is to allow consumers to understand the true cost of borrowing money. The APR annual %age rate tells the borrowers the total cost of borrowing. Broadcast, print and internet advertising are regulated. Advertising which states only the cash price or the APR is permitted. If any other credit terms are stated, full disclosure of all credit terms must be made. Credit terms are called trigger terms. They tell a buyer financing is available without giving enough information. They trigger the need for full disclosure. Examples: monthly payment, interest rate, term A borrower must be given a disclosure statement showing the full cost of borrowing within 3 BUSINESS DAYS of loan application. The APR is the effective rate of interest - what the borrower actually pays. It is usually higher than the interest rate because it includes all charges not just interest. Chapter 4 Financing If the loan will result in a lien on a personal residence, the consumer has a 3 day right of rescission. He can cancel the transaction up to midnight of the third business day following the transaction. This right of rescission does not apply to purchase mortgages. This law does not apply to commercial property or agricultural loans of more than $25,000. EQUAL CREDIT OPPORTUNITY ACT ECOA This law prohibits discrimination by lenders on the basis of sex, marital status, race, religion, age, or participation in public assistance programs. Lenders can deny credit if your sole source of income is alimony, child support or a pension plan. Child support is the most likely reason for denial (it ends). Lenders can deny traditional financing if income is commission based. FAIR CREDIT REPORTING ACT FCRA This law allows individuals to inspect their files at a credit bureau, correct any errors and make/attach explanatory statements to supplement the file. An individual who has been denied credit is entitled to a free credit report to determine the reason for denial. COMMUNITY REINVESTMENT ACT This law states that banks must meet the needs of the community in which they are chartered to do business. Redlining - the refusal to lend in a particular geographic area is prohibited. Only lenders can be guilty of redlining under this law. Additional terms: Mortgage Brokers act as an intermediary between the borrower and lender. A mortgage broker bring borrowers and lenders together for a fee. 22

23 Mortgage Banker s are persons or firms not otherwise in banking that provide their own funds for mortgage financing as opposed to banks that rely on deposits to originate loans. Equity is the difference between the market value of a property and the outstanding debt. At closing, the buyer s equity is the amount of the down payment. The seller s equity is the sale price minus the debt on the property. Usury is charging an interest rate higher than the legal limit. Usury laws protect consumers. When an unscrupulous lender takes advantage of a consumer s lack of knowledge regarding lending practices, this is called predatory lending. Actions considered predatory include steering borrowers to high rate loans, falsifying loan documents, forging signatures, changing terms at closing and requiring credit insurance, to name a few. Clients should be made aware that they are entitled to full disclosure of all charges and loan details from the lender. A loan processor usually coordinates the loan application process. Lenders will typically require at least : an appraisal of the property, a complete credit report and job history and evidence of down payment funds. PMI - Private mortgage insurance - may be required by lenders if a borrower has less than 20% equity in the property. PMI allows for the purchase of a home with a small down payment. PMI allows for high LTV s. PMI protects or insures the lender s exposure of risk, usually the top 20-25% of the loan. PMI is found on a high LTV conventional loan. Discount rate - the rate banks pay when borrowing from the Federal Reserve. Raising the discount rate by the Federal Reserve tightens the money supply. Raising the reserve requirement also tightens the money supply. The Federal Reserve controls the money supply. Point - one percent of the loan amount. Discount points are prepaid interest and tax deductible. They raise the return or yield to the lender. Origination points are loan processing fees. They are not tax deductible. Points are paid at closing. Chapter 4 Financing Buy down an upfront payment of points to reduce the borrower s monthly payment. By paying points at closing a borrower may secure a lower rate on a loan. Prime rate - the rate banks charge their preferred customers. Lien Theory State the lender has a lien and the borrower has title. Title Theory State the lender has title until the full loan amount is satisfied. Down Payment Assistance Programs (DPA s) are often linked to a government agency. Some include the State and Federal Veteran s assistance programs, local bond programs and incentives from the Federal government. However, the largest DAP is the Nehemiah program, founded by a Baptist Minister. These programs are responsible for helping many buyers to become home owners. Home equity loans are popular because they have lower rates than unsecured debt (credit cards). Leverage - the use of borrowed money to make money. (Example: low down payment on investment property). 23

24 Chapter 5: Laws of Agency Sales Exam 10 Broker Exam 11 The Principal-Agent relationship is a fiduciary relationship. The relationship is based on trust. The LAW OF AGENCY governs the relationship between a broker and his principal. The principal is often referred to as the client. All states require the disclosure of information about agency, usually at the time of the first meaningful contact with a party or prospect. With a seller, this is often at the listing presentation. With a buyer, this is often on their first visit to your office. A written agreement is the preferred method of creating agency. (a listing, a buyer s representation agreement, a property management agreement) These agreements are employment contracts. A Buyer s Representation Agreement obligates the broker to act as a fiduciary to the buyer. A Listing Agreement obligates the broker to act as a fiduciary to the seller. A Management Agreement obligates the broker/property manager to act as a fiduciary to the owner. As licensees in agency relationships we have two levels of responsibility: Chapter 5 Laws of Agency 1. Public responsibility: honesty, fairness, disclose material facts, use fair business practices, handle all funds with care, and be responsible for written or verbal statements. (These are your duties to customers or third parties in a transaction.) 2. Fiduciary responsibility: put the interests of your client first, give full disclosure to your client (advice and opinions in addition to disclosing all pertinent facts - both material and other,) exhibit trust and honesty, exercise good business judgment when working on behalf of your principal, be loyal to your principal, and be competent. (These are your duties to your client.) In addition to a written agreement, agency may also be created: 1. Orally a spoken or oral agreement - oral agency will not be upheld by the courts against the principal, but it will be binding on the agent. 2. Implied by custom in the industry, usual or customary - implied agency typically accompanies a written agreement but is not included in writing because it is considered to be understood. For example: if a licensee secures a residential listing it is implied that the property may be shown seven days a week. This is usual in residential sales. 3. Ostensible by actions which lead others to assume authority - ostensible agency is created when a licensee acts like an agent and others respond to those actions. 4. Ratification an agent acts without permission. When the principal learns of those actions, if the principal accepts those actions, or ratifies them, that creates agency by ratification. 5. Estoppel when a principal fails to maintain due diligence over his agent and as a result the court prevents the principal from denying that agency, agency by estoppel is created. Agencies are divided into three categories: universal, general, and special. 24 a. Universal agency is very broad in scope - the principal gives his agent the power to transact matters of all types for him. This is rarely, if ever, found in real estate.

25 b. General agency gives the agent the power to bind his principal in a particular trade or business. Power to bind a principal is the power to sign a legally binding agreement in the name of your principal. The general agent s signature binds or commits the client to the agreement. Limited Power of Attorney can be used to create general agency. (Owner - Property Manager) (Broker - Salesperson) c. Special or limited agency gives the agent the power to perform only specific acts and no others. This agent does NOT have the power to bind his client/principal. (Seller - Broker) In an agency relationship, specific duties exist: A principal s duties to an agent are: (CRIP) Compensation Reimbursement Indemnification Performance An agent s duties to his principal are: (OLD CAR) Obedience Loyalty Disclosure Confidentiality Accounting Reasonable care NOTE: TRUST IS NOT A DUTY. Chapter 5 Laws of Agency An agent is liable for all the professional acts he performs for his principal and a principal is liable for all the acts of his agent. As agents in real estate transactions, licensees must observe a standard of conduct which is outlined in the following guidelines: Enter all broker-client relationships and/or show property to all equally Receive all formal offers and communicate them to owners Exert your best efforts to conclude all transactions Provide equal opportunities for employment There is no right or responsibility to reveal information on protected categories (all the categories protected by the fair housing laws) Never induce panic selling (blockbusting) Never discriminate in advertising Brokers may share commissions with their salespeople or other brokers. Blind ads are prohibited. Ads must always indicate licensed status. Dual agency is still practiced in some states. The broker represents both parties with their written permission. A dual agency broker may appoint a designated agent to represent the buyer or the seller. This is similar to the appointed associate under an Intermediary that we use in Texas where we have Intermediary instead of dual agency. A single agency broker is one who does not act as a dual agent when one of the broker s buyer clients wants to purchase an in-house listing. Instead, the broker recommends that one of the parties (usually the buyer) either find another broker or continue in the transaction unrepresented. Therefore, single agency is the practice of representing either the buyer or the seller but never both in the same transaction. 25

26 Dual Agency or Intermediary may only be permitted if both the buyer and seller agree in writing. Information about your role as an Intermediary or a dual agent should be given before a party reveals any confidential information. The easiest duty of a dual agent is accounting. For all other duties the buyer and seller can have opposing interests. For the purposes of this text, the most important instrument used to create agency is the listing agreement. There are four types of listings: Open listing - The owner reserves the right to list with as many brokers as he chooses. He also reserves the right to sell the property himself and avoid paying a commission. A major concern with the open listing is agent loyalty. Open listings are not found in the MLS. Only a broker who brings a written contract will be paid. Exclusive Agency - The broker is the exclusive agent and receives the commission unless the seller sells the property himself. The seller competes with his broker. Exclusive Right To Sell - The broker is the exclusive agent, and receives the commission even if the seller sells the property himself. This type of listing eliminates most procuring cause controversies. This is the type of listing a broker wants! Net Listing - All money over the amount the owner wants for the sale of the property is treated as the broker s commission. The seller in this situation can be at risk if he is dealing with an unscrupulous broker. Chapter 5 Laws of Agency All listings (and buyer representation agreements) are taken in the name of the broker and become his property. If a sales licensee leaves his sponsoring broker he also leaves (or loses)any listings or buyer representation agreements he procured under that broker. The seller can extend listings in writing. All listings must be in writing to satisfy the Statute of Frauds. Listing or buyer representation agreements will automatically terminate on the agreement termination date. They are also terminated by: Fulfillment of purpose Abandonment or cancellation by the broker Revocation by the principal/client Mutual consent Acts of law including: Bankruptcy of the seller or the broker Death service contracts are terminated by death of either party Destruction of the property A change in property use by outside forces, such as zoning Only a broker may earn a commission and only a broker may sue to collect a commission. He may sue a seller who has defaulted on a listing agreement, or a buyer who has defaulted on a buyer s representation agreement. In order to maintain a claim for a commission, or be successful in a suit for a commission, the broker must meet the following conditions: 26 Be the procuring cause of the sale, or produce a purchaser who is ready, willing, and able to buy. Have a compensation/employment agreement in writing to enforce it. (A verbal agreement makes you a volunteer - no commission is paid)

27 In Texas he must also: Be licensed by TREC. Advise the purchaser in writing to have the abstract examined by an attorney or to obtain title insurance. Failure to do so precludes payment of any commission to the agent and can also cause suspension or revocation of a license. The federal law that has the greatest impact on agency is the Sherman Anti-Trust Act. The purpose of this law is to preserve business competition by prohibiting monopolies, monopolistic practices, and restraint of trade. The most significant impact of this on Real Estate is in the area of Commissions. Commissions are always negotiable. There is no standard or fixed rate. Broker to broker commission discussions are prohibited. Listening to broker to broker commission discussions is also prohibited. If a broker overhears other brokers discussing commission rates that broker should walk away. Any attempt to price-fix is a violation. An agreement by brokers to confer with one another regarding their commission rates would be a violation. Any agreement to limit competition by assigning market areas would also be a violation. Boycotting of discount brokers is also prohibited. Additional items: A broker may refuse to represent a prospect at will as long as he is not doing so for reasons prohibited by the Fair Housing Acts. Commissions are negotiable therefore, different clients might pay different commissions. Chapter 5 Laws of Agency Once a commission is negotiated it belongs to the broker, therefore the division of commissions is at the discretion of that broker. When an agent is also the seller or the buyer, this is called agency coupled with an interest and this dual role must always be disclosed. A subagent is an agent for a person who is already acting as an agent for a principal. For example, the listing salesperson sponsored by the listing broker is the subagent of the listing broker. THIS IS NOT A TEXAS DEFINITION OF SUBAGENCY. 27

28 Chapter 6: Mandated Disclosures Sales Exam 7 Broker Exam 8 The licensee should make every effort to be knowledgeable about the conditions of the property. This will help to avoid exposure to lawsuits. All material facts about the property must be disclosed. This would include anything that might influence the decision of a purchaser. Death on the property due to a material defect must be disclosed. Death due to violent crime (murder) on the property must be disclosed. We are not required to disclose death by natural causes or suicide. We can never disclose death due to HIV/aids. A property where there has been a murder or alleged haunting is called stigmatized. A property can be considered stigmatized if it is in the vicinity of the residence of a known sexual offender. Megan s Law is a federal law requiring all states to release information to the public about known convicted sex offenders when necessary to protect the public s safety. Licensee s are not required to disclose the information but should refer buyers to local information sources if buyers ask about this. Fraud and misrepresentations of any kind must be avoided. A seller who asks a licensee to misrepresent the property condition should be denied representation. Puffing is not misrepresentation. Puffing is marketing. Puffing uses adjectives and opinions rather than details or facts. (most beautiful landscaping) Exaggerated puffing can lead to misrepresentation. (Best water in the world) Chapter 6 Mandated Disclosures Latent or hidden defects must also be disclosed. This would include things like encroachments or zoning or deed restrictions. A Seller s Disclosure of property condition is used in many states. In Texas the seller prepares a Seller s Disclosure. The seller is responsible for its accuracy. The agent s role is to encourage honesty and full disclosure. The courts have decreed that it is a broker s responsibility to discover and disclose that there may be problems on a property. The broker s responsibility is limited to areas accessible for visual inspection. Errors &Omissions insurance can protect a broker if the seller misrepresents property condition, the broker is unaware of the misrepresentation, and could not have detected it by visual inspection. Material facts that should be questioned and disclosed include: Land/soil conditions Pest infestation, toxic mold and other interior environmental hazards Structural issues roof, doors, foundation, windows Condition of electrical and plumbing systems and fixtures Location within Natural Hazard or Specially Regulated areas nuclear power plant, landfill, Flood plains, Wetlands, Endangered species, etc. Potentially uninsurable property Known alterations and additions Public Controls, Statutes and Public Utilities to be disclosed include: Zoning and planning guidelines School districts, Utility districts, Tax Districts, Flight Paths Homeowner s Associations membership 28

29 It is the agent s responsibility to verify statements included in marketing information, such as age of improvements, size of lot and building, and property tax amounts. Use of builder numbers and tax records is advised. The Federal Interstate Land Sales Full Disclosure Act applies to all unimproved land sold interstate. The purpose of the law is to avoid fraud in marketing land. Developers must file reports with Consumer Financial Protection Bureau before offering land for sale. These property reports must disclose information about the property to be sold. If a buyer or tenant does not receive this report before signing, he may void his contract or lease. WARRANTIES Home buyer s insurance is available in many states for the purchaser s protection. For new construction the builder may use the Home Owners Warranty Corporation or HOW program. This is a 10 year warranty plan covering defects in material, faulty workmanship and structural problems. Home warranty insurance on existing homes is also available. Purchased by the buyer or seller it covers such items as heating, air conditioning, electrical, plumbing and appliances. Usually there is a deductible and some items may be excluded. This is a one year renewable policy. ENVIRONMENTAL REGULATIONS AND DISCLOSURES A variety of Federal and State laws have been passed for environmental protection. Licensees must be familiar with the nature of environmental problems and the laws and regulations that apply. Some hazardous substances licensees should be aware of: Radon a naturally occurring colorless and odorless gas produced by the decay of radioactive materials in rocks under the ground. Radon enters homes through the foundations. HUD does not require radon testing for FHA loans. Mitigation is the term used to describe methods used to lower levels of radon in homes and other buildings. Chapter 6 Mandated Disclosures Asbestos used to insulate pipes, in chimneys, in roofs, flooring materials and siding. Problems arise in its removal the dust can be extremely hazardous. There is no duty for the seller to remediate the presence of asbestos, simply to disclose it. To remove asbestos, the area must be sealed off, and then the asbestos removed. The building does not have to be tented. It is better to contain or encapsulate asbestos. An asbestos abatement plan outlines the method to handle the control of asbestos found in a property. UFFI Urea Formaldehyde Foam Insulation pumped into walls as a foam, it hardens and insulates. Moisture softens the hardened material and causes the release of hazardous gas. Lead in paint and pipes and soil use the lead paint disclosure for all properties built before The seller is responsible for providing the lead paint disclosure. The disclosure allows buyers to waive their right to a lead inspection. Older homes may have lead plumbing. Lead is hazardous when eaten or when inhaled in dust particles. There is no duty to remediate lead. Landfills or waste disposal sites improperly constructed can lead to groundwater contamination. Know locations, and disclose. Recommend water testing. 29

