Sample Exam 2 Textbook Rationales 1. d The agreement between landlord and tenant here is a tenancy at will. The tenant is free to move out at any time, and the landlord can tell the tenant it s time to go at any time. The tenancy at will ends when either party dies or when the landlord transfers title to another owner (in this case, the state). 2. c Although the fencing material is attached to the ground, the proper term is annexation. Personal property can become real property by annexation. Severance is the opposite process. 3. c The seller s contract with each broker is an open listing, a unilateral contract. In a unilateral contract, one party is not obliged to perform, but if that party does perform, the other party becomes bound to perform in an open listing by paying compensation. 4. b To regain foreclosed property after the foreclosure sale is permitted in states having statutory redemption. 5. c The owner sells the ranch to the man and then leases it back from him. In this transaction, the owner starts out as a grantor and ends up as lessee. The man starts out as a grantee and ends up being a lessor. 6. d The licensee s diligent inquiries are followed by the fiduciary duty of disclosure to the client. 7. b A front foot is one foot across the front of a property. Some properties in cities are not sold by area but by dollars per front foot. In such cases, the depth is ignored in the price calculations. Three steps: (1) Find the selling price by multiplying the front footage by the price per front foot (80 ft $500 = $40,000). (2) Find the gross commission by multiplying the sale price by the commission rate ($40,000 10% = $4,000). (3) Find the salesperson s 60 percent share of the $4,000 commission (60% $4,000 = $2,400). 8. d A homeowner can discriminate under the Federal Fair Housing Act of 1968 in several possible situations. One of these is when the homeowner is renting a room in her residence. 9. b This tank is presumed not to be round but shaped like a rectangle, with walls and all corners square. The volume of such a figure is found by multiplying length by height by width. Three steps: (1) Find the volume of the tank (12 ft 9 ft 8 ft = 864 cu ft). (2) Find half the volume of the tank (864 ½ = 432 cu ft). (3) Find the cost to fill half the tank (432 cu ft $1.82 per cu ft = $786.24, or $786 to the nearest dollar). 10. b A lender's loan-to-value (LTV) ratio uses either the appraisal or the sales price for the value. The amount a property sold for at a previous transaction is irrelevant. In this story, the appraisal is less than the current selling price. If the loan is 80 percent of the value and the appraisal is used as the value, use this calculation to find the loan amount: 80% $122,500 = $98,000. 11. b When a purchase agreement has been signed, the buyer receives equitable title. When the deed is delivered to and accepted by the buyer, then the buyer will have legal title. 12. a The annual percentage rate (APR) is required by Regulation Z of the Truth-in-Lending Act.
13. d It is presumed in this question that the property is not under sales contract at the time of the owner s death. The listing terminated upon the death of the property owner. The property is now in probate and not available for sale based on the listing with the deceased. 14. c The nursing home has an estate that lasts as long as the woman s parents live. It is a life estate pur autre vie (for the life of another). 15. d Both the buyer and the seller are the licensee s clients. He owes each of them fiduciary duties. He is the buyer s buyer broker and the seller s seller (listing) broker. 16. d The 36 sections in a township are numbered thus: Beginning in the upper-right (north east) corner and moving across to the left (west) to Section 6; thence down (south) one section to Section 7; next across to the right (east) to Section 12; thence down (south) one section to Section 13; next across to the left (west) and so on. This places Section 16 just north of Section 21. 17. b Many states allow a nominal consideration, such as $10, to be used, thus keeping the selling price out of the public record. 18. b The broker s duty is to protect the client-seller by ensuring that all documents and copies required by law are delivered to the buyer. 19. c Two steps: (1) Find the gross commission by multiplying the sales price by the brokerage rate ($195,000 7.5% = $14,625). (2) Find the salesperson s 65 percent of the gross commission (65% $14,625 = $9,506.25). 20. a The figure representing replacement cost of the improvements must be estimated. That figure will then be reduced by accrued depreciation and increased by addition of the value of the lot. Land (the lot) does not depreciate. The original cost of a property is not considered in any approach to appraisal. Sales prices of comparable properties are data used in the market data approach, not the cost approach. 21. c RESPA requires a good-faith estimate of all closing costs to be given to the borrower at or within 72 hours of loan application. 22. b A landlord s failure to repair a failed water system in the rented premises gives tenants a basis to claim constructive eviction. 23. a While the son lives, the nephew holds a remainder interest. Upon the son s death, the nephew will receive whatever estate the man had in the property that he conveyed to the son. 24. b Unpaid real estate taxes are shown on a settlement sheet as a debit (charge) against the seller and a credit to the buyer. 25. d In a net lease, a commercial tenant pays property expenses such as taxes, insurance, and maintenance. Then the rental received by the landlord is net to that landlord. 26. d Four steps: (1) Find annual interest based on the interest rate and principal balance (6.5% $165,000 = $10,725). (2) Find one month s interest by dividing the annual interest by 12 ($10,725 12 = $893.75). (3) Find the amount of the first monthly payment remaining after paying interest ($925.60 - $893.75 = $31.85). (4) Find the principal balance after paying $31.85 against the balance $165,000 - $31.85 = $164,968.15).
