s r e d i s o T n I de i Gu s ay s ay 9d d 5 s = 31 ay s ay 0d n d 9 Ja s = 28 ay s 0d ay b 2 d 1 Fe = 31 ys da ys r 51 da 1 Ma 0 = 3 ys da ys r 81 da 1 Ap 1 s = 3 ay s 2d ay y 1 a d M =2 30 ys da ys 3 a n 4 d Ju s =2 31 ay s 3d ay l 7 d u J s =2 31 ay s 4d ay g 0 d u A s =3 30 ay s 4d ay p 3 d e 3 S s = 31 ay s 5d ay t 6 c d 3 O = 30 s ay v d o N 31 c e D Passing thecolorado RealEstateExam
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TABLE OF CONTENTS Test Taking Hints & Suggestions... 5 National Exam Content Outline... 11 National Exam Preparation... 17 State Exam Content Outline... 33 State Exam Content Preparation... 35 Misc. Real Estate Notes... 44 Appendix A Settlement Sheet Debits & Credits... 63 Appendix B Proration Rules... 66 Appendix C Real Estate Math... 68 Appendix D Colorado Contracts & Rule F... 70 Appendix E Test Taking Tips for Scenario Question on National side of State Licensing Exam... 75 Appendix F Scenario Question Exercise... 77 Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 3 ~
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TEST TAKING HINTS AND SUGGESTIONS Through our experience with students taking the exam over the last 15 years, we have found that there are some common things that you need to do in order to pass the test the first time you take it. The main thing you need to pay attention to is, DON T TAKE THE TEST UNLESS YOU ARE SURE IN YOUR OWN MIND THAT YOU ARE READY TO TAKE THE EXAM AND PASS IT. If not, give yourself some extra time, a few days or a week or two, do some more of our tests and review your weak areas, until you BELIEVE you are really ready. One of the best areas to review is terminology (Our Definitions Test). Just knowing the definitions gives you an edge in passing the test. Don t let outside pressures, concerns or other people push you into taking it until YOU are ready. If you do take it and do not pass; it s just not worth it, and it will cost you an extra $85.00 to retake, which amount covers either or both parts failed. PSI knows what you are weak in when you fail a test, and that you will study up on that or those areas, so the next test you take with them they will focus on other areas and maybe with harder questions. If you are unable to cancel and get your money back and then reschedule, it is better to lose $90.00 and not take the test until you are better prepared, than to go and take the test figuring that if you don t make it, you will find out what you need to work on before you take it again. They will just change the difficulty of the questions, or give you harder questions. Their questions do not all have the same point value, some are easier and some are more difficult. THE TIME OF DAY YOU TAKE THE TEST IS MOST IMPORTANT Try to schedule your test at the time of day your brain function is at its peak. By that we mean, if you are a morning person (someone who is usually up and going before 7 AM), schedule your test for the morning. If, on the other hand, you don t get with it until about 9-10 AM, schedule your test in the afternoon. This is very important. You want your brain to be functioning at its optimum level when you test. The night before your test, do no more studying after 6 PM. If you don t know it by then, cramming won t help, so cancel your test, and take it a few days or a week later. Use the suggestions above to guide you, or give us a call and talk to an instructor for advice on what to study. RELAX the nightbefore, do something you enjoy to get your mind off of real estate, have a picnic, dinner in the park, go to a movie, take a drive up into the mountains, anything to let you get away from thinking about real estate and the test. Then get a good night s sleep. Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 5 ~
THE DAY OF THE EXAM Get to the testing center at least ½ hour before your test is scheduled to start. This will allow you time to check-in, and to get familiar with the PC you will be using, (it has a few different keys on it compared to a regular PC) so check out using the calculator, the clock, and most important, the MARK key. You will be using the MARK key a lot throughout the test. The testing center will give you a blank sheet of copy paper for you to do any figuring on that you find necessary. Write small or if you need another piece of paper go the proctor of the exam and ask for another. It has to be handed in when you finish. Before you start the test, write down any of the formulas, like the IRV formula and especially the cumulative calendar which is as follows: Jan 31 days Feb 28 days = 59 days Mar 31 days = 90 days Apr 30 days = 120 days May 31 days = 151 days Jun 30 days = 181 days Jul 31 days = 212 days Aug 31 days = 243 days Sep 30 days = 273 days Oct 31 days = 304 days Nov 30 days = 334 days Dec 31 days = 365 days This will provide you with a quick, handy reference to number of days by monthly accumulated totals, in a 365-day year. You will need this for the questions on Prorations that you will find in the test. Additionally, write down anything else you want to remember or think you might need while taking the test. You are going to use this paper throughout the test, (to cover up the choices of answers). When you get to the computer that you will be using for the exam we recommend that you take the tutorials that are available, this will help you to navigate the system, understand the bookmarks, and save you time. Reviewing the tutorials does not take away from the time you are allotted to take the exam. Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 6 ~