30 Underground storage fuel tanks old rusty or leaking containers can cause groundwater contamination. Sometimes found on both commercial and residential properties, these are commonly called UST s. Recommend water testing. Farming herbicides and pesticides another source of groundwater contamination. Recommend water testing. EMF s electromagnetic fields high-tension power lines are a controversial topic. Know their location, and disclose. The Comprehensive Environmental Response Compensation and Liability Act - CERCLA was passed in It established the Superfund to clean up hazardous waste and respond to spills. The law sets guidelines for liability strict, joint and several, and retroactive. This means an owner is personally responsible for the whole cleanup cost, and liability also extends to past owners. In a cash transaction without inspections the buyer, the seller, the broker, and all who contributed to the problem could be held liable for cleanup. As an agent it is always a good idea to recommend inspections. Chapter 6 Mandated Disclosures 30

31 Chapter 7: Contracts Sales Exam 10 Broker Exam 10 In real estate, the contract is a written promise to pay, by the buyer, and a written promise to deliver a deed, by the seller. A properly prepared contract commits both parties to its terms. To be valid and enforceable, the contract must have the following: (COLIC) 1. Competent parties 2. Offer and acceptance (mutual agreement, or meeting of the minds) 3. Legal Purpose 4. In writing - (Statute of Frauds) 5. Consideration (Not earnest money) Without #4 above the contract would be valid, but not enforceable. Statute of Frauds All contracts that relate to the transfer of any interest in real estate must be in writing to be enforceable. A verbal agreement is voluntary and will not be enforced by the courts. We always avoid verbal agreements in real estate. (In the case of two agreements, one written and one verbal, the written agreement will always take precedence.) A lease for 1 year or less does not have to be in writing. In addition to valid and enforceable, contracts can also be: Void/invalid - no binding effect on the parties who made it. (with a person who is documented as insane) Chapter 7 Contracts Voidable - one party has the right to withdraw (a minor, someone who signed under duress,or under the influence of alcohol or drugs, etc.) Unenforceable - will not be enforced by the courts (oral, violates the Statute of Frauds) Contracts can also be express or implied. An express contract is written or stated. An implied contract is by actions or evidence. (Note: stated=oral=verbal) A clause in a contract that allows each party to hold the other to strict performance on the date specified is called Time is of the essence. This clause is not a requirement of a valid contract. It is a choice. A unilateral contract binds only one party. An If then contract is unilateral. An option is a unilateral contract. An option contract is the right to purchase property within a definite time period at a definite price. There is no obligation to the purchaser to buy, but the seller is obligated to sell. Only one party makes a promise - the seller. Only one party can be sued - the seller. The option fee goes directly to the seller. To extend an option, the buyer would need to pay an added fee. When an option is exercised the unilateral contract becomes bilateral. A bilateral contract is an exchange of promises, which binds both parties. A sales contract is a bilateral contract. Both parties make promises and both can be sued. 31

32 If modification to an existing agreement is made and signed this is called an amendment. Contract for Deed (Installment Contract or Land Contract or Real Estate Contract) Seller financing that does not transfer legal title immediately. This title retention protects the seller. If the buyer defaults, the seller can regain possession. (Eviction is cheaper and easier than foreclosure). All money up to that point is considered rent. Contract for Deed benefits the seller. Parties are Vendor & Vendee and both must sign. Novation is the substitution of a new contract for an existing one. This is more common in commercial than residential real estate. Assignment occurs when there is substitution of a new party in an existing contract. This may be used to shield the identity of the buyer. Offers and Counteroffers: An offer is a properly completed form with a price less than, equal to, or more than the seller s asking price and signed by the buyer. The purpose is to open negotiations between the buyer and the seller. The offer may be called a purchase agreement. An offer can be withdrawn at any time prior to acceptance. All written offers must be presented to the seller. An offer can be accepted, rejected, or countered. Chapter 7 Contracts A counteroffer is actually a rejection of the offer, and the presentation of a new offer. The purpose of a counteroffer is to continue negotiations and work towards agreement. A counteroffer usually accepts some of the terms of the original offer and changes others. If a party receiving an offer changes even one small item in the offer before signing, this is a counteroffer. An offer can be communicated by phone, fax, , letter, or hand delivery, but the only offer that is binding is one in writing and signed by the offeror. An offer becomes a contract or binding when it is signed and the acceptance is communicated to the offering party. This communication can be called notification. At this time the commission is considered to be earned. Earnest Money Earnest money is not necessary in a sales contract; it is not the consideration. The amount of earnest money is determined by agreement of the parties. Completion, termination, and breach The effective date of a contract is the date on which the last party signs. When all the terms and conditions of the contract have been met, and carried out, it is a fully executed contract. It is considered performed or discharged. A contract that is signed but not yet carried out is called an executory contract. Contract for Deed is an executory contract. A contract will be terminated for any of several reasons including bankruptcy or foreclosure, new laws making it illegal, or destruction of the property. If one of the parties to a contract dies, the contract will be binding on the heirs. 32

33 A condition in a contract, which has not yet been met, is a contingency. Common contingencies include financing, the sale of another property and inspections. A seller can limit the length of time for a buyer s contingency to be met with an escape clause. If a contingency cannot be met, if one party cancels the agreement and the other accepts the cancellation, or if the parties agree to cancellation (mutual rescission), the contract is terminated. If the parties agree to cancel or a contingency cannot be met, the cancellation or mutual rescission should be done by written agreement. Default is non-performance of a duty under a contract. When one of the parties to the contract is in default, the agreement has been breached. In this case the injured party has several options. Seller options if the buyer defaults: hold the other party to his duties through a suit for specific performance sue for money damages accept liquidated damages. (The seller chooses to keep the earnest money deposit) decide on mutual rescission Buyer options if the seller defaults: hold the other party to his duties through a suit for specific performance sue for money damages decide on mutual rescission and recover the earnest money If the contract is not a contract of sale, partial performance may be an acceptable option for example in a long term lease, either the lessee or lessor may be willing to accept partial performance upon default by the other party. Chapter 7 Contracts In addition to our sales contracts the following agreements must follow real estate contract guidelines: Listing Agreements Management Agreements Buyer Representation agreements Lease and Lease Purchase agreements Options Right of First Refusal Cancellation and Rescission Agreements Lease agreements for one year or less are the exception to the Statute of Frauds, so we cannot require them to be in writing. However we recommend that they be in writing. Requirements of a Valid Lease: Competent parties Let and take agreement Adequate consideration Legal Purpose Recommended but not required: Description of the property (a legal description is not required, a street address is sufficient.) Execution - lessor and lessee must sign Term Delivery 33

34 Some leases will contain a Right of First Refusal. The tenant has the right to match or better any offer before the property will be sold to someone else. A lease with an option to purchase can also be negotiated. Called a lease-purchase agreement it gives the tenant occupancy now and the right to purchase at a future date. The price is set when the agreement is negotiated. It is advantageous to the tenant-buyer. NOTE:Texas specifically prohibits licensees from writing a lease with an option to buy. If your client wants this type of agreement you MUST send the client to an attorney. Chapter 7 Contracts 34

35 Chapter 8: Transfer of Property Sales Exam 4 Broker Exam 6 CLOSING/SETTLEMENT Chain of title - list of all owners of the property or a succession of conveyances whereby the present owner obtained title Abstract of title - complete history of all recorded events affecting title to the property. Title Report - a preliminary report the current condition of the title the basis for the title policy At closing where financing is involved, two processes are closing. 1. The first is the closing of the loan between the buyer and the lender. This will provide the funds for the second, which is the closing on the property. 2. The closing on the property is the execution of the sales contract. Legal requirements -RESPA - Real Estate Settlement Procedure Act RESPA Regulates closings on 1-4 family residential property with federally related financing. (Apartment complexes would not be covered.) RESPA was administered by HUD, but is now under the Consumer Financial Protection Bureau. RESPA: Allows any party to the transaction to choose the title company, and any party can pay for the policy. Prohibits kickbacks Places restrictions on requirements for tax and insurance escrow accounts no more than 2 months in advance Requires lenders to supply the borrower with a good faith estimate of closing costs within 3 business days of loan application Requires use of the HUD Uniform Settlement Statement form. Chapter 8 Transfer of Property The HUD-1 or HUD Uniform Settlement Statement is presented to divide charges and expenses between the buyer and seller. This is often called the closing statement and includes the prorations. We usually prorate through closing day, which means the seller pays for closing day. If we prorate to closing day, then closing day is negotiable. We debit the seller and credit the buyer for: unpaid taxes, unearned rent and tenant security deposits. We debit the seller with no entry for the buyer for accrued interest and existing loan payoff, and fees necessary to furnish marketable title. We debit the buyer and credit the seller for homeowner association fees, prepaid taxes and fuel in the tank. We debit the buyer and no entry to the seller for prepaid interest and charges associated with the loan, like points. 35

36 On the HUD-1 the buyer is credited for the loan amount and the earnest money deposit. The seller gets credit for the sale price. A loan assumption will be shown as a debit to the seller and a credit to the buyer. The escrow agent is responsible for closing the transaction as set forth in the sales contract, or preventing closing unless both the buyer and seller agree to any changes in the contract terms. The seller s deed and the buyer s money are deposited with the escrow agent. The agent records the deed once title conditions and any other requirements of the agreement are met, the title passes to the buyer, the seller receives his funds and the sale is completed. TRANSFERRING TITLE A change of ownership of real property is called alienation. Voluntary alienation occurs when an owner transfers title to another. Voluntary alienation usually involves a written document, such as a deed, or a will, or a power-of attorney. Involuntary alienation usually happens in court as in foreclosure, bankruptcy, condemnation, escheat, adverse possession, or inheritance without a will. Involuntary alienation can also occur from natural causes including accretion, avulsion, erosion, and reliction. Chapter 8 Transfer of Property A conveyance is any instrument or document that transfers an interest in real property. Ownership is most often transferred by deed, patent or will. REQUIREMENTS OF A VALID DEED Competent parties (GRANTOR and GRANTEE)Consideration - legal consideration can be good or valuable. Love and affection is an example of good consideration. Money is valuable consideration. Words of conveyance the granting clause - a written statement that indicates transfer of some interest in real property from one person to another. The Habendum Clause or to have and to hold clause usually follows the words of conveyance. Execution - the grantor must sign the deed. Delivery - title does not pass until the deed is delivered and accepted. Delivery can be into escrow. Delivery must be made during the life of the grantor. Legal description of the property Deeds need not be dated, signed by the grantee, or recorded. Types of deeds include: 36 General Warranty Deed - guarantees and protects against defects. It offers the buyer the best protection. Warrants title to the sovereignty of the soil. It is the most common deed and the one mentioned in the sales contract. A buyer who wishes to ensure that the seller is conveying good title should request a General Warranty Deed. Covenants in the General Warranty Deed include: * the covenant of seizen - the owner has the right to sell the property * the covenant against encumbrances - all known limits to the title are stated * the covenant of quiet enjoyment - uninterrupted use of the property is granted

37 Special Warranty Deed Guarantees title only against defects arising under the grantor s period of ownership. Defects existing before that time are not covered. Bargain and Sale Deed This is the deed with only one covenant. (Trustees, executors, sheriffs, officers of the court use this.) This deed does not provide any warrantees about the condition of the title. It only promises the grantor has the right to convey the title. Quitclaim Deed - Deed that gives NO warrantees or guarantees. It offers the least protection. It is used to clear a cloud on the title or to cure a defect in title. If there is a cloud on the title and no one available to sign a Quitclaim Deed to cure that cloud, a court action called a Quiet Title Suit or an Action to Quiet Title will correct the problem. When the government transfers title to an individual it uses a patent. When a developer turns over the streets in a subdivision to the local government this is called dedication. This is accomplished by recording the plat plan. WILLS One who makes a will is the testator. One who has a valid will is testate. The person named in the will to settle the estate is called the executor. Inheritance by will gives Title by Devise. One without a will is intestate. An administrator is appointed by the court to settle the estate of an intestate. The property will be distributed according to the Laws of Descent and heirs will have Title by Descent. An attorney-in-fact is someone who has power of attorney to act for another. An attorney in fact may not act for another after that person s death. Probate the judicial process to prove or confirm a will, or to settle the estate of one who dies intestate. Title to real property transfers at probate. Probate must begin within 4 years of death. Chapter 8 Transfer of Property RECORDING TITLE Recording is not a requirement of a valid deed. Recording gives constructive notice of ownership. This is notice to the world and protects against fraudulent sale. Taking possession of property also gives constructive notice of ownership. Recording is always done in the county where the property is located. A document must be acknowledged before it can be recorded. It must also be in English. An acknowledgment is a declaration to a notary authorized to take oaths that the signature is a free and voluntary act. An acknowledgment verifies the signature. Time and date of recording establish priority. Recording is done at the county clerk s office on Monday Friday from 8am to 4:30pm. 37

38 TITLE INSURANCE A title insurance policy agrees to compensate or reimburse the insured against any losses sustained as a result of defects in the title, other than those exceptions listed in the policy. Protection is for forged deeds, illegal acts of trustees, guardians, or attorneys, false claims of ownership and human error in copying and recording. The loss or destruction of records is also covered. The title insurance company will defend the title at its own expense, as well as pay any claims against the property, if the title proves to be defective. Title insurance will not pay for defects known to the buyer prior to the policy being issued. Title insurance must compensate owners for defects missed by the title company in its search process. Premiums are paid one time. A new policy must be issued each time the property changes ownership, or is refinanced. Title policies may contain a subrogation clause. This clause allows the title company to assume the rights of a buyer with respect to any claim against a seller, if the title company has made payments to that buyer to satisfy that claim. Unlike other types of insurance, protection is for the past not the future. Essentials of title insurance: Chapter 8 Transfer of Property Examination of public records to compile an abstract of title A title company attorney views the abstract and renders an opinion of title. A title report (snapshot of title at the present time) is prepared. This obligates the title insurance company to issue a policy of title when any curative requirements have been met. Payment of premium will result in the policy being issued. The owner s policy will protect the buyer up to the purchase price. The lender s policy, or mortgagee s policy will protect the lender up to the outstanding loan balance. (The lender s coverage declines as the debt is satisfied.) The policy is received at closing. The State Board of Insurance sets premiums in many states, including Texas. IRS TAX CODE 38 A major advantage to the owners of investment property is the ability to depreciate their investment on their income tax return. On income producing property land can never be depreciated. Only improvements can be depreciated. The straight line method is used. The economic life is the period during which improvements contribute to value, or are being depreciated. When the improvements are fully depreciated, that is the end of the economic life. The IRS permits 1031 tax-deferred exchanges. Real estate investors can defer taxation of capital gains by making a property exchange. Additional capital or property included in a transaction to even out the exchange is called boot, and the boot is taxed at the time of the exchange. The investor must hold the property for one year. An individual can have a tax-free capital gain on the sale of real property up to $250, if the property was his principal residence for at least 2 of the last 5 years. This also applies to an individual who chooses Married, filing separately for his income taxes. The limit is $500, for a couple. A taxpayer can do this an unlimited number of times.