27. c Two steps: (1) Find annual interest based on the interest rate and principal balance (6.5% $165,000 = $10,725). (2) Find one month s interest by dividing the annual interest by 12 ($10,725 12 = $893.75). 28. b The licensee was disloyal in violating seller confidentiality about bargaining strategy. Unless the seller specifically instructed the licensee to reveal her motivation and bargaining strategy, the licensee should not have done so. 29. b The rate of return is found by dividing the net annual income by the value of the property. 30. d Lender s title insurance is a buyer s expense and is shown as a debit (charge) to the buyer (borrower) on the settlement sheet. 31. b Interest adjustment is a one-time advance payment of interest for the time between settlement and the end of the month. In this case, it is for 14 days. Although July has 31 days, we are told to use the 360-day year, which gives each month as 30 days. Three steps: (1) Find one year s interest on $157,500 at 5.5 percent interest (5.5% $157,500 = $8,662.50). (2) Find one day s interest by dividing the annual interest by 360 ($662.508 360 = $24.06). (3) Find interest for 14 days (14 days $24.06 per day = $336.87). 32. d Find 127 percent of the cost three years ago: 127% $142,500 = $180,975. 33. a A clause in the sales agreement that establishes a full and satisfactory penalty for breach of contract is called a liquidated damages clause. 34. d Recorded mechanics liens can be found in the public record by an abstractor performing a title search. Rights of persons in possession, encroachments, and inaccuracies in a survey can only be found by inspecting the property. 35. b Two steps: (1) Find the area of the lot by dividing its sale price by the price per square foot ($193,600 4.40 = 44,000 sq ft). (2) Find the side of the lot adjacent to the 200-foot side by dividing the area by the 200-foot side (44,000 sq ft 200 ft = 220 ft). 36. a Because the rate is negotiable, the broker apparently negotiated a better rate with this client than with others. The seller wasn t a client until the rate was set and the contract signed. So the broker had no obligation to help the seller get a better commission rate at the broker s expense. 37. a The renter is subletting to the friend because the renter is still paying the landlord the rent but subleasing to a third party (the friend) and collecting rent from her for that time period. The renter has not relinquished all of her interest in the property. 38. d In an exclusive-right-to-sell listing, the listing broker receives a commission no matter who sells the listed property during the term of the listing. Brokers may have to prove they were the procuring cause in some open-listing and exclusive-agency-listing situations. But procuring cause is of no significance in exclusive-right-to-sell-listing situations. 39. a Capitalization rate is influenced by investment risk. The higher the risk, the higher the capitalization rate an investor wants. 40. c The book value of the property is not related to the market value; book value is an accounting technique for getting the tax benefits of paper depreciation. Land does not depreciate in book value. The property (including land and improvements) was purchased for $142,000. Five steps: (1) Find the original book value of the improvements by subtracting the value of the land from the entire purchase price ($142,000 - $18,000 =
$124,000). (2) Find the depreciation for one year using a 31.5-year economic life ($124,000 31.5 = $3,936.51). (3) Find total depreciation over the last 7 years (7 $3,936.51 = $27,555.57). (4) Find the present book value of the improvement ($124,000 - $27,555.57 = $96,444.43). (5) Find the present book value of the improvement plus the land ($96,444.43 + $18,000 = $114,444.43, or $114,444 to the nearest dollar). 41. d The present grantee must give a deed to the grantor. A deed is a one-way, one-time instrument. Once it is used, it can t be redirected to another grantee. A new deed must be drawn, even to return property to a recent grantor. 42. c If a person wishes to own the entire quarter (160 acres) of a 640-acre section in which that person already owns 20 acres (½ ¼ ¼ 640 = 20), then the portion of the section still to be acquired is 140 acres (160 acres 20 = 40). Find the cost of 140 acres if each acre will cost $300 (140 $300 = $42,000). 43. b At this point, the offer has not been accepted and there is no contract, or meeting of the minds. 