Your test time starts when you put the first question up on the screen. When the question and answer choices appear, we want you to cover up the choices of answers immediately, with the aforementioned paper, and read the question 3 times so that you have a pretty good idea of what it is really asking you, before you try to answer it. Then, uncover the choices and answer it if you can. If you aren t sure, or don t know the answer, MARK it (hit the MARK key) and go to the next question, (DON T WASTE TIME ON ANY QUESTION) and do it the same way you did the first question, cover up the choices of answers, read the question 3 times, uncover the answers, answer it if you can, if not, MARK it and go on. Continue on in this manner to the end of the test. DO NOT LEAVE ANY QUESTIONS UNANSWERED UNLESS THEY ARE MARKED. You are to go through the entire exam THREE TIMES in this manner. The 2 nd time through you will only see the questions you MARKED. Go through it the same way you did the 1 st time (cover up the answers, read the question 3 times, answer it if you can, if not, MARK it, and go on. Now, go through the remaining marked questions a 3 rd time (by now, you probably only have about 5 to 12 questions you haven t answered yet. Go through it exactly the same way as the first and second time. However, check the clock to see how much time you have left before starting the 3 rd time thru. After you have gone through the test in the recommended manner a 3 rd time, or if you don t have enough time to go through it a 3 rd time, and you still have a few questions you haven t answered, wouldn t you agree that you are probably down to guessing. If so, let s do it scientifically, and play the percentages. We know there are more correct answers that are either B or C, with B being more popular, so, we suggest you answer all remaining questions with B, unless B would obviously be a wrong answer on any particular question, in that instance, answer that question with C. ANY QUESTION LEFT UNANSWERED WILL BE SCORED AS WRONG, so be sure there is an answer for each and every question. You will not be allowed to take anything with you into the exam room except a couple of pencils (make sure they have good erasers). If you need a break, it s best to take it between the National part and the State part. If you take a break during either section of the exam, you will be losing time because the clock is running. You will have 2 hours for the National part of the exam, and 1 hour 50 minutes for the State part of the exam. It has been our experience, that if you do the test exactly the way we recommend, you will have about a 10% to 13% overall, better score on your exam. That means that you will get anywhere from 15 to 20 more right answers, and that may be enough to help you pass the test. Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 7 ~
Having gone thru all of our tests, you know that you have missed questions because you didn t read the question well enough. By forcing yourself to read the question 3 times it will help you to get more right answers. It will also help you to know what they are REALLY asking you in some of their questions. PSI would prefer that you don t pass the test. They are in the business of selling the testing, and they would appreciate you giving them another $85.00. Also, once you have answered a question, it is gone. Even though you can go looking for it, do not do so. Usually your subconscious mind will help you answer it correctly the first time, and if you start analyzing your answer, and go back and change it, you will usually change it to a wrong answer. PRACTICAL EXAM PREP EXERCISE Probably the best way to really know if you are ready to take and pass the State Exam is to be able to go through a complete transaction (both parts, s ellers side and the buyers side) filling out and being able to explain all of the contracts and disclosure documents used in a normal transaction. We recommend you do the following before you take the exam using your spouse, friend or significant other to play the parts of the seller and buyer. You will play the part of a real estate agent throughout. We want you to ROLE PLAY the SCENARIO below as realistically as possible. You are to fill out all of the necessary forms and disclosure documents, read them to your client and be able to explain them if they ask you questions (and they should ask questions) before you ask them to sign the document. Print all of the contracts and disclosure documents that you will need prior to starting this exercise. You should print out 2 copies of each document. 1. List your own home (if it s an apartment, pretend it s a condo, if it is a rental, pretend you own it for this exercise. DOCUMENTS NEEDED A. Exclusive Right to Sell Listing Contract When you use it check the box for Agency B. Source of Water Addendum C. Lead Based Paint Disclosure (Sales) D. Definitions of Working Relationships E. Seller s Property Disclosure (Residential) F. Change of Status G. Square Footage Disclosure Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 8 ~
H. Inspection Notice I. Seller Authorization J. Counterproposal K. Agreement to Amend / Extend L. Agreement to Amend / Extend with the Broker M. Closing Instructions N. Exclusive Right to Buy When you use it check the box for Transaction Broker O. Contract to Buy and Sell (Residential) Check the box for Transaction Broker P. Earnest Money Receipt Scenario- - - You are an agent on floor duty at CRES Realty and you receive a call from a person who wants you to come over to their house tonight at 4:00 pm to discuss listing their home. You assemble all of the necessary paper work and go to their home at the appointed time. After building some rapport with the home owner, they decide to list their home with you as their Agent, and you fill out the Definitions of Working Relationships and all the necessary contracts and disclosures, (Seller s Forms- - A, B, C, D, E, H, I, M, P, will be used now) while you are doing that you have the sellers fill out the Seller s Property Disclosure form, when you are both finished you will read and explain each one to the owner and get their signature on each. Fill out the Square Footage Disclosure (Use the measurements that are in the county records unless they are grossly incorrect), form and you sign it and give a copy to the seller and then leave for home. You take your paperwork to the office the next morning, proud that you got the listing, and begin marketing your new Listing by putting it into the MLS. One week later, you are holding an Open House on your listing and a prospective buyer couple shows up to see the house. You show them the home, and they like it so much that they want you to write up an offer immediately. You fill out the Definitions of Working Relationships, explain that you will be working with them as a Transaction Broker, and they are OK with that. Then you do the Right to Buy Contract, which establishes your employment with the buyers, and you will check the box for Transaction Broker, then read and explain it to your buyers and have them sign them along with the other necessary documents, which you also read and explain before they sign. (Buyers Forms needed now- - C, D, M, N, O, P). The buyers leave, asking you to present their offer ASAP. You wrap up all of your things and are about to leave, when the sellers get back home. You tell the sellers you have an offer that you need to present, but first you have to go over the Change of Status form because the buyers wants you to help them as a Transaction Broker, and since the sellers allowed you to change to Transaction Broker Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 9 ~