39 A homeowner can deduct his property taxes and the interest on his mortgage. He can also deduct discounts points and prepayment penalties on loans. The owner of a single-family home can depreciate the property if it is used as rental property. First time homebuyers may withdraw up to $10,000 from individual retirement accounts (IRA s) without penalty, (but not without tax) for down payment on a home. Foreign Investment and Real Property Tax Act this law was passed to ensure that nonresident aliens and foreign corporations pay U.S. income tax on gains from the sale of U.S. real property. The title company will withhold 10% of the sellers sale price over $300,000. Legal vs. Equitable Title Upon creation of a binding offer to purchase, the seller holds legal title for the buyer who has equitable title. Legal title transfers at closing. So a buyer with a signed sales contract, who has not yet gone to closing, has equitable title. FORECLOSURE AND ALTERNATIVES Foreclosure is the legal process instituted by a Trustee, lien holder or creditor, after a debtor s default on his payments. In other words, the lender begins the foreclosure. Any excess money left over from the forced sale is given to the debtor. In the event of a shortage, the lender may sue the borrower for a Deficiency Judgment. Foreclosure under the Deed of Trust ends when the trustee delivers Trustee s Deed to the buyer. If the Trustee fails to deliver the deed the buyer may use a Vendee s Lien to protect his interest. Chapter 8 Transfer of Property At foreclosure all junior liens against the property are wiped out. An alternative to foreclosure is deed in lieu of foreclosure. This is sometimes called friendly foreclosure or voluntary deed. The lender accepts a deed from the borrower. The lender must also accept any junior liens on the property. This would be the fastest way for the lender to get title to the property. Redemption At any time up to the moment of the foreclosure the borrower has the right to step in and pay what he owes and reclaim property forfeited due to mortgage default. This is his equity of redemption, or equitable redemption. A lender would almost always prefer equity of redemption to deed in lieu of foreclosure. There are legal guidelines for notices to be provided in the event of a foreclosure. The lender must send the notice of foreclosure by certified mail 21 days before the foreclosure sale. There is no requirement that the borrower receive the notice, only that the lender sends it. The notice of foreclosure must be posted at the door of the county courthouse and filed in the county clerk s office. With a traditional mortgage (not a Deed of Trust) the foreclosure will be recorded as a Lis Pendens. Lis Pendens gives constructive notice that a lawsuit affecting a particular property has been filed and is pending. Short Sale A sale of secured real property that produces less money than is owed the lender the lender releases its lien so property can be sold to the new purchaser. The lender often requires that brokers adjust their commissions on these transactions. The lender saves the delay and expense of foreclosure. A short sale will result in a negative note on the credit report of the defaulting borrower and a loss of as much as 200 points in credit score, but is better than a foreclosure. 39

40 Chapter 9: Practices of Real Estate Sales Exam 12 Broker Exam 11 TRUST ACCOUNTS If the broker accepts the earnest money or deposit and acts as an escrow agent, the money must be deposited in a special trust account set up for this purpose. All client s funds can be kept in the same account as long as written records are maintained. No commingling or conversion is allowed. In commingling, a broker mixes client money with his funds, either business or personal. In conversion, a broker uses a client s money or commingled funds for his own purposes. Title companies and attorneys will also have trust accounts for holding client funds. FAIR HOUSING LAWS The Civil Rights Act Of 1866 prohibits discrimination based on color. There are no exceptions or exemptions for this law. The Federal Fair Housing Act, known as the Title VIII of the Civil Rights Act of 1968, forbids discrimination on the basis of race, color, national origin, and religion. A 1974 amendment added sex as a protected category. Sexual preference is not a protected category. Chapter 9 Practices of Real Estate This act was amended in 1988 to include family composition and the handicapped, and that amendment was enforceable in (Family composition may be referred to as familial status.) Familial status means a minor living with a parent or guardian. Handicapped means mental or physical impairment alcoholics or recovering drug users and AIDS victims are included in the list. A handicapped tenant may modify an apartment to meet his needs, at his own expense, but, must be willing to restore the apartment before moving out, again at his own expense, if the landlord requires it. Violations include charging higher security deposits, segregating any one category from any other, or refusing to permit a tenant to modify rental space. Age is not covered. This is to allow for senior housing. In senior housing communities at least one person over the age of 55 must be living in 80% of the units. Senior housing communities may refuse to sell or rent to those under 55 years of age, or to families with children. The law forbids discrimination and discriminatory practices in connection with the LEASING or SELLING of residential real estate not only by owners, but also by lenders, investors, builders, brokers, and real estate organizations and services. A landlord can refuse to lease to a mentally handicapped tenant who is a danger to himself and others. There is no federal standard for determining mental handicap. Note: There are some exceptions to the rules, but Real Estate Licensees are NEVER exempt. Exceptions include: 1. FSBO of a single-family home when the owner owns no more than three homes at a time, and no discriminatory advertising is used. 40

41 2. Rental of an owner occupied 1-4 family home when the services of a broker are not used and no discriminatory advertising is used. 3. Churches owning rental property may restrict occupancy to members of the congregation, as long as membership in the congregation is open to all. 4. Private clubs owning lodgings may restrict occupancy to members as long as the lodgings are not operated commercially. The law prohibits blockbusting - causing panic selling by homeowners, also known as panic peddling. The law prohibits steering - directing buyers into or away from certain areas because of their race, color, etc. This is also known as channeling. Discrimination in advertising is also a violation of this law. (Example a tiny house could be advertised as cozy for two but not as perfect for a couple. ) In advertising terms used to describe the property would be acceptable: two bedroom, master down, etc. Terms used to describe or imply the type of person/people who might live on or in a property would be a violation: no Irish,, no wheelchairs, etc. The law requires that every broker display the Equal Housing Opportunity Poster in his office. Failure to display the poster may be considered prima facie evidence of discrimination. The Equal Housing symbol is a house with an equal sign inside. Judges may award both economic and non-economic damages, issue injunctions, assess attorney s fees and assess civil penalties. There are no criminal penalties. Chapter 9 Practices of Real Estate The maximum civil penalty for a single violation of the law is $110,000. Victims have up to 1 year to file a complaint. If a complaint is filed against a licensee, the licensee s best defense is written records of his interaction with clients and prospects. This law is administered by HUD. When a complaint is made to HUD, HUD will try mediation and conciliation to resolve the problem before pursuing the matter in court. ADA The Americans with Disabilities Act was passed in 1990 to prohibit discrimination against individuals with disabilities. The main goal of the law was accessibility through the removal of barriers. Requirements include, but are not limited to: the installation of ramps, levered door handles, wheel chair access, lowering of telephones, use of Braille markers on elevator buttons, and flashing lights in addition to sirens for the hearing impaired. In addition, the employment of qualified job applicants, regardless of disability is required. New construction, including remodeling, must meet higher standards of accessibility than existing structures. Single-family homes are exempt from ADA. Churches and historical buildings have some exemptions. Churches built before 1990 are exempt but renovation of older churches or newly constructed churches must comply with the law. 41

42 Historical buildings preserved to demonstrate the past are exempt. Historical buildings that serve a public purpose, like a couthouse, must be modified for ADA. In commercial properties, both the landlord and the tenants can be held liable for the failure to provide access. Therefore, if a party is successful in a lawsuit, landlords and all tenants can be fined. This makes it more difficult for the owners of non-compliant buildings to find tenants. Violators of this law may face injunctions and civil penalties of up to $50,000 for a first violation and up to $100,000 for subsequent violations. Individuals with a history of mental impairment, who have been declared recovered, continue to be protected under ADA. Brokerage and Broker/Salesperson agreements Brokerage is the aspect of the real estate business that pertains to overseeing the needs of the parties and completing the transaction. Brokerage is not agency. A licensee sponsored by a broker will be a general agent for that broker. Although not required by law, this should be established by written agreement. A sponsorship agreement should cover matters such as: compensation, training, hours, company identification, fees and dues, expenses, fringe benefits, territory, withholding, termination of sponsorship and general office policies and procedures. Chapter 9 Practices of Real Estate Most often, a licensee is an independent contractor. Independent contractor status must be established by written agreement between the parties. An associate must have a real estate license, and 90% or more of his income must come from production, rather than hours worked. A broker cannot require his sales associates to work strictly scheduled hours without jeopardizing this independent contractor status with the IRS. Although a broker may not require set hours, he may require a fulltime commitment. An independent contractor must agree to pay all of his own payroll taxes. None will be withheld from any payment he receives. Income will be reported to the IRS on form 1099 MISC. Even though a licensee is an independent contractor, the broker will be liable for the acts of licensees he sponsors. Training and supervision is in the best interests of both the broker and salesperson. GENERAL ETHICS A licensee should practice within his area of competence. For example: a new licensee with no specific background or education in finance or investing would not be considered competent to represent a client in purchasing investment property. Licensees are specifically prohibited from practicing law without a law license. Examples of this behavior would include giving legal interpretations of documents involved in a transaction, preparing legal documents, such as wills, contracts, deeds, or deeds of trust, advising a client on how to take title, and discouraging clients from seeking the advice of an attorney in negotiations which involve special terms and conditions. When advising a client to see an attorney, it should be done before a client signs anything he/she does not understand. A licensee can be held financially responsible for any loss a client suffers if it is determined that the loss was a result of the licensee s unlawful practice of law. 42

43 Chapter 10: Specialty Areas Sales Exam 4 Broker Exam 5 Property managers must be knowledgeable regarding leases and the landlord-tenant relationship. (Review pages 10 and 34 for more details about leases.) Terms to know: 1. Percentage rent - Lease in which all or part of the rent amount is based on the receipts of the tenant s business. (Typical shopping center lease) 2. Contract rent - The rental income as stipulated by the parties in a contract. 3. Economic rent - The rent the property could currently command on the open market. 4. Subletting - The transfer of rights under a lease, with liability remaining with the lessee. 5. Sale and Leaseback - One party sells the property and then leases it back, usually for a longterm lease. It frees up capital to the lessee. 6. Expiration - When a lease agreement comes to the end of the lease period and terminates. 7. Termination - When the time period on a lease ends or is cut short. 8. Mutual rescission - When a lease is terminated by agreement of the parties. 9. Constructive eviction occurs when the landlord allows the property condition to deteriorate to the point that the building is uninhabitable and the tenants are forced to leave. Chapter 10 Specialty Areas 10. Gross Lease - The landlord pays all the expenses of the property. The tenant pays only rent. 11. Net Lease - The tenant pays rent plus some of the expenses of the property. 12. Time Share - part ownership of a property coupled with the right to exclusive use of it for a specified number of days per year, without the responsibility of full ownership. This can be called interval ownership. It is tenancy in common ownership. This is most often used for resort or vacation properties. 13. Cooperative or Co-op land and buildings are owned by a corporation. Tenants own shares in the corporation, and have a proprietary lease on their unit. The corporation pays for the mortgage, property taxes and maintenance of the building. The residents have a personal property interest in their units & the common areas. 14. Condominiums laws referred to as horizontal property acts are generally the base for condos. Each unit is a separate legal ownership and each resident arranges his own financing. Property taxes are assessed on each unit separately. Taxes are based on the assessed value of the unit, which is based on its market value. It is not necessary for the taxing authority to assess and tax the common areas separately. Monthly condominium fees have nothing to do with taxes for the common areas. Condominium managers work for resident owners & their main responsibility is to preserve property values. Condominium residents are required to observe by-laws. 43

44 Property manager and owner relationships A property manager is a general agent with a broad scope of responsibilities and liabilities. A management agreement is used to create this relationship and define the role and responsibilities of the agent. Once a licensee agrees to be a property manager the first step is to sign the management agreement. He needs E&O (Errors and Omissions) Insurance. A property manager s job is to preserve the value of an investment property while generating income as an agent for the owners. His key responsibility is to generate income for the owner. He must make periodic reports to the owner. Property & Casualty insurance will be necessary to compensate any individuals who may be injured on the property. Contractors or employees who handle cash or the private property of tenants should be bonded (under surety bond). A special concern for the manager of industrial property would be the environment and environmental hazards. Subdivisions Developer purchases undeveloped property and divides it into lots for development. As soon as the property is divided into lots the developer will record the plat. He will then be able to sell those lots to builders. Chapter 10 Specialty Areas Builder constructs buildings on land and sells them. Development of the land must comply with local zoning, any municipal development guidelines and any environmental regulations. Builders are often required to follow deed restrictions placed by the developer. All development must provide for water, sewer, and utility easements. If a builder builds without a permit, he may be required to take down the building. A certificate of occupancy is most often required on new construction. Party wall owners owe each other a duty of joint support. No action by one owner can harm the position of the other. Flipping one party buys a property with the intention to QUICKLY transfer (flip) it to the ultimate buyer. UETA - the Uniform Electronic Transactions Act states that E signatures, also called electronic signatures are the legal equivalent of a handwritten signature. 44

45 BROKERS ONLY (* Items for both salesperson and broker exam) 1. Income property Investment in commercial property provides both personal and tax advantages. Personal advantages include a hedge against inflation, a higher than average rate of return and the ability to leverage. (use borrowed money to make money). Tax advantages include favorable capital gains tax rates, deferred taxation on 1031 exchanges only boot is taxed on an exchange - depreciation, deductions, and tax credits for renovation of historic properties. If an installment sale is used, only the profit on payments received is taxed, and interest is taxed as ordinary income. ****Tax advantages such as 1031 exchanges are considered the main incentive to investment in real estate. ****Disadvantages of real estate investment include a lack of liquidity, risk, expense, and the need for management. Lack of liquidity is considered the main disadvantage of real estate investment. Terms to know: Cash flow spendable income from rental property Pyramiding using currently owned property to purchase additional properties either by sale or refinancing. 2. Agricultural Property Farming properties fall into a variety of categories. Selling farm and ranch properties requires a general knowledge of all of the following: Chapter 10 Specialty Areas a. Irrigated properties pastures, orchards, vineyards and raw crops b. Ranch livestock production and ranges for grazing c. Range property with grasslands, forests or shrubs, natural or cultivated for the purpose of feeding livestock. d. Dairy farms value will be a combination of improvements, equipment and the herd e. Permanent plantings orchard and vineyard properties. These require several years to start up. Value of existing properties is largely dependent on past management. f. Timberland standing timber is real property, while cut timber is personal property. g. ***Emblements crops cultivated annually personal property. Emblements belong to the farmer who cultivated them. Factors in valuing agricultural property include climate, management, condition, improvements and productivity. 3. Business opportunities: If inventory and equipment are included in the sale of a business, they are considered personal property and transferred with a bill of sale. Whenever the sale of a business includes a substantial portion of inventory, the UCC, Uniform Commercial Code, applies. Compliance protects the buyer s title to equipment and inventory. 45

46 Areas of concern in business sales: a. Comprehensive written contracts should be used. b. Representations and warranties made by the seller should be noted. c. Franchises, licenses, leases, and permits should be secured. d. A covenant not to compete may be included. e. Authenticity and transferability of accounts receivable should be established. f. Existing leases, assignment or novation, can be a contingency. g. Ownership of fixtures to be included in the sale should be verified. h. If real property improvements are included in the sale, compliance with zoning, building codes, and environment laws, and marketable title should be verified. Chapter 10 Specialty Areas 46

47 Chapter 11: Math Sales Exam 7 Broker Exam 5 A total of 6 topics are considered for math questions on the exam. Below is a list of the topics, followed by some basic math information and sample problems. 1. General Math 2. Property Tax Calculation 3. Lending 4. Calculations for Transactions 5. Calculations for Valuations 6. Mortgage Calculation PERCENT Many real estate problems involve a rate or percent. A percent is a number expressed as part of 100 total parts. Therefore 6% means 6 out of 100 parts. Whenever we have a percent or rate we have an all purpose formula based on the following sentence: A part is a % of the total. This can be written as: Part = % x Total If Part = % x Total, then Part Total = %, and Part % = Total. Chapter 11 Math These three formulae may be written using a T. Part % Total To use the T, cover up whatever it is you are trying to find, and the T tells you how to solve for it. For example, if you are looking for the %, Part over Total, or Part divided by Total will give you the %. If you are looking for the Part, % x Total = Part. If you are looking for the Total, Part over %, or Part divided by % will give you the Total. AREA C Area of a square or rectangle = L x W C The result will be in square units square inches, square feet, square yards, etc. C The area of a triangle = base x height 2. C To change inches to feet, divide by 12. C To change feet to yards, divide by 3. 47

48 C To change square feet to square yards, divide by 9. C Volume involves 3 dimensions and is expressed in cubes. C Volume of a cube = L x W x H C 1 acre = 43,560 square feet C Taxable value divided by 1000 x mills = tax C Loan amount divided by 1000 x loan factor = monthly principle and interest amount Problems: 1. A seller has received $225, for the sale of his home. This represents a 20% profit. What did he pay for the house when he purchased it? 1. $180, $187, $175, None of the above Chapter 11 Math 2. The Smiths would like to purchase new carpet for their family room. The room is 18 x 20. Carpet costs $17.99 per square yard and the padding is an additional $2.00 per sq. yard. What will the new carpet and padding cost? 1. $ $ $ None of the above 3. Three years after buying a home for $250000, the Smith s are selling it for $280,000. They live in a state with a transfer tax of 5 mills. How will this be shown on the closing statement? 1. $1,400. Debit the seller and credit the buyer. 2. $150. Debit the seller and no entry to the buyer. 3. $1,400. Debit the seller and no entry to the buyer. 4. None of the above 4. Mark purchased a home for $150,000. He had an 80% LTV. He has paid off $42,000 of his purchase mortgage. He is selling the house for $179,000. How much equity does he have? 1. $71, $59, $101, None of the above 48