44. d Six steps: (1) Find the annualized rent for an apartment renting for $795 per month (12 $795 = $9,540). (2) Find the annualized rent from three such apartments (3 $9,540 = $28,620). (3) Find annualized rent for the apartment renting for $1,200 per month (12 $1,200 = $14,400). (4) Find annualized rent for the apartment renting for $900 per month (12 $900 = $10,800). (5) Find the total annualized rent for the five apartments ($28,620 + $14,400 + $10,800 = $53,820). (6) Find the broker s 8½ percent commission on the total annualized rent (8½% $53,820 = $4,574.70). 45. c A cubic yard is one yard (3 feet) long, one yard high, and one yard deep. Volume is found by multiplying the length by the height by the depth (3 ft 3 ft 3 ft = 27 cu ft). It takes 27 cubic feet to make a cubic yard. Four steps: (1) Find the volume of the warehouse in cubic feet (36 ft 200 ft 12 ft = 86,400 cu ft). (2) Find how many cubic yards come from 86,400 cubic feet by dividing by 27 cubic feet (86,400 27 = 3,200 cu yd). (3) Find the monthly rent at $1 per cubic yard ($1 per cu yd 3,200 cu yd = $3,200). (4) Find the annual rent (12 $3,200 = $38,400). 46. d Lenders can charge as many discount points as they wish, so long as the annual percentage rate (APR) disclosed in the papers accurately reflects the points and other lending charges. 47. a The man has a defeasible fee, but it is not subject to a condition subsequent (i.e., something does not need to happen for him to get the fee); he is given possession at the time of the deed. He has a determinable, defeasible fee, with the owner retaining a possibility of reverter. 48. a The buyer will be debited (charged) enough money on the closing statement to reimburse the seller for the unused portion of prepaid taxes. Three steps: (1) Find the monthly amount of the real estate taxes ($1,116 12 = $93). (2) Find how many months lie between the settlement and the end of the year (15 days, or ½ month, in November and a full month in December = 1½ months). (3) Find the taxes on 1½ months (1½ $93 = $139.50). 49. b The storeowner has transferred all of his leasehold interests in the property to the woman, a process known as an assignment. 50. c The house and lot together cost $234,500. Because the lot value is $80,000, the value of the improvements (house, etc.) is $154,500 ($234,500 $80,000 = $154,000). Only the
improvement can be depreciated for tax purposes. Find the annual depreciation on the improvement using a 31½-year life ($154,500 31.5 = $4,904.76). 51. c Seven steps: (1) Find the first year s rental (12 $1,000 = $12,000). (2) Find the manager s 7 percent commission on this amount (7% $12,000 = $840). (3) Find the second year s rental which is 10 percent more (10% of $12,000 = $1,200 + $12,000 = $13,200). (4) Find the manager s 5 percent commission on this amount (5% $13,200 = $660). (5) Find the third year s rental (10% of $13,200 = $1,320 + $13,200 = $14,520). (6) Find the manager s 3 percent commission on this amount (3% $14,520 = $435.60). (7) Find the total of the manager s commissions ($840 + $660 + $435.60 = $1,935.60, or $1,936 to the nearest dollar). 52. a To protect one s claim of ownership against later grantees from the same grantor, one must either take possession or record the deed preferably both. To hold an unrecorded deed and fail to take possession is a very weak position. 53. c Married couples, filing jointly, who have lived in a property two of the most recent five years, enjoy a capital gain exclusion upon sale of their home of as much as $500,000. The married couple s gain is far less than $500,000. 54. a Permission of the true owner would have made a squatter s claim for adverse possession impossible. Possession must have been hostile, which includes acting without permission as well as acting against the best interests of the true owner. 55. d When joint tenant Frank died, his share went to the only surviving joint tenant of the original three Wilma. Judy s share had become a tenancy in common by being sold to Laura. That left Laura and Wilma as tenants in common. 56. a A settlement statement will always charge (debit) the buyer for the selling price. 57. b Escheat is the right to force a sale to the state; condemnation proceedings are the court process of establishing a fair price when the state s offers do not satisfy the seller. 