in their listing contract, you need to get this form signed before you present the offer. You and the sellers take care of this and then you present the offer. The sellers like everything in the offer except that the price is $3,600.00 below the asking price and the sellers want you to counter the offer back to the buyers at half of the amount less that they offered (only $1,800.00 below asking price). You write up the counter, get it signed and leave to go present the counter to your buyers. You call the buyers from your cell phone, telling them you are on your way with something they will be happy about. When you arrive at their home, you explain that the seller split the amount they discounted the price, in half, but loved the rest of the offer, and if they can accept the counter, they have just purchased their new home. The buyers assumed the seller would not accept the low offer, and were prepared to have to pay the full $3,600.00. They sign the counter, and you call the seller and notify them that you are on your way to their house to deliver a signed copy, and that they have a good, complete contract. You deliver the document and then go home. Two day later, the buyers request you to change the date for their inspection to 4 days later than it was scheduled, because their inspector is not available till then. You fill out the Amend / Extend form and take it to the buyers for their signatures, after which, you take it to the sellers for their signatures. The sellers sign it, but want to renegotiate your commission since you will be getting both sides of the transaction. They ask you to drop your commission by 3%, but after much negotiation you get them to settle for a 1% drop, so you write up an Amend / Extend with the Broker stating the change and both of you sign it. Now, you are headed towards closing. The amount of time needed to complete this exercise will vary from person-to-person, but, if you do it in a realistic manner, as if it was a REAL-LIFE situation, you will probably spend about 8 to 10 hours. You can break it into segments if you wish. We really don t recommend you try to do it in one session. THIS IS ABSOLUTELY THE BEST METHOD TO STUDY FORMS, because you have to go thru them lineby-line, word-by-word a couple of times, and an opportunity to explain them. It really locks-in the information you will need to answer about 1/3 of the questions on the test. Other Information you need to be sure of in order to pass the state portion of the exam will be found in CR classes 1, 2, 3, 4, 7, 8,12 and all the closing classes. Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 10 ~
National Exam Content Outline Property Ownership (5 Items 6%) 1. Classes of Property a. Real versus Personal Property b. Defining Fixtures 2. Land Characteristics and Legal Descriptions a. Physical Characteristics of Land b. Economic Characteristics of Land c. Types of Legal Property Descriptions d. Usage of Legal Property Descriptions 3. Encumbrances a. Liens (Types and Priority) b. Easements and Licenses c. Encroachments 4. Types of Ownership a. Types of Estates b. Forms of Ownership c. Leaseholds d. Common Interest Properties e. Bundle of Rights 5. Physical Descriptions of Property a. Land and Building Area b. Basic Construction Types and Materials Land Use Controls and Regulations (5 Items 6%) 1. Government Rights in Land a. Property Taxes and Special Assessments b. Eminent Domain, Condemnation, Escheat c. Police Power 2. Public Controls Based in Police Power a. Zoning and Master Plans b. Building Codes c. Environmental Impact Reports d. Regulation of special land types (floodplain, coastal, etc.) 3. Regulation of Environmental Hazards a. Abatement, mitigation and cleanup requirements b. Contamination levels and restrictions on sale or development of contaminated property c. Types of hazards and potential for agent or seller liability. 4. Private Controls a. Deed Conditions or Restrictions b. Covenants (CC&Rs) c. HOA Regulations Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 11 ~
Valuation and Market Analysis (7 Items 9%) 1. Value a. Market Value and Market Price b. Characteristics of Value c. Principles of Value d. Market Cycles and other Factors Affecting Property Value 2. Methods of Estimating Value/Appraisal Process a. Market or Sales Comparison Approach b. Replacement Cost or Summation Approach c. Income Approach d. Basic Appraisal Terminology (Replacement versus Reproduction Cost, Reconciliation, Depreciation, Kinds of Obsolescence) 3. Competitive/Comparative Market Analysis (CMA) a. Selecting and Adjusting Comparables b. Factors to Consider in a CMA c. Contrast CMA, Broker Opinion of Value (BOV), Appraisal d. Price/Square Foot e. Gross Rent and Gross Income Multipliers 4. When Appraisal by Certified Appraiser is required Financing (7 Items 9%) 1. General Concepts a. LTV Ratios, Points, Origination Fees, Discounts, Broker Commissions b. Mortgage Insurance (PMI) c. Lender Requirements, Equity, Qualifying Buyers, Loan Application Procedures 2. Types of Loans a. Term or Straight Loans b. Amortized and Partially Amortized (Balloon) Loans c. Adjustable Rate Loans (ARMS) d. Conventional versus Insured e. Reverse mortgages; equity loans; subprime and other nonconforming loans 3. Sources of Loan Money a. Seller/Owner Financing b. Primary Market c. Secondary Market d. Down Payment Assistance Programs 4. Government Programs a. FHA b. VA 5. Mortgages/Deeds of Trust a. Mortgage Clauses (Assumption, Due-On-Sale, Alienation, Acceleration, Prepayment, Release) b. Lien Theory versus Title Theory c. Mortgage/Deed of Trust and Note as Separate Documents 6. Financing/Credit Laws a. Truth in Lending, RESPA, Equal Credit Opportunity b. Mortgage Loan Disclosure and Seller Financing Disclosure Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 12 ~