49 5. A developer has purchased 30 acres. He will set aside 15% for streets and 5% for a park. He will divide the rest into half acre lots selling for $20,000 each. What will his total sales price be? 1. $600, $480, $960, None of the above 6. The owner of an office building receives $10,000 in monthly rent. His expenses for the property are $57,500 per year. If he is earning a 10% rate of return, what is the value of the building? 1. $425, $195, $625, None of the above 7. An office building has a useful life of 30 years. It is currently 14 years old. The original cost of the building was $720,000. What is the depreciated value of the property? 1. $384, $336, $360, None of the above 8. An average residential property in a given neighborhood costs $179,900 and is currently leased for $1250 per month. If another home in the neighborhood is leased for $1500 a month, using the GRM, what will be the value of that property? Chapter 11 Math 1. $201, $251, $215, None of the above 9. Using the loan factor chart at the end of this chapter determine which of the following loans has a smaller monthly payment: 1. $155,000 at 6.25% for 15 years. 2. $180,000 at 7.5% for 30 years. 3. The payments will be equal. 4. None of the above. 10. Calculate the tax proration for a closing on Sept. 9th where the annual taxes of $6357 have not been paid. The buyer pays for closing day. Use a calendar year (365 days) and indicate how the proration will be shown on the closing statement. 1. $ credit to the seller and debit to the buyer 2. $ debit to the seller and credit to the buyer 3. $ debit to the seller and credit to the buyer 4. none of the above 49

50 11. What monthly income will your buyers need to qualify for a $200,000 loan at 6% for 30 years if lenders are qualifying at 28%. Use the loan factor chart to find the factor. Monthly taxes and insurance will be $ $7, $6, $4, None of the above Math Answers: 1. When someone sells for a profit, the sale price represents 100% of the cost, plus the profit percent So $225,000 = 120% of the original cost. SP: $225,000 = Original cost = $187, % Original cost 2. area = length x width area = 18 x20 = 360 sq. ft. 360 sq. ft. / 9 = 40 sq. yds. $17.99 carpet + $2.00 padding = $19.99 per sq. yd x 40 sq.yds = $ Chapter 11 Math 3. Value / 1,000 x mills = tax $ / 1,000 = 280 x 5 mills = $1,400 tax This expense is paid by the seller to the state, so The entry is a debit to the seller, but no entry to the buyer. 4. Loan = 80% of $150,000 $120,000 debt $179,000 sale price - 42,000 paid - 78,000 still owed $ 78,000 still owed $101,000 equity 5. 15% of the land for streets + 5% for a park means 20% unusable. 100% - 20% = 80% usable acres 80% x 30 = 24 usable acres 1/2 acre lots = 2 lots for each acre 2 x 24 = 48 lots $20,000 per lot x 48 lots = $960,000 50

51 6. Net Annual Income rate of market return value $10,000 rent x 12 months = $120,000 annual rent - 457,500 expenses $62,500 net annual income $62,500 10% 625, $720,000 / 30 years = $24,000 depreciation per year. 14 years old = 16 years left 16 x $24,000 = $384,000 depreciated value 8. Price / rent = GRM $179,900 / 1250 = GRM x rent = Price x $1,500 = $215, Loan Amount divided by 1000 x the factor = Principal and Interest Payment $155,000/1000 = 155 x $8.57 = $ $180,000/1000 = 180 x $7.00 = $ Answer choice is 2. Chapter 11 Math 10. $6357/365 = $ tax per day x 251 days ( January 1 - Sept. 8) = $ Since the taxes are unpaid, the seller owes this amount to the buyer who will receive the full year bill at the end of the year, therefore, debit the seller and credit the buyer. 11. PITI = 28% of monthly income A factor is P&I per month for each $1,000 borrowed Loan / 1,000 x factor = P&I/month $200,000 / 1,000 = 200 x $6 = $1,200 P&I PITI 28% monthly income T&I $2,100 PITI $2,100 / 28% = $7,500 monthly income to qualify for the loan 51

52 Chapter 11 Math Interest Rate 15 year P&I per $ year P&I per $1000 5% / / / / / / / % / / / / / / / % / / / / / / / % / / / / / / / % / / / / / / /

53 State Test Section Champions School of Real Estate

54 Chapter 1: Commission Duties and Powers Sales Exam 2 Broker Exam 3 TEXAS REAL ESTATE COMMISSION (TREC) TREC was created in 1949 to administer the provisions of the License Act. TREC has the authority to make rules and regulations. TREC can advise with reference to its rules and the laws that govern licensees. TREC consists of 9 commission members, 3 represent the general public and 6 are real estate brokers. All are appointed by the governor and approved by the Senate. They serve for 6-year terms. TREC has the power to subpoena books, records, and witnesses. If a licensee fails to respond to a subpoena, TREC can file suit with the Attorney General to enforce the subpoena. Only TREC has the power to issue or revoke Real Estate Licenses. A hearing for the revocation or suspension is held at TREC in Austin unless a licensee requests the hearing be held in his county. If a licensee, in violation, fails to respond to a summons from TREC, TREC will automatically schedule the hearing in Austin. Chapter 1 Commission Duties and Powers If your license is revoked by TREC, you may appeal the decision to the district court. The Broker Lawyer Committee writes the promulgated contract forms. This committee has 13 members. 6 are brokers appointed by TREC. 6 are lawyers appointed by the President of the State Bar Association. 1 is a public member appointed by the governor. PENALTIES People engaged in the real estate brokerage business without having secured a license from TREC are guilty of a Class A Misdemeanor and subject to a fine of not more than $4, or imprisonment in the county jail for not more than one year, or both. Trials for this would be held in the county court. In addition, persons guilty of a violation of the License Act and whoever profited there from are liable for additional civil penalties of up to three times the amount of money received. TREC may assess an administrative penalty of up to $5,000 per day for violation of the license act by any person, either licensed or unlicensed. If TREC assesses a penalty, a licensee has 30 days to pay the penalty. An unlicensed assistant must be careful to avoid activities requiring a license. Both the assistant and the licensee could be fined. An unlicensed assistant may perform clerical duties and act as a greeter at an open house. 54

55 REAL ESTATE RECOVERY TRUST ACCOUNT It was created by TREC to pay aggrieved persons who suffered a monetary loss due to unscrupulous acts of the licensees. These persons can receive up to three times the amount of money lost. If at any time in the calendar year the account balance is below $1,000,000. the commission is authorized to assess each real estate broker and salesman on renewal of his license during the following calendar year a fee of $10.00, or a pro rata share of the amount necessary to bring the balance to $1,700,000. TREC invests the fees that have been deposited when the recovery trust account is above the statutory minimum, to offset future claims. TREC only invests in Treasury Bills or Notes, or in the same manner as the Employees Retirement System of Texas. If the balance in the account exceeds $3.5 million the excess goes into the state s General Fund. If the Recovery Trust Account balance is not below $1,000,000 TREC simply continues to invest the funds. When an amount is paid out of the Real Estate Recovery Trust Account on behalf of a licensee, the license of the individual can be revoked or suspended. This license may never be recovered until the account has been repaid with interest. ***State law limits the maximum payment, which is $100,000 per licensee & $50,000 per transaction. TREC plays no part in resolving conflicts between licensees. Chapter 1 Commission Duties and Powers 55

56 Chapter 2: Licensing Sales Exam 2 Broker Exam 4 PERSONS EXEMPT FROM REAL ESTATE LICENSING: 1. Texas licensed attorneys can handle a real estate transaction for a client for a fee as long as they do not participate in broker to broker commission splits. Any attorney licensed in a state other than Texas will need to be licensed in Texas (as an attorney) to handle a real estate transaction for a client for a fee in Texas. 2. Court appointed receivers, trustees, guardians, and sheriffs. 3. Administrators and executors of a will. 4. On-site apartment managers. 5. New home salesmen working for one builder or owner. 6. Cemetery lot salesmen. 7. A person selling his own property. 8. An employee leasing or renting property for the owner. 9. Corporate employees selling corporate property. 10. Hotel/motel personnel. 11. An attorney-in-fact. 12. An auctioneer calling a real estate auction. 13. Anyone selling mobile homes. 14. Anyone engaging in or carrying out foreclosure sales. Chapter 2 Licensing PERSONS WHO MUST HAVE A REAL ESTATE LICENSE; 1. Attorneys must have a real estate license to participate in a commission split. 2. Auctioneers involved in any part of a real estate transaction. 3. Apartment locators. 4. Real Estate salespeople. 5. The designated officer of a licensed real estate corporation, or the designated manager of a licensed Real Estate Limited Liability Company. The designated one is a broker. 6. Business entities that receive compensation on behalf of a license holder (example: a salesman who incorporates and wants commissions paid to his/her corporation) must be licensed as a broker 7. A third party (person or entity) who controls the acceptance or collection of rent from a single family residence. 8. Any business entity that engages in real estate brokerage and is required to be registered to do business in Texas with the Secretary of State must be licensed as a broker. 1-4 MUST BE SPONSORED BY A BROKER AND RECEIVE COMMISSIONS ONLY FROM THAT BROKER. 5-8 MUST BE LICENSED AS BROKERS. STEPS IN OBTAINING A REAL ESTATE LICENSE: Meet the educational requirements. 2. Submit an application with or without a sponsoring broker. 3. Submit the required fees. 4. Pass the state exam. Competency is determined solely by passing the state exam. 5. Demonstrate integrity.

57 An application for a license will be denied if an individual is unable to satisfy TREC as to their honesty, integrity and trustworthiness. An application will also be denied if an individual has defaulted on Texas State student loans. LICENSING REQUIREMMENTS: Must be 18 years of age, or older. Resident of Texas at the time of application. Comply with legal residency requirements. (May NOT be an illegal alien.) Retake the exam as many times as necessary for one year from the date of application Submit fingerprints to TREC before or after testing. EDUCATIONAL REQUIREMMENTS: Salesman s License: 180 classroom hours consisting of 60 hours in Principles of Real Estate, 30 hours in Law of Contracts, 30 hours in Promulgated Forms and 30 hours in the Law of Agency. Broker s License: 900-classroom hours, including 30 hours of Real Estate Brokerage, and 4 years of active sales licensee experience during the preceeding 5 year period before the date the application is filed points of experience is also required. A broker who sponsors a salesperson, a designated broker of a business entity, or a license holder who is a delegated supervisor of one or more license holders for six months or more during the current license must attend a six hour broker responsibility course. Renewal: SAE - Salesman s Annual Education - The initial salesperson license will issue for a twoyear period. For the first renewal, the salesperson must complete 90 hours of additional core real estate course credit. For each renewal period thereafter, the salesperson will be subject to Mandatory Continuing Education (MCE) requirements to renew a license. Licensees subject to SAE who do not submit education prior to or in conjuntion with their renewal will have their renewal rejected and cannot renew. Their license will be EXPIRED. Chapter 2 Licensing MCE (Mandatory Continuing Education) is taken after the agent has completed his first renewal and has a total of 270 core hours. MCE must be taken once every 2 years to renew a salesman or broker license and is a 15-hour course including 6 hours of legal/ethics update as mandated by TREC. MCE must be taken within the renewal period. (NOTE: The six hours of broker responsibility training is included in the 15 hour MCE requirement.) When subject to MCE renewal must be made before the expiration date on the license. If renewal is overdue, a Late Renewal Application form must be submitted along with renewal fees and proof of continuing education. The licensee who does not renew by their expiration date is considered: EXPIRED. The maximum period of time for late renewal with monetary penalties is six months. If an on time renewal does not include the required education, the licensee will be required to pay a $200 deferral fee and will have 60 days to complete the education. The license will be active for those 60 days. After 60 days TREC moves this license to inactive status. To reactivate or take the license to active status they must: Pay the $200 late fee Take the required education Pay an additional $250 penalty Testify on the renewal form they did not engage in real estate while they were inactive Submit the required form to return to active status, along with the $20 fee 57

58 Therefore, an ontime renewal with late education completed within 60 days results in a $200 penalty. Ontime renewal with late education completed after the 60 day period results in a $450 ($200+ $250) penalty plus a $20 filing fee. An individual may not hold a Broker s and a Salesman s license at the same time. Texas is a one person, one license state. However, any licensed Broker may act as a salesman and a broker at the same time. INACTIVE STATUS: TREC allows inactive status. TREC will hold a broker or sales license for the licensee. The licensee must still pay renewal fees and meet SAE requirements. Once past SAE requirements, MCE is not required for inactive status. The time spent as inactive does not apply toward the four-year requirement for a broker s certification. The inactive licensee may not engage in the real estate business. The inactive licensee does not need a sponsoring broker during this period. To activate an inactive license, apply through a broker, pay $20 and complete 15 hours of MCE if necessary. Additional Points: Chapter 2 Licensing An applicant who has applied with a broker and passed the test cannot engage in business until the license is received in the broker s office. An applicant applying without a broker cannot engage in business until a broker is selected and receives the applicant s license. If a broker dies, or is declared legally insane or if a broker s license is suspended, his salesperson must change to another broker immediately. When changing to a new broker, a licensee is authorized to engage in the business as soon as his fees and sponsorship forms have been mailed to TREC. This is also true when re-activating an inactive license. If a broker has more than one place of business he must obtain a branch office license for each additional office at a cost of $20.00 per office. It is not necessary to have a licensed broker at each location. There is no time limit for TREC to deny an application. However once TREC decides to disapprove an application they must notify the applicant within 30 days. If an application for licensure is disapproved by TREC, the applicant may make an appeal within 10 days after the receipt of the notice of denial. If no appeal is made within the 10 days, the applicant gives up the right to do so, and the ruling of the Commission stands. If a licensee defaults on Texas State Student Loans, TREC will refuse to renew the license of that individual. A broker using a DBA or assumed name, must file with his county clerk in every county where he/she has an office. If an applicant applies without a broker and passes the test, there is no time limit for choosing a broker. TREC Consumer Information Form 1-1: Notifies the public of the recovery trust account Applies to both real estate licensees and inspectors Must be displayed in the broker s office. 58

59 Chapter 3: Standards of Conduct Sales Exam 7 Broker Exam 9 The performance of any single act defined or described in the Texas Real Estate License Act as requiring a license, without such license, constitutes a violation of the Act. TEXAS REAL ESTATE LICENSE ACT (TRELA) TRELA was passed by legislation to protect the public against unscrupulous brokers and salesmen. The rules and regulations are construed liberally with a view toward their purpose - TREC always favors the consumer - and have the full force and effect of the law. Reasons for SUSPENSION or REVOCATION of a Broker s or Salesman s License Guaranteeing future profits. Salesmen receiving commissions directly from selling, leasing, negotiating, appraising, or auctioning real estate. Failing to specify a definite termination date in a Buyer s Representation Agreement or a Listing contract that is not subject to prior notice. Selling real estate by lottery. Giving legal advice. Reminder: we can prepare a real estate contract addendum but we can never write a contract or draft a lease purchase agreement. Not advising a purchaser in writing to get an attorney s opinion of title on the abstract or to obtain an Owner s Title Policy. This must be done prior to the closing on the property. Placing a sign offering to sell, rent, or lease real estate without first obtaining the written permission of the owner. Acting in the dual capacity of broker and undisclosed principal. A licensee must disclose if he is representing his spouse, parent, or child. Knowingly making a substantial misrepresentation. Puffing is not misrepresentation. Advertising without first identifying the person advertising as an agent or broker. Commingling money - earnest money must be placed in an escrow account, not in with broker personal or operating accounts. Conversion - spending commingled funds is also prohibited. Threatening to sue for a commission you have not earned. Not furnishing copies of a document to one of the signatories, upon demand. Steering of prospective buyers. You are also subject to federal and state prosecution. Being convicted of a felony in which fraud is an essential element. A licensee convicted of any felony has 30 days to notify TREC of this conviction. Disbursing money deposited in a trust account before the transaction concerned has been consummated (at closing) or finally otherwise terminated. Chapter 3 Standards of Conduct Additional Points: The broker is responsible for all professional acts or occupational activities of the salesmen he sponsors including advertising, use of promulgated forms, proper disclosure, etc. If the broker wishes to terminate sponsorship, he must notify the salesman in writing and return the salesperson s license certificate to the Commission immediately. A sales licensee who wishes to terminate his association with the sponsoring broker must do so in writing. 59

60 A commission can never be paid to any unlicensed person in Texas. A licensee may share or rebate a portion of the commission to a client within a transaction. For example: list at a lower than expected commission rate or contribute to a buyers closing costs on the HUD-1. A licensee may rebate a portion of the commission to a customer with the client s permission. A licensee may give a referral gift up to $50 in value (not cash) to an unlicensed individual who provides a referral. Nonresident brokers must work through resident brokers. A foreign broker, or a broker from another state may collect a commission from a Texas broker, as long as that broker does not negotiate in Texas. A commission may be paid in the form of cash or a gift. (Example: $1,000 watch) Only a broker may sue to recover lost commission. He may sue a seller who has signed a listing agreement, and then defaults, or a buyer who has signed a Buyer s Representation Agreement and then defaults. Telemarketing for listings is legal in Texas, however, a real estate license is required. An unlicensed assistant is not permitted to telemarket for listings. When telemarketing or cold calling a licensee must observe the Federal Do Not Call list and the State No Call list. The Federal list regulates interstate and international calls. The Texas list regulates interstate and intrastate calls. A licensee can telemarket people on the lists with whom he has a past professional relationship. Chapter 3 Standards of Conduct In advertising A broker who has a web site must include his name or company name on each page of the web site A licensee with a web site must include the name of his sponsoring broker or company If a licensee lists himself as a real estate sales person in the phone book he must include the name of his broker or company in the information. When advertising listed property, the broker or company name must be included in the ad. 60