58. b Three steps: (1) Find the percentage left for the college: 100% - (54% + 18% + 16%) = 12%. The college s share of $79,000 is 12 percent of the estate. (2) Find the entire estate by dividing the college s share by 12% ($79,000 12% = $658,333.33). The children s share was 18 percent. (3) Find the amount of the children s share (18% $658,333.33 = $118,499.99, or $118,500 to the nearest dollar). 59. d External sometimes called economic obsolescence is depreciation from factors outside of the subject property (e.g., run-down buildings nearby or the bankruptcy of a major local employer). 60. d Regulation Z of the Truth in Lending Act requires the entire phrase XX percent annual percentage rate, or XX APR. 61. d When the net annual income remains the same, an increase in the rate of return expected by investors (capitalization rate) will require lowering the amount they are most likely to pay for a property (the appraisal amount). If they pay more for the property, their cap rate will become less. 62. c ECOA does not protect applicants with bad or nonexistent credit. It does protect applicants who receive public assistance from being rejected because of the public assistance.
63. c Because the deed had never been delivered and accepted, it had not transferred title. The woman still owned the property when she died, and it will pass according to the terms of her will. 64. c The borrower will pay annual interest on a constant debt of $90,000. Two steps: (1) Find one year s interest ($90,000 7.5% = $6,750). (2) Find the total interest for 15 years the life of the loan (15 $6,750 = $101,250). 65. a This undisclosed dual agency is the basis for rescission of contract without obligation either to the broker or the purchaser. 66. b Two steps: (1) Find the percentage of the selling price that will be left after the broker takes 6 percent (100% - 6% = 94%). The desired net amount, $90,000, will be 94 percent of the selling price. (2) Find the required selling price by dividing the desired net by 94 percent ($90,000 94% = $95,744.68, or $95,745 to the nearest dollar). 67. b The Nigerian family would not have been denied membership in the club if they had met the other legitimate membership requirements (e.g., paid the membership fee). Therefore, the club is allowed to exclude them from its members-only vacation facility because they are not members. 68. d Licensees are responsible for disclosing to all parties not only whatever materials facts they know but also those they reasonably could have known. 69. c When properties owned by either the dominant or servient tenant become properties of the same owner, then the properties are merged under one legal description and the easement is terminated. Easements do not automatically terminate and may require court action to do so, nor do they terminate with death, because they run with the land. 70. a RESPA indicates that it is the right of a borrower (buyer) to request a copy of the HUD-1 form one day before settlement. 71. d There is a three-day right of rescission for consumer credit loans. That is why the lender does not issue a check on the day of a closing of a refinancing of a mortgage. 72. c Three steps: (1) Find the value indicated by using a 10 percent cap rate ($30,000 10% = $300,000). (2) Find the value indicated by using a 12 percent cap rate ($30,000 12% = $250,000). (3) Subtract $250,000 from $300,000 ($300,000 - $250,000 = $50,000). 73. a A contract that contains a liquidated damages clause sets forth the entire penalty for breach of some part of a contract or of the whole contract. 74. a A higher capitalization rate, with no change in net annual income, will result in a lower indicated value in the appraisal. 75. b When the lender requires that a borrower not only pay interest but also grant partial ownership in the property being financed, the arrangement is a participation loan. 76. c Three steps: (1) Find the total of payments on the 15-year loan (15 yr 12 payments per yr $644 = $115,920). (2) Find the total of payments on the 30-year loan (30 yr 12 payments per yr $600 = $216,000). (3) Find what percentage $216,000 is of $115,920 ($216,000 $115,920 = 186%, or 186 percent). 77. b The price a property finally sells for in an arm's-length transaction is, by definition, its market value.
78. d The tax is found by multiplying the assessment by the equalization factor and the result by the tax rate: $185,000 x 110% 40 mills ($.040) = $8,140. 79. b At settlement, items prepaid by seller will appear as debits to (charges against) the buyer and credits to the seller. 80. b This manager is attempting to control risk by preparing for an emergency.