7. Mortgage Fraud, Predatory Lending Practices (Risks to Clients) a. Usury and Predatory Lending Laws b. Appropriate Cautions to Clients Seeking Financing Laws of Agency (11 Items 14%) 1. Laws, Definitions, and Nature of Agency Relationships a. Types of Agents/Agencies (Special, General, Designated, Subagent, etc.) b. Possible Agency Relationships in a Single Transaction c. Fiduciary Responsibilities 2. Creation and Disclosure of Agency and Agency Agreements (General; Regulatory Details in State Portions) a. Creation of Agency and Agency Agreements b. Express and Implied c. Disclosure of Representation d. Disclosure of Acting as Principal or other Conflict of Interest 3. Responsibilities of Agent to Seller, Buyer, Landlord or Tenant as Principal a. Traditional Common Law Agency Duties ( COALD ) b. Duties to Client/Principal (Buyer, Seller, Tenant or Landlord) c. Effect of Dual Agency on Agent s Duties 4. Responsibilities of Agent to Customers and Third Parties 5. Termination of Agency a. Expiration b. Completion/Performance c. Termination by Operation of Law d. Destruction of Property/Death of Principal e. Termination by Acts of Parties Mandated Disclosures (8 Items 10%) 1. Property Condition Disclosure Forms a. Agent s Role in Preparation b. When Seller s Disclosure Misrepresents Property Condition 2. Warranties a. Types of available warranties b. Coverages provided 3. Need for Inspection and Obtaining/Verifying Information a. Agent Responsibility to Verify Statements included in Marketing Information b. Agent Responsibility to Inquire about Red Flag Issues c. Responding to Non-Client Inquiries 4. Material Facts Related to Property Condition or Location a. Land/Soil Conditions b. Accuracy of Representation of Lot or Improvement Size, encroachments or Easements affecting Use c. Pest Infestation, Toxic Mold and other Interior Environmental Hazards d. Structural Issues, including Roof, Gutters, Downspouts, Doors, Windows, Foundation e. Condition of Electrical and Plumbing Systems, and of Equipment or Appliances that are Fixtures Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 13 ~
f. Location with in Natural Hazard or Specially Regulated Area, Potentially Uninsurable Property) g. Known Alterations or Additions 5. Material Facts Related to Public Controls, Statutes or Public Utilities a. Local Zoning and Planning Information b. Boundaries of School/Utility/Taxation Districts, Flight Paths c. Local Taxes and Special Assessments, other Liens d. External Environmental Hazards (lead, radon, asbestos, formaldehyde foam insulation, high-voltage power lines, waste disposal sites, underground storage tanks, soil or groundwater contamination, hazardous waste) e. Stigmatized/Psychologically Impacted Property, Megan s Law Issues Contracts (10 Items 13%) 1. General Knowledge of Contract Law a. Requirements for Validity b. Types of Invalid Contracts c. When Contract is Considered Performed/Discharged d. Assignment and Novation e. Breach of Contract and Remedies for Breach f. Contract Clauses (Acceleration, etc.) 2. Listing Agreements a. General Requirements for Valid Listing b. Exclusive Listings c. Non-Exclusive Listings 3. Management Agreements [Broker Only] 4. Buyer Broker Agreements/Tenant Representation Agreements 5. Offers/Purchase Agreements a. General Requirements b. When Offer becomes Binding (Notification) c. Contingencies d. Time is of the Essence 6. Counteroffers/Multiple Counteroffers a. Counteroffer Cancels Original Offer b. Priority of Multiple Counteroffers 7. Lease and Lease-Purchase Agreements 8. Options and Right of First Refusal 9. Rescission and Cancellation Agreements Transfer of Title (6 Items 7%) 1. Title Insurance a. What is insured against b. Title Searches/Title Abstracts/Chain of Title c. Cloud on Title/Suit to Quiet Title 2. Conveyances after Death a. Types of Wills b. Testate vs. Intestate Succession Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 14 ~
3. Deeds a. Purpose of Deed, when Title Passes b. Types of Deeds (General Warranty, Special Warranty, Quitclaim) and when Used c. Essential Elements of Deeds d. Importance of Recording 4. Escrow or Closing a. Responsibilities of Escrow Agent b. Prorated Items c. Closing Statements/Closing Disclosure d. Estimating Closing Costs 5. Foreclosure, Short Sales 6. Tax Aspects of Transferring Title to Real Property 7. Special Processes [Broker Only] Practice of Real Estate (11 Items 14%) 1. Trust Accounts (General; Regulatory Details in State Portions) a. Purpose and Definition of Trust Accounts b. Responsibility for Trust Monies c. Commingling/Conversion d. Monies held in Trust Accounts 2. Fair Housing Laws a. Protected Classes b. Covered Transactions c. Specific Laws and their Effects d. Exceptions e. Compliance f. Types of Violations and Enforcement g. Fair Housing Issues in Advertising 3. Advertising a. Incorrect Factual Statements versus Puffing b. Uninformed Misrepresentation versus Deliberate Misrepresentation (Fraud) c. Truth in Advertising 4. Agent Supervision a. Liability/Responsibility for Acts of Associated Agents b. Responsibility to Train and Supervise c. Independent Contractors d. Employees 5. Commissions and Fees a. Procuring Cause/Protection Clauses b. Referrals and Finder Fees 6. General Ethics a. Practicing within Area of Competence b. Avoiding Unauthorized Practice of Law 7. Issues in Use of Technology (electronic signatures, document delivery, internet advertising) Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 15 ~
8. Antitrust Laws a. Antitrust Laws and Purpose b. Antitrust Violations in Real Estate Real Estate Calculations (5 Items 6%) 1. General Math Concepts a. Addition, Subtraction, Multiplication, and Division b. Percentages/Decimals/ Fractions c. Areas, including Acreage 2. Property Tax Calculations (not Prorations) 3. Lending Calculations a. Loan-to-Value Ratios b. Discount Points c. Equity d. Qualifying Buyers 4. Calculations for Transactions a. Prorations (Utilities, Rent, Property Taxes, Insurance, etc.) b. Commissions and Commission Splits c. Seller s Proceeds of Sale d. Total Money Needed by Buyer at Closing e. Transfer Tax/Conveyance Tax/Revenue Stamps 5. Calculations for Valuation a. Comparative Market Analyses (CMA) b. Net Operating Income c. Depreciation d. Capitalization Rate e. Gross Rent and Gross Income Multipliers (GIM, GRM) 6. Mortgage Calculations a. Down Payment/Amount to be Financed b. Amortization c. Interest Rates d. Interest Amounts e. Monthly Installment Payments Specialty Areas (5 Items 6%) 1. Property Management and Landlord/Tenant 2. Common Interest Ownership Properties 3. Subdivisions 4. Commercial, Industrial, and Income Property Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 16 ~