61 Chapter 4: Agency/Brokerage Sales Exam 8 Broker Exam 10 Senate Bill 489 allows a broker to act as an intermediary in a transaction where he represents both the seller and the buyer and has the written permission of both parties including how the broker will be paid. Only a broker can be an Intermediary. Statutory Intermediary takes precedence over common law dual agency. A broker who agrees to represent both the buyer and the seller MUST do so as an Intermediary. As an Intermediary it would be appropriate for a broker to appoint associates to work with the parties to the transaction. A broker who works alone or who only sponsors 1 licensee must be an intermediary without appointments. An appointed associate, under an Intermediary, may give advice and/or opinions to one party in a transaction. A broker may never give advice and/or opinions to either party. He may only disclose facts about the property. The secondary notice of Intermediary - The Intermediary Relationship Notice -is used when a buyer client wants to purchase an in-house listing. Senate Bill 489 requires a licensee to give Information About Brokerage Services (disclosure of agency) to a prospect at the first substantive dialogue. This includes a FACE-TO-FACE meeting where substantive discussion of real estate takes place or any mailing with a substantial amount of information about a particular property. Exceptions include Open Houses, when meeting with a party represented by another licensee, or when the proposed transaction is for a residential lease for not more than one year, and no sale is being considered. The TREC IABS form is voluntary. If any other form is used it must contain the IABS information using TREC wording, in at least 10-point type. Chapter 4 Agency/ Brokerage Senate Bill 489 requires a licensee representing a party to disclose this representation at first contact with another party or licensee. Oral or written disclosure is allowed. A subagent is a licensee who represents the seller, while being sponsored by a broker other than the listing broker. He is working with a buyer customer rather than a buyer client. Senate Bill 489 limits the liability of a licensee for the acts or misrepresentations of a party or subagent as long as the licensee was unaware of the misrepresentation or concealment of material fact. The Seller s Disclosure of Property Condition must be given to a buyer BEFORE HE SIGNS AN OFFER to make that offer binding on the buyer. If the buyer does not have the disclosure before signing, he has 7 days to terminate his offer, after receiving the disclosure. The accuracy of the seller s disclosure is the responsibility of the seller. A seller s disclosure is not required in a foreclosure sale, tax sale, sale by guardian, executor, or administrator, or sale by a builder of a new home. A licensee has 5 days to enter a new listing into the M.L.S. If a client does not want the listed property in the MLS, the licensee may not enter it. The length of the protection period in the listing agreement is negotiable. 61

62 The license act requires a broker to provide a minimum level of service to a client. A broker who represents a party or who lists real property under an exclusive agreement must: inform the party of material information related to the transaction, including the receipt of an offer by the broker answer the party s questions and present any offer to or from the party refrain from telling another broker to negotiate directly with the broker s client. A licensee may advertise another broker s listing with the permission of that broker. A broker may refer clients to a lender with whom he has a professional connection as long as the broker discloses the connection. Chapter 4 Agency/ Brokerage 62

63 Chapter 5: Contracts Sales Exam 7 Broker Exam 8 Licensees must use standard Contract forms when applicable. Exceptions are: those prepared by Attorneys from this state or any other state, or those specified by governmental agencies, property owners, or their lawyers. TREC has promulgated sales contract forms for most residential properties including Farm and Ranch. TREC has no forms for commercial transactions. TREC has no forms for the sale of Co-ops. The Broker Lawyer Committee writes the promulgated contract forms. TREC promulgates them. You can find Time is of the Essence in the Sales Contract in the Termination/Option paragraph and it is found in the Back-Up Addendum and in the Short Sale Addendum. You can also find it in the Addendum for Sale of Other Property by Buyer or in the Third Party Financing Addendum. The Seller s Temporary Lease Addendum TREC 15-3, and the Buyer s Temporary Lease Addendum TREC 16-3, are for use when the lease period is for 90 days or less. All backup offers must be presented to the seller. For a backup offer to become effective the previous contract must be terminated and the backup buyer must pay any option fee, name any option period, and deposit any earnest money with an escrow agent. An option fee must be paid independently of any other consideration. The last party to sign a contract is the party accepting the final change. The broker is responsible for filling in the effective date. This will also be the effective date of the option period if there is one. Chapter 5 Contracts A clause in a contract requiring a condition to be met is a contingency clause. If a contingency cannot be met, the buyer is generally entitled to a refund of his earnest money. An individual has four years from the effective date of a contract or the date of the incident to file a complaint with TREC regarding the licensee involved. After four years, TREC will no longer investigate a complaint. The complaint must be written and signed. The parties to the contract also have four years to sue for non performance. For example, if one party has promised to perform a particular action after closing such as having repairs made to the property, and has not fulfilled that promise, the injured party has 4 years to sue. If a broker has more than one offer on a listed property, he must present all offers, but there is no required order of presentation. If a broker accepts an earnest money deposit, and acts as an escrow agent, the money must be deposited in a trust account by the close of business of the second business day after the execution of the contract. A broker must keep records of this account for 4 years. Division of commission is at the discretion of the broker. The Statute of Frauds requires that all contracts that relate to the transfer of any interest in real estate must be in writing to be enforceable. This also applies to compensation/employment agreements, such as listings and buyer representation agreements. Verbal agreements make you a volunteer in the eyes of the courts. 63

64 R.E. Inspectors must use promulgated forms for residential inspections. If lender required repairs exceed 5% of the price the buyer can terminate the contract. 5% is the criteria. No other number is the criteria. Our contracts encourage the parties to agree to mediation for dispute resolution. We no longer have a Mediation Addendum. In mediation a mediator hears both sides and tries to help the parties come to an agreement. A commission mediator will have at least 40 hours of formal training in ADR (alternative dispute resolution) procedures. In arbitration the arbitrator hears both sides and then tells the parties what to do. In the event of breach of contract, where one party is in default, all TREC contracts state: The injured party can sue for specific performance, seek such other relief as may be permitted by law, or both. If property is located in a Certificated Service Area of a Utility Service Provider, a disclosure to buyers that there may be a charge for turning on or connecting water and sewer services is required by the Texas Water Code. Chapter 5 Contracts A buyer who receives a Title Commitment, and is unhappy with the information about the title, or a buyer who receives a survey, and is unhappy with the information in it, has the previously negotiated number of days (in the contract) to address his concerns with the seller. The title company has 20 days to provide the title commitment after they receive the sales contract TREC defines a reasonable amount of time as two days. Note to students: It is recommended that you read through the TREC 1-4 Family Resale Contract shortly before you take your license exam. 64

65 Chapter 6: Special Topics Sales Exam 4 Broker Exam 6 1. COMMUNITY PROPERTY is a statutory estate in Texas. All property acquired after marriage, including property acquired with labor, is jointly owned by the husband and wife. Income on separate property is considered community property. An increase in value of separate property is not community property. For example, if a spouse has a house worth $50,000 at the time of marriage and its value rises to $100,000, the increase is not community property. However, once community efforts, credit, or funds are used to increase the value or improve the property, community property rights accrue. A spouse can waive community property rights by written agreement. Property acquired prior to marriage, or during marriage by inheritance (devise or descent), or gift, may remain separate property. 2. HOMESTEAD is also a statutory estate in Texas. Homestead protection is automatic and cannot be waived. The homestead of a family is protected from forced sale by all creditors except: mortgage, property taxes( ad valorem taxes), mechanics and materialmen s liens, and homeowner associations. When a homestead is foreclosed on for unpaid property taxes, the owner has 2 years to redeem the property. When a homestead is foreclosed on for unpaid homeowner association fees, the owner has 6 months to redeem the property. An urban homestead has a maximum size of 10 acres. A rural homestead has a maximum of 200 acres. One homestead per person or family. The homestead exemption - a tax benefit, should not be confused with the homestead protection. Homeowners must apply for the exemption and must occupy the home on January 1st to qualify! You can back file for two years if you have failed to claim this exemption. Chapter 6 Special Topics The Deceptive Trade Practices Act (DTPA) does not apply to commercial properties over $500,000. It allows for the recovery of triple damages. An individual has 2 years from the discovery of the deception to file a complaint. A broker who is not a registered property-tax consultant may still legally perform property-tax consulting services for single-family residences. He can provide this service for free or for a fee. A 30 hour class is required to become an Appraisal Review Board Arbitrator. In this role the maximum fee for this service is $500. A seller of coastal property abutting tidally influenced water must provide the Notice Regarding Coastal Area Property. This notice tells buyers that owners may gain or lose portions of the land due to the actions of water. A seller who sells property located seaward of the Gulf Intracoastal Waterway must disclose that structures must not be erected seaward of the vegetation line. If a structure is erected seaward of that line, or becomes seaward as a result of natural causes, the structure would be subject to a lawsuit by the State of Texas for removal. The purpose of a Municipal Utility District (also called a water supply corporation) is to provide flood control or drainage, water and sewers to residents of the district. If property is located in a M.U.D., this must be disclosed, as well as the bonded indebtedness, the tax rate, and standby fees of the M.U.D. Texas Legislation allows a buyer to back out of an offer if the bonded indebtedness is not disclosed prior to closing. The seller must deliver and the buyer must sign the M.U.D disclosure. 65

66 Intestate Succession - the laws that govern how property passes when a person dies without a will or with a will that makes only a partial distribution of his/her property. In the event that a person dies intestate, the courts will appoint an administrator to settle the estate. Property will be distributed according to the Laws of Descent and Distribution. Heirs to any real property, in this case, will have Title by Descent. Property goes to kindred male and female. Spouse and children have priority under the laws of descent. Title transfers to heirs at probate. Landlord tenant facts: Chapter 6 Special Topics a. Security deposits earn interest at a rate contractually agreed upon by the parties. b. Tenants may sign an agreement waiving a right to interest on the security deposit. Land lords must account for security deposits 30 days after tenant leave. c. If a tenant installs a burglar alarm in a rented property, he must notify the landlord and supply instructions and passwords to that landlord. d. Landlords must provide new locks on rental property no later than seven days after a n e w occupant takes possession of a leasehold premise. Smoke detectors must be operational at the time the tenant is granted possession. Keyless deadbolts are required but not double cylinder locks. e. If a tenant cannot gain access to storage space, because the landlord has not emptied it, and the tenant has to rent additional storage space, he has two years to sue the landlord to recover the expense for the rented storage space. f. Forcible entry and detainer, or an action of forcible detainer, is the legal term for eviction. This process would be used by a landlord. g. If a tenant moves out, while still owing rent, and leaves personal property behind, the property is considered abandoned. The landlord can dispose of the tenant possessions, sell them, or pack and store them. (The landlord must give the required notices before doing so.) Rule P-53 Title companies are not permitted to provide food and beverages for a picnic or party for a single firm, and cannot provide continuing education classes unless they charge the market rate for those classes. They can provide tokens like pens and pads. They may have an annual party for all the firms who might use their services. A simple summary of the rule is to say the title company cannot provide anything that a business person would normally consider an expense of doing business, or a tax deduction. 66

67 Texas Department of Insurance regulations regarding mold: 1. Testing mold is not necessary to determine if it should be removed. If mold is visible it should be removed. 2. Removal is called remediation. 3. Both mold assessors and mold remediators must be licensed. 4. Testing after remediation is not required. 5. Property owners can assess and remediate their own properties without a license. 6. If you hire a mold remediator, he must give you a Certificate of Mold Remediation no later than 10 days after work is complete. The certificate verifies that the mold has been removed and certifies with a reasonable certainty that the underlying cause of the mold has been corrected. 7. Receiving a Certificate of Mold Remediation is an advantage for a homeowner because it prevents an insurer from making an underwriting decision on the property based on previous mold damage or claims. 8. On selling a home, the law requires you provide the buyer with copies of all Certificates of Mold Remediation you have received for the property within the past 5 years. Texas Veteran s Loan Program This is a housing assistance program for Texas veterans. Texans with a US military background may be eligible to have their mortgage loans sold to the Texas Veteran s Land Board instead of to the secondary market. The benefit to the veteran borrower is a rate of interest up to 1/2% lower than prevailing market rates. Texas Veterans Land Board (TVLB) The TVLB will loan up to $100,000 for 30 years at a very competitive rate of interest to finance the purchase of unimproved property. The veteran buyer must obtain a survey and pay a 5% down payment. The minimum tract size is one acre. At closing the veteran is deeded the property and signs a note payable to TVLB, which is secured by a deed of trust. Chapter 6 Special Topics 67

68 Chapter 1 Review 1. The fact that an individual must go to the land describes which of the physical characteristics of land? 1. Non homogeneity 2. Immobility 3. Indestructibility 4. Situs 2. John and Mary are co-owners of a property. John has a 60% interest in the property and Mary has a 40% interest. What type of freehold estate do they have? 1. Joint tenancy 2. Estate in severalty 3. Tenancy in common 4. Life estate 3. A property is surveyed to determine a legal description. The surveyor works from a point of beginning, and measures terminal points and angles. What method of land description is he using? 1. Metes and bounds 2. Lot and block 3. Monuments 4. Government survey system Chapter 1 Review 4. John leased space in a building and installed bookcases and ceiling fans in that space. His lease will soon expire. What will happen to the bookcases and fans? 1. He can remove them before the lease expires and take them with him. 2. He can remove the bookcases, but must leave the ceiling fans 3. He can remove the fans but must leave the bookcases 4. Because they have been installed, the bookcases and fans are fixtures and have become part of the property. He must leave them behind. 5. Which of the following is an example of an involuntary, statutory, specific lien? 1. Ad valorem tax lien 2. IRS tax lien 3. Mortgage 4. Judgment 6. A buyer s agent has helped her buyers to find a property. The sellers have installed a fountain in the courtyard and the buyers have stressed to their agent that they want the fountain to be included in their purchase. What should the buyers agent do to ensure that her clients get the fountain? 1. The agent can simply tell her clients not to worry, because the fountain is installed. This makes it a fixture, and fixtures are included in the sale. 2. The agent can call the listing agent to be certain that the sellers did not exclude the fountain when they listed the property. 3. The agent can include wording in the buyers offer that indicates the fountain is included in the sale. 4. The buyers agent can use the Addendum for the Sale of Additional Property by the Buyer.