National Exam Preparation REAL PROPERTY CHARACTERISTICS & DEFINITIONS Must Know Vocabulary Chattel Real: A personal interest in real property, such as a lease, mortgage or trust deed. Deed of Conveyance: Signed by the trustee to return title to trustor after trust has been paid. Delivered upon full payment of a mortgage or deed of trust Eminent Domain: The right of a government to take private property for public use upon the payment of just compensation. Equitable Title: The buyer's interest in real property during the sales contract. Escheat: The reversion of property to the state in the event the owner dies without leaving a will and has no blood heirs or relatives to whom the property may pass by lawful descent. Estate for Years: An interest in land for a fixed period of time, whether for a day or 99 years; often called a tenancy for years. Fee Simple absolute: The most comprehensive ownership of real property known to the law. Holographic Will: A will written dated, and signed in the testator's writing. Intestate: A condition where a person dies without leaving a will. Joint Tenancy: Co-owners equally entitled to use of property with the right of survivorship. Any two people can hold joint tenancy. Quiet Enjoyment: Right of an owner or tenant to the use of a property without interference. Redemption: The right of an owner to reclaim real estate by paying the debt after default, together with interest and costs. Reversionary Interest: An interest in lands or other property, upon the termination of the preceding estate; a future interest. Seizin: Possession of real estate by one entitled to it. Tenancy by the Entirety: Similar to Joint Tenancy, it is used in only a few States (Not Colorado). It is a type of concurrent estate in real property held by a married couple each owns the undivided Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 17 ~
whole of the property, coupled with the Right of Survivorship, so that upon the death of one, the survivor is entitled to the decedent's share. Tenancy in Common: Co-ownership with each entitled to possession according to proportionate share and no right of survivorship. Land Use and Control Condominium: Individually owned units and ownership in common areas. Cooperative: An apartment building in which tenancy is obtained by purchasing shares of stock of a Constructive Notice: The recording of documents is considered notice to the entire world (even though all of the world will never read them!) and it is presumed that all persons have knowledge of the contents. Possession of a property is considered constructive notice that the person in possession has an interest in the property. Owners of shares are entitled to occupy a specific apartment in the building. Limited Common Elements: Areas that are included with a condominium or townhouse for the use of a specific unit such as storage units and parking spaces. Master Plan: A city's zoning plan usually designed to spread the tax load and provide employment by developing a combination of residential, commercial, and industrial property uses. Non-conforming Use: Municipalities change zoning laws i.e. commercial down zoned to agricultural. While a property is being used for its original purpose (commercial use) it is not conforming to the new zoning law. Non- conforming properties are often referred to as having rights, which are "Grand fathered", and these rights may terminate upon transfer of the property. Recording: The act of writing or entering an instrument in a book of public record. Restrictive Covenant: A clause in a deed limiting the use to which the property may be put. Statutory Dedication: The recording of an approved subdivision map that indicates land dedicated to public use. Time-share: Ownership in a specific period of occupancy (usually a week) including an interest in common areas. Variance: A requested exemption from a zoning provision. An owner would need to obtain a variance if building a garage closer to the street than is permitted by the county zoning setback rules. Zoning: Land use rules such as setback requirements and types of uses. Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 18 ~
Real Property Characteristics & Definitions Facts to Remember Metes and bounds property descriptions may make reference to an existing point, such as an iron stake. The term POB (Point of Beginning) is frequently used in metes and bounds descriptions. Recorded subdivisions use lot and block references in legal descriptions. Extended insurance coverage may be used to insure mineral rights. A lien is a monetary claim. Tax sales wipe out prior liens against the property by use of a tax deed. Words of Conveyance are required for the valid transfer of title by deed. Title insurance policies protect the purchaser against title problems, such as title forgeries. Condominium fees include maintenance, insurance, and association fees. Anything that casts a doubt on the title of a property is called a cloud on the title. A life estate is considered a freehold interest. To qualify for the homeowner capital gains exclusion the homeowner must have occupied the home for at least two of the last five years. An action to quiet title is a legal process used to clear a cloud on a title. Fee simple ownership is freely transferable. When part of a property is taken by the state through eminent domain and the remaining property loses value as a result, the owner is entitled to severance damages. The "have and to hold" provision in a deed is called the habendum clause. A general warranty deed has the most covenants and offers the greatest protection of any deed. Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 19 ~
Measurement and Cost Real Property Characteristics & Definitions Math Study Length multiplied by width equals square feet. Height is used for cubic feet only. 3 feet long x 4 feet wide = 12 square feet. Number of square feet multiplied by the cost to build per square foot equals the cost to build. 12 square feet x $150 per square foot = $1800 to build Costs of repairs per square foot deducted from cost to build equals value of used structure. $150 per square foot to build less $2 per square foot to repair = $148 square foot value. 12 square feet x $148 per square foot = $1776 used structure value The number of square feet divided by the length equals the width. 12,600 square foot property /140 feet long = 90 feet wide. The number of square feet divided by the width equals the length. 12,600 square foot property /90 feet wide = 140 feet long. To measure the square footage of a fence, add the lengths and multiply by the height. A fence around a property that is 60 feet by 100 feet is 60 +100 + 60 + 100 = 320 linier feet. Property Taxes Value multiplied by tax rate equals tax owed. $250,000 value x.015 tax rate = $3,750 tax owed. Divide the tax due by twelve to determine monthly tax due (general exam only) $3,750 annual tax /12 = $312.50 monthly tax Monthly tax multiplied by months seller owned property equals current year taxes due buyer. (General exam only) $312.50 monthly x 3.5 months (April 15th closing) = $1,093.75 Credit to buyer and debit to seller Property tax due multiplied by the late payment penalties percentage equals the penalty due. $2,000 property tax x 5.5% (due April 1 paid September 15 with penalty of 1% month) = $110 The penalty for portions of property tax with different due dates is calculated separately for each due date then added together for the total penalty. $2,000/2 = $1,000 (half due April 1) x 5.5% = $ 55 $2,000/2 = $1,000 (half due June 1) x 3.5% = 35 Total penalty $90 Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 20 ~
Valuation & Appraisal Must Know Vocabulary Accrued Depreciation: The total of the depreciation accumulated over a period of time. Appurtenance: A permanent addition to the land. Something adapted to the use of the real property and which passes as an incident to said land, such as a house, barn, garage or right of way. Capitalization Rate: Net operating income divided by property value. Example: net operating income $30,000 / property value $200,000 = 15% Cost Approach: Determining value by adding the cost of the components needed to produce it and subtracting a value for wear. The best method for new structures as it tends to set the upper limit of value. Depreciation: A method for calculating the loss in value of something that wears out through normal use. External or Economic Obsolescence: Factors outside of the subject property that adversely affect the value. Gross Rent Multiplier (GRM): Also called the gross income multiplier uses a basic formula for quickly estimating the return on investment in income property. Market Analysis: The price that willing buyers have recently paid for similar properties. Adjustments for differences from the subject property are made in the comparable properties. Progression: A gain in value due to being in an area of more expensive homes. Reconcile Estimates: Comparing and adjusting [mal estimate of value based on the factors involved in different methods of appraisal. Regression: A loss in value due to being in an area of less expensive homes. Replacement Cost: Cost to replace a structure in its current condition. Replacement cost must be based on the same utility using current materials and designs Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 21 ~
Valuation & Appraisal Important Facts to Remember A market analysis is usually used to set an asking price when there has not been a formal appraisal. Market conditions affect value through the rules of supply and demand. More buyers than homes = higher prices. Less buyers than homes = lower prices. Increases in interest rates make buying more expensive and decreases the number of sales thereby increasing the number of renters. The highest and best use brings the highest gross rental income. A lower capitalization rate creates an increased value and a higher capitalization rate produces a decreased value. Land does not depreciate. Property Value Valuation & Appraisal Math Study Original value multiplied by a percentage increase = Amount of increase. $100,000 Original Value x 3% percentage increase = $3000 increase Original value plus increase equals new value $100,000 + $3,000 = $103,000 new value Due to a good market, a $300,000 house increases in value by 24% $300,000 x.24 = $72,000 + $300,000 original value = $372,000 new value Calculate annual increases to determine value after several years. Value after one year $372,000 x 1.24 second year increase = $461,280. To calculate by the cost approach, first multiply the cost to build the structure by the remaining value percentage after depreciation and add the value of the land. $150,000 cost to build x 80% remaining value (life of 50 years with 10 years gone) = $120,000 $120,000 structure value + $75,000 land cost = $195,000 value of property. To determine the gross rent multiplier, divide the sale price by the annual rent. $ 197,500 sale price / $15,800 = 12.5 gross rent multiplier. Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 22 ~
Amount of gain on sale divided by cost equals percentage of return. $340,000 sales price - $250,000 property cost = $90,000 gain on sale. $90,000 gain on sale / $250,000 property cost = 36% return on investment. Capitalization Approach Net operating income divided by the value of the property determines the capitalization rate. The value multiplied by the capitalization rate equals the net income. $200,000 value x 8% capitalization rate = $16,000 Net operating income. The net operating income divided by the capitalization rate equals the value. $16,000 Net operating income / 8% capitalization rate = $200,000 value As the capitalization rate is lowered the value goes up. $16,000 Net operating income / 5% capitalization rate = $320,000 value As the capitalization rate is raised the value goes down. $16,000 Net operating income /10% capitalization rate = $160,000 value Potential Income minus vacancy allowance equals gross income. $100,000 Potential income - 3% vacancy allowance = $97,000 gross income ($100,000 x 3% = $3,000) Gross income minus operating expenses and replacement reserves equals net operating income. $97,000 gross income - $81,000 operating expenses and replacement reserve = $16,000 net operating income. Operating expenses include costs to operate the building including taxes and maintenance, but do not include costs unrelated to building operation such as depreciation or debt service. Types of Value: Market Value, the most likely value a property would receive in a fair, competitive market Appraised Value, an estimate of market value for the purpose of assessing property taxes Appraised Value, an estimate of market value determined by a licensed appraiser Loan Value, the greatest amount a lender will loan on a given property Insurable Value, the greatest amount an insurer will insure on a given property Characteristics of Value (aka DUST): Demand, the level of desirability in the market Utility, the useful functionality Scarcity, the supply available Transferability, the property can be transferred or sold Value is not the same as Price. Value is an estimate of potential selling price, Price in itself is an actual sold price. Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 23 ~