69 7. All of the following are fixtures except: 1. Shrubs 2. A pool 3. A chandelier 4. A garden bench. 8. Mary and John are married with grown children. Both are intestate. If John dies and Mary becomes the owner of their home, what type of ownership did they have? 1. Tenancy by the entirety 2. Tenancy in severalty 3. Community property 4. Tenancy in common 9. A one-half acre parcel of land in Manhattan, NY is worth considerably more than a one half acre parcel in White Plains, NY. This is an example of: 1. Scarcity 2. Non-homogeniety 3. Modification 4. Fixity 10. What is the difference between an easement and a lien? 1. An easement is an encumbrance and a lien is not. 2. An easement is a right in land and a lien is not. 3. An easement is voluntary and a lien is not. 4. An easement is recorded and a lien is not. 11. A seller shows his property with ceiling fans. After closing when the buyer enters the house the ceiling fans have been removed and the wires are hanging from the ceiling. Which statement best describes this situation; 1. The seller can take the fans because they are chattel. 2. The seller cannot take the fans because they are personalty 3. The seller can take the fans because severance is permitted. 4. The seller cannot take the fans because they are fixtures. Chapter 1 Review 12. A married couple purchases property and takes title as Tenants by the Entirety. All of the following are true except: 1. This type of ownership estate avoids probate. 2. This ownership takes precedence over a written will. 3. When one spouse dies their share will pass to their heirs including but not limited to the surviving spouse. 4. This type of ownership is only available when the co-owners are husband and wife. ANSWERS: 2,3,1,4,1,3,4,1,1,2,4,3 69

70 Chapter 2 Review 1. The local government needs your land to build a new high school. They have the right to take your land for the public good. This is called: 1. The right of escheat 2. The right of eminent domain 3. The right of condemnation 4. Police power 2. You have recently purchased property in an area regulated by zoning. It has come to your attention that you have a zoning violation on the property. What should you do? 1. Ignore the violation, as it is a pre-existing condition 2. Claim non-conforming use to continue the violation 3. Request a variance from the zoning board 4. File a claim against the title company that issued your title policy 3. One of the property owners in a subdivision is violating the deed restrictions. What can the other property owners do to get him to comply? 1. Seek an injunction from the courts 2. Sue for damages 3. Seek a judgment from the courts 4. Ask the courts for an action of forcible entry and detainer Chapter 2 Review 4. Your property borders a non-navigable waterway and you have riparian rights. You have built a 10-foot pier at the water s edge. How do you measure your property? 1. To the end of the pier 2. To the vegetation line 3. To the middle of the waterway 4. To the middle of the waterway, or the end of the pier, whichever is greater. 5. Mary, a single woman, has no children. She owns real property and dies intestate. What happens to her real property? 1. The government takes it under the right of escheat. 2. The government takes it by condemnation under the right of eminent domain. 3. The court will appoint an administrator and it will be distributed to her heirs by the Law of Descent. 4. The courts will appoint an executor to distribute her property to her heirs by the Law of Descent. 6. Which of the following is the best example of a buffer zone? 1. Garden apartments between single family homes and retail shops. 2. A park between small single family homes and large single family homes. 3. A factory between a shopping center and a park. 4. A self-storage complex between an office building and a parking garage. 7. All of the following terms refer to water rights except: 1. Appropriative 2. Riparian 3. Littoral 4. Prior appropriation 70

71 8. What is the main difference between Zoning and Master Planning? 1. Zoning laws are implementation and Master Planning is a process. 2. Zoning never changes but Master Plans do. 3. Zoning regulations are mandatory, but Master Planning guidelines are voluntary. 4. Zoning is private and Master Planning is governmental. 9. A property owner has a gas station on his land. The zoning committee changes the zoning to R-1. What must the property owner do? 1. Apply for a variance. 2. Nothing his property is automatically considered a non-conforming use. 3. Apply for a non-conforming use. 4. Nothing his property is automatically granted a variance. 10. A property owner receives a notice that his land is in an improvement district. What does this mean? 1. Coming improvements will increase his property value at no cost to him. 2. He can expect zoning changes on the property in the near future. 3. He will receive an additional tax bill. 4. He will be asked to donate funds for community improvements on a voluntary basis. 11. A property owner has installed a chain link fence on his property. He has received an official notice requiring the removal of this type of fence. This fence is most likely a violation of: 1. Zoning 2. Building codes 3. Environmental regulations 4. Deed restrictions or deed covenants 12. A single property is regulated by building codes, zoning and deed restrictions. The rules are in conflict with one another. Which must the property owner obey? 1. Deed restrictions always take precedence over other rules. 2. Zoning rules always take precedence over other rules. 3. Building codes must be obeyed no matter what other rules exist. 4. The property owner must obey whichever rules are the strictest or most limiting. Chapter 2 Review ANSWERS: 2,3,1,3,3,1,4,1,2,3,4,4 71

72 Chapter 3 Review 1. M.A.I. refers to which professional group: 1. Real Estate Brokers 2. Real Estate Inspectors 3. Mortgage Brokers 4. Real Estate Appraisers 2. A builder is using inferior siding and paint in an effort to construct affordable housing. This would be an example of: 1. Physical depreciation 2. Functional obsolescence 3. Economic obsolescence 4. External obsolescence 3. An appraiser has been asked to determine the market value of a home significantly older than all the other homes in the neighborhood. What approach would he use? 1. Market Data Approach 2. Cost Approach using reproduction cost 3. Cost Approach using replacement cost 4. Income Approach Chapter 3 Review 4. A builder is very successful and active in a new subdivision. Homes in the subdivision are selling well, and the builder is making a good profit on the sales. Two new builders arrive and begin to sell in the same subdivision. All experience a lower level of profit. This demonstrates which principle of appraisal? 1. The principle of increasing and decreasing returns 2. The principle of regression 3. The principle of highest and best use 4. The principle of competition 5. When measuring gross area the appraiser measures the: 1. Exterior, not including unfinished space 2. Interior, not including unfinished space 3. Under roof, including unfinished spaces 4. Slab 6. Which of the following is the best definition of market value? 1. The price a willing seller will sell for. 2. Most probable price. 3. The price a willing buyer will pay. 4. Cost 7. In preparing an appraisal, which of the following would have the least impact on the appraiser s estimate of value? 1. Physical deterioration 2. Functional obsolescence 3. Economic obsolescence 4. External obsolescence 72

73 8. An appraiser has been asked to determine the value of an old house in an up and coming neighborhood. What method would he be most likely to use to provide the most accurate and reliable result? 1. Income Approach 2. Market Data Approach 3. Cost Approach 4. Gross Rent Multiplier 9. What is the least important factor for a licensee preparing a CMA? 1. The information from expired listings of unsold property in the area. 2. The prices of current listings in the neighborhood. 3. The date of closed sales used for comparables. 4. The curb appeal of the property. 10. What does the term modular refer to? 1. The number of model homes in a new neighborhood. 2. Prefabricated housing 3. Condominiums 4. Cooperatives 11. An appraiser is using the Market Data Approach to determine the value of a residential property. All of the following are true except: 1. His comparables should not be more than one year old. 2. He should have three to five comparables for the property. 3. The best comparable will have the least number of adjustments regardless of value. 4. The comparables should not be more than six months old. 12. An appraiser has been hired to appraise a commercial office building that is fully leased. What approach to appraisal will he use to determine his opinion of value? 1. Cost approach 2. GRM 3. Income approach 4. GIM Chapter 3 Review ANSWERS: 4,2,3,4,3,2,1,2,1,2,1,3 73

74 Chapter 4 Review 1. A clause allowing a lender to move to or take a lower lien position is called: 1. A subrogation clause 2. A subordination clause 3. An alienation clause 4. A defeasance clause 2. A veteran has received a certificate of eligibility for $40,000. He has signed a contract to purchase a home for $155,000. The CRV on the property is $153,000. The bank wants a 75/25 ratio. How much cash does the buyer need to purchase the property? 1. $0 2. $115, $5, $2, Which of the following actions on the part of the Federal Reserve would tighten the money supply? 1. An increase in the reserve requirement 2. A decrease in the reserve requirement 3. An increase in required down payment amounts 4. A decrease in the discount rate Chapter 4 Review 4. All of the following pledge property as security for a debt except: 1. Mortgage 2. Deed of trust 3. Contract for deed 4. Note 5. Which of the following instruments is the promise to repay a debt? 1. Mortgage 2. Deed 3. Deed of Trust 4. Note 6. What is the advantage to the borrower of a VA loan? 1. The loan is guaranteed. 2. There is a small funding fee. 3. Interest rates on VA loans are always lower than rates on Conventional Loans. 4. The guarantee on the VA loan is free. 7. Regulation Z, regulates all of the following except: 1. Non real estate loans greater than $25, Internet advertising 3. Printed advertising 4. Broadcast advertising 74

75 8. John has a loan with equal regular payments of principal and interest. Long before the debt is satisfied, the balance is due in a payment substantially larger than all the others. This is best described as a: 1. Term loan 2. Partial Amortization loan 3. Graduated Payment Mortgage 4. Bi-weekly loan 9. For what group of buyers would the ARM be the least desirable? 1. Those subject to job transfer. 2. First time buyers. 3. Those on a fixed income 4. Those seeking a low monthly payment 10. Where can you expect to find PMI? 1. On an FHA loan 2. On a VA loan 3. On a low LTV conventional loan 4. On a high LTV conventional loan 11. Who could be considered an intermediary between the borrower and the lender? 1. Mortgage Banker 2. Mortgage Broker 3. Buyer s agent 4. Buyer s broker 12. What is a point? 1. 1 % of a loan amount 2. 1% of the price of the property 3. 1% of the down payment 4. Prepaid interest based on market conditions. Chapter 4 Review ANSWERS: 2,4,1,4,4,4,1,2,3,4,2,1 75

76 Chapter 5 Review 1. A broker owes customers: 1. The same level of responsibility that he owes clients 2. Honesty, advice and opinions 3. Honesty and fairness 4. Honesty, fairness and full disclosure of all facts 2. A broker has a listing on a property. The seller has accepted an offer from the buyer, but the transaction fails to close. Under which of the following conditions would the broker be eligible for a commission? 1. The seller has declared bankruptcy and the sale has been cancelled. 2. The buyer has been unable to obtain financing. 3. The buyer has changed his mind and decided not to purchase the property. The seller has agreed to mutual rescission. 4. The seller has refused to clear up a cloud on the title and the property cannot be transferred to a buyer. Chapter 5 Review 3. At a recent social gathering several real estate brokers from the neighborhood were overheard discussing commission rates and attempting to come to an agreement on a way to communicate their rates to one another. What is true about this conversation and any resulting action on their part? 1. The brokers are in violation of the Sherman Anti-Trust Act. 2. The brokers have not violated any law, and are demonstrating a good faith effort to meet the needs of the community. 3. The brokers have violated the Statute of Frauds. 4. The brokers have done nothing wrong as long as the conversation was not converted to a written agreement. 4. What are an agent s duties to his principal? 1. Obedience, loyalty, disclosure, integrity and competency 2. Compensation, reimbursement, indemnification, and performance 3. Fidelity, integrity and competency 4. Care, obedience, loyalty, disclosure, accounting and confidentiality 5. An agent has acted without authority to do so. His principal has found out about the actions and accepted them. What kind of agency does this describe? 1. Agency by ratification 2. Agency by estoppel 3. Ostensible agency 4. Agency coupled with an interest 6. Broker B has signed a Buyer Representation Agreement with his clients. As a buyer s agent he must disclose all of the following except: 1. His buyer s ability to make a higher offer 2. How long the property has been on the market 3. The maximum price he feels his buyer s should offer, regardless of list price 4. Terms in the offer which are favorable to the seller 76

77 7. A broker has written permission to represent both the seller and the buyer as a dual agent. Under these circumstances, which of the duties of an agent would be the easiest for him to fulfill? 1. Obedience 2. Loyalty 3. Confidentiality 4. Accounting 8. A property at 123 Main Street has been listed by Mary, a sales licensee at ABC Realty for several weeks. Last week, Mary died. What effect will Mary s death have on the Listing Agreement? 1. Nothing 2. It is terminated 3. It is binding on Mary s heirs 4. The seller can claim abandonment and terminate the listing. 9. Which of the following is not a violation of the Sherman Anti-Trust Law? 1. Two brokers discussing commission rates with the intention of setting a rate for their market, but then never acting on the discussion. 2. A broker listening to a conversation by other brokers regarding fixed commission rates in their market. 3. A broker setting a fixed commission rate that he will charge to all his clients. 4. Several brokers assigning market areas to eliminate competition. 10. Which of the following is not a duty of an agent? 1. Obedience 2. Care 3. Trust 4. Loyalty 11. A broker has listed a seller s property. The seller travels extensively and would like the broker to have the authority to accept a full price offer if he receives one. The seller s lawyer prepares a limited power of attorney authorizing the broker to accept any offer for at least list price. Once the broker has the authority to accept a full price or better offer for the seller, what is his agency role with that seller? 1. He is a limited agent 2. He is a general agent 3. He is a universal agent 4. He is an implied personal agent Chapter 5 Review 12. A signed employment agreement is necessary to: 1. work in a real estate office 2. be considered an agent by the IRS 3. sue for a commission 4. be an agent under licensee guidelines ANSWERS: 3,4,1,4,1,1,4,1,3,3,2,3 77

78 Chapter 6 Review 1. All of the following must be disclosed when listing a property except: 1. Death on the property due to a structural defect 2. Death on the property due to natural causes 3. The possible presence of lead paint 4. The presence of endangered species 2. When participating in interstate land sales a broker must provide the buyer with: 1. A property report 2. A survey 3. A seller s disclosure of property condition 4. Photos of the property to be sold 3. Which of the following deaths on a property should never be disclosed? 1. Murder 2. Suicide 3. Death due to HIV/Aids 4. Natural causes Chapter 6 Review 4. What is the purpose of an Environmental Impact Statement? 1. To determine the effect of a proposed project on the community. 2. To evaluate the after-effects of a government project on the community. 3. To determine the amount of pollution resulting from a government construction project. 4. To provide legislators and the public with an ongoing evaluation of the environmental impact of a project as it progresses toward completion. 5. A commercial property is sold for cash without inspections. After closing the buyer discovers environmental problems on the property. Who would be liable for cleanup? 1. The seller 2. The seller and all in the chain of title who contributed to the problems 3. The buyer and the seller and all in the chain of title who contributed to the problems 4. The buyer, the seller, the broker, and all in the chain of title who contributed to the problems 6. All of the following are hazardous substances that a licensee should be aware of except: 1. Radon 2. Asbestos 3. Electromagnetic Fields 4. Acrylic paint 7. Which of the following is the best example of puffing? 1. This is the largest lot in the subdivision. 2. The children in this neighborhood attend the best elementary school in the district. 3. I think this is the best floor plan available from this builder. 4. This home has the lowest taxes of any on this street. 78

79 8. A buyer s agent has helped a buyer to find a home. The buyer has expressed concern about the possible presence of radon. What should the buyer s agent recommend to the buyer in this case? 1. Tell the buyer to mention his concerns to his structural inspector. 2. Recommend an inspection for hazardous materials. 3. Recommend that the buyer purchase a test kit to determine the possible presence of radon on the property. 4. Tell the buyer to question the seller about the possible presence of radon. 9. A chemical manufacturing company purchases a plant. After closing they discover that the previous owners had spilled hazardous materials on the land. According to CERCLA, who is liable for the cost of the cleanup? 1. The new owners. 2. The previous owners. 3. Both the new owners and the previous owners. 4. The title insurance company. 10. Who is responsible for providing a lead paint disclosure? 1. The seller and the buyer. 2. The seller and his broker. 3. The seller and both brokers 4. The seller. 11. A property has lead paint in the interior and on the exterior. Which of the following statements is true? 1. The seller must remove the interior paint, but not the exterior paint. 2. The seller must remove all lead paint 3. The seller has no duty to remediate lead, simply to disclose it. 4. The seller does not have to remove the paint, but he must contain it. Chapter 6 Review 12. Which of the following is an example of puffing? 1. This house has the most beautiful décor of all my current listings. 2. Students in this district have the highest SAT scores in the county. 3. Property taxes on this home are the lowest in the neighborhood. 4. This builder uses only the best quality materials available. ANSWERS: 2,1,3,1,4,4,3,2,3,4,3,1 79

80 Chapter 7 Review 1. Mark has an option to purchase Bob s property. The option expires at the end of the month and Mark would like to extend the option. What would he need to do? 1. Open title on the property 2. Apply for financing 3. Pay an additional option fee 4. Offer an assignment to the seller 2. A buyer has signed an agreement to purchase a property from a seller. He has met all the terms and conditions of the listing. The listing broker has taken the agreement to the seller. The seller has changed his mind about selling and refuses to sign the agreement. What is true? 1. The buyer can sue the seller for specific performance. 2. The seller does not have to sell, but he owes the listing broker a commission. 3. The seller does not have to sell, and does not owe a commission at this time. 4. The buyer cannot force the seller to sell, but can sue for damages. Chapter 7 Review 3. Mark had an Open Listing on a seller s property. He had shown the property three times to the same potential buyers. Each time, he notified the sellers of the showing by phone. He heard from the sellers that he should no longer show the property as it was sold. Several weeks later, he learned that it was sold to the buyers he brought to the property. What are Mark s rights with respect to a commission from the sellers? 1. Mark is entitled to a full commission as agreed to in the Open Listing. 2. Mark is not entitled to any commission as he did not bring the offer to the sellers. 3. Mark is not entitled to a commission because he did not give written notice of his showings. 4. Mark is only entitled to a partial commission from the sellers as he did not do the paper work for the sale. 4. Mary has leased office space for ten years. The lease has run for 8 years and Mary has asked the landlord for permission to terminate the lease contract. If he agrees this would be an example of: 1. Partial performance 2. Specific performance 3. Default 4. Breach of contract 5. Who will be the last party to sign a contract? 1. The seller 2. The buyer 3. The broker 4. The party accepting the final change 6. All of the following are examples of Contract for Deed except: 1. Real Estate Sales Contract 2. Real Estate Contract 3. Land Contract 4. Installment Contract 80