Contracts, Agency & Federal Regulations Must Know Vocabulary Attorney-In-Fact: One who is authorized to perform certain acts for another under a power of attorney (powers must be in writing). Blockbusting: The illegal practice of attempting to induce a person to sell or rent a dwelling by making statements that imply racial changes in the neighborhood. Exclusive Agency Listing: A listing whereby the owner appoints one real estate broker as sole agent for a specified period of time. The owner may sell the property to a buyer that the owner finds without paying the broker a commission. Exclusive Right-to-Sell: A listing contract in which the owner appoints one real estate broker as sole and exclusive broker for a specified period of time. Regardless of who sells the property, the broker is entitled to a commission Land Contract: Sales contract where the seller retains title to the property until all or a part of the purchase price has been paid also called Contract for Deed. Lease Option: A lease with a clause giving the renter the right to purchase the property at a specific price. Option Contract keeps offer open for a specific period of time. Liquidated Damages: A remedy listed in a sales contract; if a buyer does not perform under the contract, the seller retains all payments and things of value already received as full compensation and both parties are released from all obligations. Open Listing: An authorization for a non-exclusive right to secure a purchaser for a property. Procuring Cause: An event that results in an agent finding the final buyer; the real estate agent who first procures a ready, willing, and able buyer for an agreed upon price and terms and is entitled to the commission. Puffing: An exaggerated statement of opinion given by the broker during a sale. Right of First Refusal: A clause in a contract that gives someone the opportunity to match a legitimate offer. Steering: The illegal practice of directing buyers toward a certain neighborhood because of the ethnic mix. Trade Fixtures: Articles used in a business, such as signs, light fixtures, etc. Unenforceable: Cannot be enforced by a court of law, such as verbal contracts Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 24 ~
Contracts, Agency & Federal Regulations Important Facts to Remember The Essential Elements of a contract are: legally competent parties, offer and acceptance, consideration, legal purpose, reality of consent (not signed under duress). For most real estate contract additional elements are: in writing, all signatures of parties, legal description on deeds. A Valid Contract has all the essential elements and so has full legal force and effect A Void Contract is missing one or more essential elements and so has no legal force and effect. A Voidable Contract is binding on one party, but not the other. A contract signed by a minor is a VOIDABLE contract. To Execute a contract means either to sign a contract, or to fulfill and complete the terms of the contract. Selling shares in a real estate investment, such as a Limited Partnership organized to buy and sell interstate or a condominium unit where the sale involves a mandatory rental pool, requires a securities license When a broker receives multiple offers on a property, all offers actually received should be presented at the same time. According to the laws of agency all real estate agents involved with a sale must be made aware of the broker's fiduciary responsibilities. Listing agreements must include a description of the property. Only the employing broker may compensate a broker associate. According to Fair Housing laws, brokers must not discriminate or accept listings from sellers who insist on discriminating. A real estate sales contract requires the buyer and seller to complete the sale within a specified time period. An option to buy remains in force even if the seller dies during the option period. A seller who offers an option to buy will keep the option fees even if the prospective buyer does not exercise the option. Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 25 ~
The death of a principal terminates an agency agreement such as a listing contract. Acceptance of a contract takes place upon mailing. Revocation of an offer takes place upon receipt. The amount of commission on a listing contract is determined by negotiation between the seller and the broker. The Americans with Disability Act prohibits discrimination when employers have 15 or more employees. Drug addiction is specifically excluded from handicapped status or protection. Mutual assent or acceptance is required for a valid contract. A contract would be void if entered into for an illegal purpose. Contracts, Agency & Federal Regulations Math Study Commissions on sales are usually a percentage of the sale price. Sales price multiplied by commission percentage equals commission amount. $200,000 sales price x 6% commission rate equals $12,000 commission. The commission divided by the commission rate equals the sales price. $12,000 commission amount /.06 commission rate = $200,000 sales price The sales price less the commission equals net after commission $200,000 sales price - 6% or $12,000 commission = $188,000 The net after commission is equal to the remaining percentage of the sale price. $200,000 x 94% = $188,000 The net after commission divided by the remaining percentage is equal to the sale price. $188,000/94% = $200,000 Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 26 ~