81 7. The best description of a counteroffer is: 1. An offer that accepts some of the provisions of a previous offer. 2. An offer that rejects some of the provisions of a previous offer. 3. An offer that rejects some of the provisions of a previous offer, and accepts some of the provisions of a previous offer. 4. A rejection of an offer. 8. Which of the following contracts would be voidable? 1. A contract for cash. 2. A verbal lease agreement for seven months 3. A contract with a minor. 4. A contract to sell illegal drugs. 9. A tenant has a three year lease on some office space. He has occupied the space for seven months. His landlord dies. The heirs sell the building. The new landlord wants the tenant to move out. Does the tenant have to move, and why or why not? 1. Yes the owner s death terminated the lease. 2. Yes, the sale of the property terminated the lease. 3. No, the tenant wasn t given any notice. 4. No, the tenant has a lease for three years. 10. A buyer and his agent visit a listed property. The buyer loves the property and wants to purchase it. He speaks with the seller, who is at home at the time, and they come to an agreement regarding price and terms. They shake hands on the agreement and the buyer happily leaves the property. His agent should: 1. Congratulate him on negotiating the purchase. 2. Tell the buyer the verbal agreement is illegal. 3. Tell the buyer that he will have to pay the agent s commission since the sales contract is verbal. 4. Warn the buyer that the verbal sales contract is unenforceable. Chapter 7 Review 11. Which of the following terms is used to describe a situation where a buyer and seller agree to terminate a contract? 1. Mutual rescission 2. Novation 3. Assignment 4. Default 12. A seller s property is listed for $399,900. A buyer makes an offer for $389,000. The seller counteroffers for $392,500. The buyers have not responded to the counteroffer. The sellers receive another offer for $395,000. They would like to accept this new offer. What is true? 1. They can accept the new offer. 2. They can accept the new offer, but only after withdrawing their counteroffer. 3. They cannot accept the new offer until the counteroffer expires. 4. They can only accept the new offer as a backup offer. ANSWERS: 3,2,2,1,4,1,4,3,4,4,1,2 81

82 Chapter 8 Review 1. None of the following is an example of voluntary alienation except: 1. Bankruptcy 2. Assignment by attorney in fact 3. Inheritance without a will 4. Escheat 2. Which of the following conveys title to real property and insures good title? 1. A general warranty deed 2. A policy of title insurance 3. A title commitment 4. An attorney s opinion of title 3. A buyer has discovered a defect in title and has suffered a loss due to the defect. The title company has compensated the buyer for the loss. Subsequently, the buyer is awarded a judgment against the seller. The title company is entitled to a portion of the judgment as reimbursement for the claim it paid. This describes: 1. Subordination 2. Seisen 3. Subrogation 4. Sufferance Chapter 8 Review 4. What expenses of home ownership can a buyer deduct on his income taxes? 1. Principal, interest, taxes and insurance 2. Interest, taxes and insurance 3. Taxes and depreciation 4. Taxes and interest on his mortgage 5. What law sets limits on tax and insurance escrow accounts? 1. Equal Credit Opportunity Act 2. Truth in Lending 3. Real Estate Settlement Procedure Act 4. Fair Credit Reporting Act 6. When can deeds be recorded? , Monday through Friday :30, Monday through Friday :30, Monday through Friday , Monday through Friday 7. How is a loan assumption shown on the HUD-1? 1. Credit the buyer and debit the seller. 2. Credit the seller and debit the buyer. 3. Debit the seller and no entry for the buyer. 4. Debit the buyer and no entry for the seller. 82

83 8. All of the following are true regarding wills and inheritance except: 1. If a person dies intestate, heirs have Title by Descent on any property they inherit. 2. Title to real property is transferred at probate. 3. If a person dies intestate an executor will distribute the property according to the Laws of Descent. 4. If a person dies testate, his heirs will have Title by Devise on any property they inherit. 9. A buyer with a signed sales contract who has not yet gone to closing has: 1. Equitable title. 2. Defeasible fee. 3. Equity of redemption. 4. An option. 10. A landowner wants to sell his property. A title search uncovers a cloud on the title. There is no one available to sign a quit claim deed to clear up the cloud. What can the owner do? 1. Advertise ownership in the Public Notice section of the newspaper. 2. Record a sworn affidavit stating his ownership is uncontested. 3. Pursue an action to quiet title in court. 4. File a lis pendens on the property. 11. When an investment property owner is depreciating his improvements on his income taxes what method of depreciation will he use? 1. Straight line method 2. Sum of the years digits method 3. Accelerated depreciation 4. He cannot depreciate the improvements, only the land. 12. Investment property owners can defer taxation with a trade of real property. All of the following are true regarding these tax deferred exchanges except: 1. Anything added to trade to even it out is called boot 2. At the time of the exchange, only the boot is taxed 3. Investors must hold the property for 5 years before exchanging it 4. Boot can be real property, personal property or cash. Chapter 8 Review ANSWERS: 2,1,3,4,3,3,1,3,1,3,1,3 83

84 Chapter 9 Review 1. In senior housing communities, at least one person over the age of 55 must be living in what percent of the units? 2. 60% 3. 70% 4. 75% 5. 80% 2. None of the following are included in protected categories under the Civil Rights Act of 1968 except: 3. Soldiers 4. Homosexuals 5. Single parents 6. Migrant workers 3. A practice of trying to induce homeowners to sell by convincing them that a minority group is moving into the area causing property values to drop is: 1. Blockbusting 2. Steering 3. Channeling 4. Coercion Chapter 9 Review 4. The main goal of the ADA is the removal of barriers. All of the following are required under ADA except: 1. Wheel chair access 2. Automatic doors 3. Lowered phones and light switches 4. Levered door handles 5. According to Regulation Z, which of the following is not a trigger term? 1. Monthly payment amount 2. Down payment amount 3. Interest rate 4. APR 6. Mary, a real estate licensee, has been accused of treating some buyers unfairly under the guidelines of the Fair Housing law. How can Mary best demonstrate her equal treatment of all parties? 1. Mary can provide written records detailing her methods and results with all her past customers and clients. 2. Mary can provide character references from her broker and other professional associates. 3. Mary can provide sworn affidavits from past clients regarding her professional demeanor. 4. Mary does not have to prove her innocence, the complainant must prove Mary s guilt. 7. Which of the following properties would not be in violation of the ADA for the failure to provide a wheelchair ramp? 1. A one story office building 2. A church built before A county courthouse housed in an historic building. 4. A private museum. 84

85 8. All of the following are true regarding the Civil Rights Act of 1968 except: 1. The owner-occupant of a three-family house can discriminate in renting a unit in the house. 2. Churches can restrict occupancy of church owned rental property to church members. 3. Private clubs can prevent non-members from staying in club run properties. 4. A FSBO who owns no more than four homes can discriminate when selling a home. 9. How long does a victim of discrimination have to file a complaint? 1. Six months. 2. One year. 3. Eighteen months. 4. Two years. 10. An integrated private club has refused to allow a non-member minority couple to stay in club lodgings. What is true? 1. The club is in violation of the Civil Rights Act of The club is in violation of the Civil Rights Act of The club is not violating any law. 4. The club is in violation of both Civil Rights Acts. 11. What is the maximum penalty for a single violation of the Civil Rights Act? 1. $55, $110, $100, There is no maximum penalty for a single violation 12. Which of the following deaths on a property must be disclosed? 1. Murder 2. Suicide 3. Death by natural causes 4. Death due to Aids/HIV Chapter 9 Review ANSWERS: 4,3,1,2,4,1,2,4,2,3,2,1 85

86 Chapter 10 Review 1. John has leased commercial property and pays rent based on the receipts of his business. This type of rent is referred to as: 1. Contract rent 2. Economic rent 3. Percentage rent 4. Gross rent 2. When the residents of a property own shares in the corporation and have a proprietary lease on their space they live in a: 1. Condominium 2. Cooperative 3. Townhouse 4. Time share 3. The property management agreement creates what kind of agency? 4. General agency 5. Special agency 6. Limited agency 7. Universal agency Chapter 10 Review 4. Who would use the remedy of Forcible Entry and Detainer? 1. The tenant 2. The lessee 3. The landlord 4. The buyer 5. The landlord pays the expenses of the property. The tenant pays rent and utilities. What kind of lease is this? 1. Gross lease 2. Estate for years 3. Periodic tenancy 4. Net lease 6. John and Mary would like exclusive use of a vacation property every summer for two weeks. They would like to enjoy the privileges of ownership without all the responsibilities. What should they do? 1. Purchase a time share 2. Purchase a resort condominium 3. Purchase a co-op 4. Rent a vacation property 7. Mark lives in a condominium and stacked storage boxes to the ceiling of his balcony. He is in violation of the rules for doing this. What rules are being violated? 1. Deed restrictions 2. Zoning 3. By-laws 4. Building Codes 86

87 8. A client has asked an agent, What is the biggest disadvantage of investing in real estate? The licensee s response should be: 1. Risk 2. Expense 3. Inability to leverage 4. Lack of liquidity 9. Two single family homes use a shared driveway between the properties. This is an example of: 1. A party wall. 2. An easement. 3. A zoning violation. 4. A non-conforming use. 10. All of the following are true about emblements except: 1. They are attached to the ground. 2. They are personalty. 3. They are fixtures. 4. Title is transferred with a bill of sale. 11. What is the difference between the role of a property manager of an apartment complex and the role of the manager of a condominium complex? 1. The apartment manager will focus on income and the condominium manager will focus on preserving property value 2. There is no difference in their roles. 3. The apartment manager is a general agent and the condominium manager is a universal agent. 4. The apartment manager works for a resident owner, but the condominium manager works for investors. Chapter 10 Review 12. How are the property taxes for the common areas of condominiums paid? 1. From monthly condominium fees paid by residents 2. By the board of the condominium complex 3. By individual unit owners as part of their property tax bill 4. Common areas are exempt from taxation ANSWERS: 3,2,1,3,4,1,3,4,2,3,1,3 87

88 Texas Law Review Questions 1. In order for a back-up offer to become effective all of the following must be done except: 1. The previous contract must be terminated 2. The back-up buyer must pay any earnest money stated in his offer 3. The back-up buyer must pay any option fee and name his option period 4. The back-up buyer must name his inspector(s) 2. A broker must do all of the following except: 1. Be sure to review all contracts prepared by licensees he sponsors 2. Be sure his licensees use promulgated forms 3. Be sure his licensees obey the laws in advertising 4. Be sure his licensees follow all TREC rules and regulations 3. If a broker is using an assumed name, or DBA, this must be filed in: 1. Austin 2. The county courthouse in every county where he does business 3. The District Attorney s office 4. In the county courthouse in every county where he has an office Texas Law Review Questions 4. What are the penalties for practicing an act of brokerage without a license? 1. Fine of $4000 and/or imprisonment in county jail for up to one year 2. Same as 1 plus civil suit for damages 3. Fine of $100 - $500 and/or imprisonment in county jail for up to one year 4. Same as 3 plus civil suit for damages 5. Which of the following differentiates a Broker-Intermediary from a Salesperson-appointee? 1. The salesperson can give advice and opinions to one party in the transaction 2. The salesman can give advice and opinions to both parties in the transaction 3. The broker can give advice and opinions to one party in the transaction 4. The broker can give advice and opinions to both parties in the transaction 6. When a broker markets his own property he should: 1. Use the IABS to disclose his interest 2. Use the TREC promulgated form to disclose his interest 3. Not mention his interest unless the buyer decides to buy the property 4. Inform the buyer that he is a licensee 7. Which of the following is considered community property? 1. Property acquired by husband or wife prior to marriage 2. Property acquired by husband and wife after marriage with labor 3. Property held as tenancy in common 4. Property inherited by husband 8. Marketing real property by guaranteeing a profit when it is resold is: 1. Good sales technique 2. Permitted so long as no deception is intended 3. Appropriate only when comparable sales analysis shows the accuracy of such a claim 4. Cause for suspension or revocation of licensure 88

89 9. The rules and regulations of TREC: 1. Must receive approval from the governor 2. Must be approved by district court 3. Have the full force and effect of law 4. Are promulgated by the Consumer Protective Agency 10. The Texas Real Estate Commission was created in 1949 primarily to: 1. Settle disputes among claimants to commission fees 2. Enforce provisions of the Fair Housing Act 3. Protect the public 4. Regulate the activities of the local trade association boards 11. The standard contract forms adopted by the TREC 1. Must be used by all brokers and attorneys handling real estate transaction 2. Are optional but may be requested by either principal in a real estate transaction 3. Must be used by real estate licensees in all transactions to which the forms are appli cable 4. Contain suggested language that a broker or salesman may wish to include when writing a sales contract 12. According to TREC, acting as a broker or salesperson without first obtaining a license is a: 1. Felony 2. Misdemeanor 3. Tort 4. Misdeed 13. A buyer and seller have signed a contract for the sale of the seller s property. The buyer has received the survey and is unhappy with some of the information. Which of the following actions should he pursue? 1. The buyer should file the survey with the local courts and sue the seller for failure to disclose the problems shown in the survey 2. The buyer should notify the seller of his decision not to purchase the property 3. The buyer has the previously negotiated number of days to notify the seller of his concerns and ask the seller to correct the problems 4. The buyer has 7 days from receipt of the survey to terminate the agreement Texas Law Review Questions 14. What power does the Commission have when a licensee fails to comply with a subpoena? 1. Decline to renew the individual s license 2. Freeze the bank account of the licensee 3. Order the appropriate county sheriff to place the person in jail 4. File suit through the attorney general to enforce the subpoena 15. When must disclosure of representation be made in order to comply with the law? Senate Bill 489 requires disclosure of representation to be made: 1. At the first face to face meeting 2. At first contact 3. At the first substantive dialogue 4. On a form approved by a Texas real estate attorney 89

90 16. A licensee in violation has ignored a summons from TREC. What will TREC automatically do? 1. Revoke the license. 2. Suspend the license 3. Fine the licensee $ Set a hearing in Austin 17. What remedy is available in every TREC contract form for Breach of Contract? 1. Arbitration. 2. Mediation. 3. Suit for specific performance, seek such other remedies as may be permitted by law, or both 4. Default. 18. A licensee is working as a buyer s agent. Her buyer wants to take his contract to an attorney for advice. The licensee should: 1. Give the contract to the buyer to take to his attorney. 2. Get approval from her broker before giving the contract to the buyer. 3. Select or recommend a particular attorney for her buyer to work with. 4. Terminate her relationship with the buyer as he appears to be considering a lawsuit. Texas Law Review Questions 19. Which of the following would cause TREC to refuse to license an applicant? 1. Felony conviction. 2. Inability to demonstrate honesty, integrity and trustworthiness to TREC. 3. Misdemeanor conviction. 4. Past revocation of a Real Estate License. 20. A tenant has vacated a rental property. He stills owes rent. He has left personal property behind. The landlord can do any of the following except: 1. Sell the property. 2. Dispose of the property. 3. Pack and store the property. 4. Attach the wages of the tenant for the rent owed. 21. When a licensee has been assessed an administrative penalty by TREC as a result of TREC determining an infraction of its rules, how long does the licensee have to pay that penalty? days days days days 22. All of the following are true regarding mold remediation except: 1. Only a licensed remediator can remove mold. 2. A homeowner is entitled to a Certificate of Mold Remediation within 10 days of the work being completed. 3. An insurance company cannot make an underwriting decision based on previous mold claims if the property owner has a Certificate of Mold Remediation. 4. When a property is sold, the seller must provide all Certificates of Mold Remediation he has received in the past five years. 90

91 23. In order to be certified as a mediator for the Texas Real Estate Commission, an individual must complete a course in Alternative Dispute Resolution (ADR). This course is: hours hours hours hours 24. If a licensee, under MCE requirements, renews on time without including the required education what will TREC do? 1. Consider the license expired. 2. Hold the license in inactive status until the education requirements have been met and the $450 of penalties and fees have been paid. 3. Consider the license active for an additional 60 days, during which time the licensee must complete the required education and pay the $200 amount for fees and penalties 4. Consider the license active for an additional 30 days during which time the licensee must complete the required education and pay the $200 amount for fees and penalties. 25. A broker has represented a seller in the sale of the seller s property. The property was listed for sale as is. The seller provided a seller s disclosure stating there were no known problems of any kind with the property. The property was sold to a buyer who agreed to the as is provision. After closing the buyer moved in and immediately he discovered many serious problems with the property. He had an inspection done, and the inspector determined that the problems were not new, but rather most were long standing. The buyer sued the seller and was able to have the sale reversed. Is the broker entitled to keep the commission earned on this sale? 1. Yes. 2. No, because the buyer is no longer willing therefore the broker is not the procuring cause of sale. 3. No, because there was fraud involved in the transaction. 4. No because the broker did not require the buyer to have inspections prior to closing. Texas Law Review Questions ANSWERS: 4,1,4,2,1,4,2,4,3,3,3,2,3,4,2,4,3,1,2,4,3,1,4,3,1 91