Calculate each portion of a commission schedule involving different percentage rates and add the amounts to determine the total commission. Sales price $260,000, commission 4% off first $100,000 plus 3% next $100,000 + 2.5% remainder $100,000 x 4% = $4,000 $100,000 x 3% = 3,000 $ 60,000 x 2.5% = 1,500 $8,500 total commission Deduct expenses related to commission income before commission splits are made. $8,500 total commission less 10% as an agency fee split with 60% going to the selling agent. $8,500 total commission - $850 agency fee =$7,650 x 60% = $4,590. Real Estate Finance & Settlement Must Know Vocabulary Acceleration Clause: A clause in a contract by which the time for payment of a debt is advanced, usually making the obligation immediately due and payable, because of the breach of some condition, such as failure to pay an installment when due. Alienation Clause: Also called due-on-sale clause, gives the lender the rights to make all future payments due in the event of a sale or other transfer of mortgaged property. Blanket Loans: A single mortgage that covers more than one piece of property. Construction Loans: A short-term loan used to finance the building of a structure. Defeasance Clause: Gives the mortgagor the right to redeem property upon the payment of mortgagor's obligations to the mortgagee. Direct Endorsement Program: Regulations that allow lenders to make underwriting decisions on FHA-insured loans. Judgment Lien: A legal claim on the property of a debtor that allows the creditor to sell the property for payment of the amount of the judgment. Leverage: The use of debt to finance a large asset with a small amount of cash. A high degree of leverage will yield the greatest return during a period of inflation. Liquidity: Assets having the ability to convert to cash or its equivalent. Mortgagor: The party who, by a mortgage, conveys an interest in a property as security for an obligation to repay a loan. Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 27 ~
Mortgagee: The party to whom the property is conveyed under a mortgage as security for the repayment of a loan or fulfillment of some obligation, usually the creditor. Non-conforming Loan: a loan that does not meet the requirements of Fannie Mae or Freddie Mac. Redemption: The right of an owner to redeem or reclaim the real estate by paying the debt or charge (such as mortgage or tax lien) after default, together with interest and costs. Rescission: The right to return a loan after review of the provisions. Borrowers have three days to review a loan before it becomes final if the mortgage is for any purpose other than the first lien on the buyer's primary residence. Shared Appreciation Mortgage: A loan with a fixed rate of interest and interest to be paid on a certain percentage of the appreciation in value of property. The appreciation percentage is due upon transfer or sale of the property or the repayment of the loan. Take-out-loan: Permanent mortgage loan that pays off a construction loan. Truth-In-Lending Act: (Settlement Procedures) includes costs of borrowing and prepayment penalties, if any. Wrap-Around Mortgage: A loan that uses a promissory note for a portion of the price of a home wrapped around the seller's existing mortgage. The buyer makes payments to the seller and the seller continues paying the mortgage company. Real Estate Finance & Settlement Important Facts to Remember Broker may not fill in loan papers or prepare mortgages but may explain types of loan programs offered Several deposits may be made in one escrow/trust account if they are of the same nature, such as earnest deposits, and each has a separate identifying heading. Depositing funds belonging to others, such as earnest deposits, into accounts belonging to the broker (commingling) is not allowed. If a broker advertises a specific aspect of a loan, such as the interest rate, the Truth-in-Lending Act requires full disclosure. The credit column for each party (Seller, Buyer, and Closing Entity) is used to show increases in value. Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 28 ~
The debit column for each party (Seller, Buyer, and Closing Entity) is used to show decreases in value. When prorating on the general portion of the Colorado pre-licensing exam calculate using 30 days in a month and 360 days in a year. The mortgagor (borrower) secures the note by signing the mortgage. When conveyed during a real estate transfer the document used to transfer personal property, such as furniture, is a Bill of Sale. Earnest money paid is a credit to the buyer and a debit to the closing company. A title commitment indicates that an insurance company is willing to insure the ownership of the property. FNMA is an association that buys mortgages on the secondary market. FHA insurance protects the lender in case of buyer default on a mortgage. A veteran may not borrow more than the CRV (certificate of reasonable value) of a home but may pay more by adding cash. VA benefits are restored to a veteran after a loan is paid off in full. The Equal Credit Opportunity Act allows three business days to rescind consumer credit. Specific terms in an ad, such as amount down, will trigger the need for full disclosure. Home equity loans fall within the rules of the truth-in-lending act because they are consumer credit secured by the borrower's residence. **************************************************************************** TRID - This acronym stands for TILA-RESPA Integrated Disclosures and refers to new forms intended to make the mortgage process clearer to consumers. As a result of this new rule, two forms will be used for essentially all real estate transactions involving a new closed-end consumer mortgage application. These forms are called the Loan Estimate (LE) and the Closing Disclosure (CD). The Loan Estimate provides information to consumers to make comparison shopping easier and to ensure that consumers understand loan and closing costs. The Loan Estimate must be provided to the consumer within three days of the submission of a loan application, and the consumer must acknowledge receiving it. The Loan Estimate must be reissued for all Buyer/Borrower requested changes and The Closing Disclosure must be received by the buyer and seller three days before closing, and the lender must have proof of receipt. It represents a combination of the old HUD-1 Settlement Statement and the old Final Truth-in-Lending (TIL) disclosure and is designed to provide disclosures that will be helpful to consumers in understanding all of the costs of the transaction. Copyright 2017 Colorado Real Estate School All Rights Reserved. Revised 01-23-2017 ~ 29 ~