92 Exam Prep Course Take Home Test 1. Community property is that owned by: 1. the church 2. parent and child if the child is over the city or community 4. husband or wife when purchased with community funds 2. When real estate under lease is sold, the lease: 1. expires within 30 days, unconditionally 2. is broken 3. remains binding on the new owner unless otherwise stipulated in the lease itself 4. must be renewed 3. Income approach for an appraisal would be most widely used: 1. on a newly opened subdivision 2. on commercial and investment property rented to tenants 3. on property heavily mortgaged 4. on property heavily insured Exam Prep Course Take Home Test 4. The right to cross over property owned by another is called: 1. adverse possession 2. an easement 3. a homestead 4. a lien 5. Unpaid taxes on real estate may become: 1. a lien 2. an easement 3. a relinquishment 4. a mortgage 6. Deeds are recorded in the: 1. City hall 2. County courthouse 3. State capitol building 4. Tenancy in common 7. Real property owned by the husband or wife prior to marriage is: 1. community property 2. separate property 3. personal property 4. tenancy in common 8. Eminent domain is: 1. the action of taking property for public use 2. a written agreement 3. the right to take property for public use 4. evidenced by zoning 92

93 9. The deed which states that the title conveyed is good from the sovereignty of the soil to the grantee and that no one else can successfully claim the property is a: 1. special warranty deed 2. general warranty deed 3. quit claim deed 4. bargain and sale deed 10. One who acquires property under a deed is: 1. an optionee 2. a vendor 3. a grantee 4. a trustee 11. The tax on a given piece of real estate is determined by multiplying the tax rate of the assessing body by the: 1. selling price 2. appraised value of the property 3. assessed valuation 4. market value less depreciation 12. The law which requires certain contracts to be in writing to be enforceable is called the: 1. written instrument act 2. statute of limitations 3. statute of frauds 4. license act 13. To ascertain the exact boundary lines of property, one should obtain a: 1. title insurance policy 2. survey, with corners staked, by a licensed surveyor 3. warranty deed 4. bill of sale Exam Prep Course Take Home Test 14. Amortization is the process of: 1. liquidation of debts by installments 2. depreciation 3. appraisal 4. appreciation 15. An attorney-in-fact is the holder of: 1. a certificate as an attorney-at-law 2. a power of attorney 3. an appointment by court order 4. deed from a trustee under a will 16. The amount of deposit money is fixed by: 1. the Real Estate License Act 2. agreement of the parties 3. a minimum percentage of the selling price 4. a broker 93

94 17. If a broker received more than one bona fide offer for the same property at approximately the same time, he should: 1. submit all offers to the owner unless otherwise instructed 2. submit only the highest offer 3. submit only the one he considers in the seller s best interest 4. determine which offer came first 18. An instrument that is used to create a lien on real estate to secure the repayment of a loan is: 1. a bond 2. a deed 3. a mortgage 4. a lease 19. A contract which provides for the payment of a commission to a broker even though the owner makes the sale without the aid of the broker is called an: 1. exclusive listing 2. open listing 3. option 4. exclusive right to sell Exam Prep Course Take Home Test 20. The broker must obey all instructions made to him by his principal. Should the principal instruct the broker to violate the law, the broker should: 1. do as instructed 2. do what he thinks best under the circumstances 3. withdraw from the transaction 4. do nothing 21. The person who borrows the money and gives the mortgage is known as the: 1. mortgagee 2. assignor 3. mortgagor 4. payee 22. A listing to sell property and obtain a fixed specific price for the owner is: 1. an implied listing 2. a net listing 3. a perpetual listing 4. an exclusive agency listing 23. When a salesman leaves the association of a broker for any reason, the broker must return the sales license to the Commission and notify the salesman: 1. immediately 2. within 10 working days 3. within 30 days 4. within 5 working days 24. A person who has real property willed to her by a relative is said to acquire title by: 1. descent 2. adverse possession 3. devise 4. escheat 94

95 25. All of the following acts are forbidden by the Federal Fair Housing Law except: 1. racial discrimination in home repair financing 2. discrimination on the basis of national origin 3. racial discrimination in real estate board membership 4. discrimination on the basis of age 26. Charging an interest rate higher than the legal limit is: 1. money laundering 2. leveraging 3. usury 4. permitted for borrowers with very low credit scores 27. The person who conveys title to real property is the: 1. grantee 2. devisor 3. trustor 4. grantor 28. Escrow accounts are open for the protection of the: 1. property 2. principals 3. salesman 4. escrow holder 29. If a governmental agency requires a certain property for public use, it may acquire title by: 1. a lawsuit 2. an attachment 3. a claim of adverse possession 4. condemnation under the right of eminent domain Exam Prep Course Take Home Test 30. When there is a mortgage on your home and you pay it off, you receive: 1. a warranty deed 2. a quitclaim deed 3. a bill of sale 4. a release of lien 31. A mortgage insured by the FHA is usually borrowed from: 1. the seller 2. a lending institution 3. the U.S. government 4. Fannie Mae 32. Anything fastened or attached to real property permanently is considered to be: 1. personal property 2. real property 3. private property 4. community property 95

96 33. A printed advertisement, usually in pamphlet form, for a new subdivision is called: 1. a reservation 2. a prospectus 3. an origination 4. a property report 34. Borrowing funds to increase purchasing power is called: 1. amortization 2. arbitrage 3. leverage 4. sale and leaseback 35. A deed passes evidence of title to real property at the time it is: 1. written 2. notarized 3. delivered 4. recorded 36. A salesman who sells a property to a purchaser recommended by a friend should: 1. pay the friend 50% of the commission 2. pay the friend 10% of the commission 3. pay the friend a negotiated percent of his commission 4. pay the friend with a gift of up to $50 in value Exam Prep Course Take Home Test 37. A percentage lease is a lease: 1. which provides for a percentage to be paid to the broker as commission 2. which covers only a percentage of the property 3. in which the rent is based on receipts of the tenant s business 4. none of the above 38. Commingling as used in real estate law is: 1. a meeting of brokers and principals 2. placing a client s money in an escrow account 3. placing principal s money with the broker s money 4. placing a broker s personal funds in his business account 39. To be enforceable, a listing agreement must be signed by the: 1. seller 2. buyer 3. broker 4. attorney of record 40. The number of acres in a section is: 1. 5, , Fannie Mae refers to: 1. the chairman of the Real Estate Commission 2. the Federal National Mortgage Association 3. the Federal Housing Authority 4. the Financial Management Authority

97 42. To be binding, a lease must be signed by or for the: 1. agent 2. landlord 3. lessor and lessee 4. property owner 43. An agent is one who is employed by a: 1. salesman 2. principal 3. master 4. broker 44. A contract which has no force or effect is said to be: 1. valid 2. invalid 3. voidable 4. revoked 45. The party appointed by the court to settle the estate of a deceased person who died intestate is called the: 1. executor 2. beneficiary 3. trustee 4. administrator 46. A broker who acts for more than one party in a real estate transaction without the knowledge and consent of all parties is: 1. ethical 2. subject to disciplinary action 3. called a Dual Agent 4. within the law if no party suffers financial loss Exam Prep Course Take Home Test 47. When dying intestate and leaving no heirs, a person s property passes to the state by: 1. eminent domain 2. escheat 3. adverse possession 4. condemnation 48. Refusal by a real estate broker on the grounds of race to cooperate with other brokers is covered by the: Civil Rights Act 2. Federal Fair Housing Law 3. Sherman Anti-Trust Act 4. Taft-Hartley Act 49. The loss in value of a home due to it being considered out-of-date is called: 1. economic obsolescence 2. environmental obsolescence 3. appreciation 4. functional obsolescence 97

98 50. A mortgagee is a person who: 1. lends money to a mortgagor 2. borrows money and puts property up as loan security 3. leases real property 4. purchases land on an installment 51. When a notary public or other qualified official attests to the signature on a mortgage, it is called an: 1. authorization 2. acknowledgement 3. execution 4. authentication 52. A judgment is a: 1. court decree 2. jurisdiction of a court 3. an illegibility 4. decision of a jury 53. The authorization for a person to act for and in behalf of another is called: 1. an option 2. a precedent 3. power of attorney 4. a release Exam Prep Course Take Home Test 54. Marginal real estate is: 1. a border strip or alley between two lots 2. yielding farm land 3. land which barely repays cost of operation 4. wasteland, due to erosion, swamps, etc. 55. A quit claim deed is generally used under which of the following conditions? 1. to transfer a warranted title 2. to remove a defect in title 3. if grantor is financially unable to guarantee title 4. if grantee has lost the deed to the property 56. All listings shall be taken in the name of the: 1. buyer 2. sponsoring broker 3. escrow holder 4. salesman who listed the property 57. The chain of title refers to: 1. an abstract 2. means of conveying title to real estate 3. succession of recorded ownership on a parcel of real estate 4. title certificate 98

99 58. Invalidate means: 1. to change the date 2. unchanging unto perpetuity 3. render null and void 4. amended 59. A buyer who has signed an offer to buy and later receives the seller s disclosure has how many days to terminate the offer after receiving the disclosure? a negotiable number 60. A real estate license may be revoked in Texas for: 1. guaranteeing a profit from the resale of property 2. selling homes which have not been designed by a registered architect 3. refusal to join the local board and/or pay the proper board dues 4. failure to cooperate with another salesperson or broker 61. The selling price of residential property is most often determined by: 1. speculative value 2. intrinsic value 3. market value 4. replacement cost 62. An impartial person who helps resolve disputes informally in a non-binding decision is a/an: 1. arbitrageur 2. mediator 3. arbitrator 4. power of attorney Exam Prep Course Take Home Test 63. Which of the following listing contracts affords a broker the greatest protection: 1. open listing 2. exclusive listing 3. verbal listing 4. net listing 64. The period in which a building earns sufficient income to justify its operation is: 1. age of depreciation 2. obsolescence 3. reserve value 4. economic life 65. A broker can determine the average selling price of homes in a certain area by: 1. appraised value 2. comparative analysis 3. assessed value 4. estimate of earned increment 99

100 66. Describing land boundaries using terminal points and angles is called 1. acreage 2. metes and bounds 3. perimeter 4. government survey 67. Title to real property may be insured for the grantee by securing a: 1. policy of title insurance 2. recording of the deed 3. certificate of title 4. guarantee of title 68. An option given without actual consideration is: 1. valid in a court of law 2. enforceable in Texas 3. invalid 4. a binding contract if reduced to writing 69. The clause in a deed which sets forth the extent of the title being conveyed is the: 1. lis pendens 2. testimony clause 3. habendum clause 4. indenture clause Exam Prep Course Take Home Test 70. Building restrictions are considered to be: 1. general liens 2. specific liens 3. enforceable 4. indenture clause 71. Deed restrictions are created by the: 1. grantor 2. trustee 3. grantee 4. statutory power of local ordinance 72. A listing on community property should be signed by: 1. purchaser and broker 2. buyer and seller 3. husband and wife 4. broker and listing salesman 73. The statutory information statement about agency must be provided: 1. when the licensee meets face-to-face with a party concerning a proposed real estate transaction 2. before the contract is signed 3. in all open house situations 4. at the first meeting with a prospect 100

101 74. Another broker has a listing on a property you wish to sell. As a broker, you should: 1. call owner of the property 2. show your client the property 3. obtain permission from the other broker to show the property 4. purchase the property yourself and resell it 75. A minor s contract authorizing the sale of real property is: 1. voidable 2. terminated 3. void 4. invalid 76. The owner of 5 parcels of property desires a mortgage loan and offers all 5 parcels as security. The mortgage he will generally be required to execute is called: 1. a first mortgage 2. an amortizing mortgage 3. a blanket mortgage 4. a construction mortgage 77. A licensee selling a property on which she holds an option must notify the buyer that she is: 1. the optionee 2. the tenant 3. the optionor 4. the lessee 78. A selling agent may accept a note in lieu of earnest money if: 1. it is negotiable 2. the broker insures it 3. the seller consents 4. it is in an amount demanded by the seller as earnest money Exam Prep Course Take Home Test 79. The termination of a contract by mutual agreement of the parties is called: 1. binder 2. joint tenancy 3. rescission 4. breach of contract 80. The law which governs the relationship between a real estate agent and client is the: 1. law of agency 2. statute of limitations 3. contract law 4. statute of frauds 81. An example of a fiduciary relationship is that which exists between: 1. broker and prospect 2. broker and anyone she talks to about real estate 3. broker and principal 4. broker and the real estate commission 101

102 82. An apartment building where apartment units are individually owned and there is common ownership of lobbies, elevators, etc., is known as a: 1. condominium 2. common tenancy 3. co-habitation 4. joint tenancy 83. If a broker s license is suspended for one year, her two salesmen: 1. must surrender their license for the same period 2. may continue to operate the broker s business 3. may, upon proper application, transfer to another broker 4. will not be affected if they are independent contractors 84. An appurtenance is: 1. comparability to the sales price of similar properties 2. a building which intrudes upon another s property 3. a utility lien charged by the government for sewers, etc. 4. something which passes with the land, such as a right of way 85. The person who executes a deed is: 1. the person whose property rights are transferred 2. the person who buys the property 3. the mortgagee 4. the real estate broker Exam Prep Course Take Home Test 86. A report setting forth the estimate of value of real estate is: 1. an abstract 2. a critique 3. an appraisal 4. a closing statement 87. RESPA stands for: 1. Real Estate Recovery Fund 2. Real Estate Center at Texas A&M 3. Real Estate Settlement Procedures Act 4. Real Estate Standards and Practices Association 88. Those things which may be occupied under lease by a tenant are called: 1. tenancies 2. shelter 3. tenements 4. hereditaments 89. Commission rates are determined by: 1. The Texas Real Estate Commission 2. Local area boards 3. The Texas Legislature 4. Agreement of the parties 102

103 90. Breach of an oral agreement of sale results in: 1. an action for specific performances 2. an action for damages 3. a suit by broker against buyer for commission 4. no cause of action 91. A person who transfers title to another by deed is said to have divested title by: 1. involuntary alienation 2. descent 3. voluntary alienation 4. devise 92. The description of real estate in a deed is NOT adequate if described by: 1. lot and block number 2. government survey 3. metes and bounds 4. house number 93. The only item of chattel among the following is: 1. standing timber 2. a fence erected on a lot 3. a tractor 4. a prefabricated home built on a lot 94. Which of the following is LAWFUL under the federal Civil Rights Law? 1. assigning salesman to prospects according to the race of the prospects 2. assigning salesmen to prospects according to the race of the salesmen 3. assigning salesmen to branch offices according to the racial composition of the neighborhood in which the offices are located 4. none of the above Exam Prep Course Take Home Test 95. One of the following types of real estate which is NOT considered commercial property is: 1. shopping centers 2. department stores 3. housing projects 4. drive-in theaters 96. Economic obsolescence of real estate results from all of the following except: 1. movement of industry 2. juvenile delinquency 3. changing neighborhoods 4. physical deterioration 97. Under the Civil Rights Act of 1968, persons complaining of discrimination in housing have the choice of which of the following? 1. file an action in Federal court 2. file an action in state or local court 3. file a complaint with HUD 4. any of the above 103

104 98. When a sales license is issued, it is mailed to: 1. the salesperson 2. the sponsoring broker 3. the local board of realtors 4. the Real Estate Commission 99. Which of the following loans would NOT be subject to the provisions of RESPA? 1. a loan made from deposits insured by the FDIC 2. an FHA loan 3. a loan from a private investor who invites more than one million dollars per year in such mortgages 4. a loan on a six unit apartment house 100. Punitive damages for a single violation in a suit brought under the Federal Fair Housing Law are limited to which of the following? 1. $10, $25, $55, $110,000 Exam Prep Course Take Home Test 104

105 Answers for Exam Prep Take - Home Test 1) 4 26) 3 51) 2 76) 3 2) 3 27) 4 52) 1 77) 1 3) 2 28) 2 53) 3 78) 3 4) 2 29) 4 54) 3 79) 3 5) 1 30) 4 55) 2 80) 1 6) 2 31) 2 56) 2 81) 3 7) 2 32) 2 57) 3 82) 1 8) 3 33) 2 58) 3 83) 3 9) 2 34) 3 59) 2 84) 4 10) 3 35) 3 60) 1 85) 1 11) 3 36) 4 61) 3 86) 3 12) 3 13) 2 37) 3 38) 3 62) 2 63) 2 87) 3 88) 3 Exam Prep Course Take Home Test 14) 1 39) 1 64) 4 89) 4 15) 2 40) 3 65) 2 90) 4 16) 2 41) 2 66) 2 91) 3 17) 1 42) 3 67) 1 92) 4 18) 3 43) 2 68) 3 93) 3 19) 4 44) 2 69) 3 94) 4 20) 3 45) 4 70) 3 95) 3 21) 3 46) 2 71) 1 96) 4 22) 2 47) 2 72) 3 97) 4 23) 1 48) 2 73) 1 98) 2 24) 3 49) 4 74) 3 99) 4 25) 4 50) 1 75) 1 100) 4 105

106 Definitions 106