LearningExpress Editors - Real Estate Sales Exam

REAL ESTATE
SALES EXAM
REAL ESTATE
SALES
EXAM
NEW YORK
Copyright © 2004 LearningExpress, LLC.
All rights reserved under International and Pan-American Copyright Conventions.

Published in the United States by LearningExpress, LLC, New York.
Library of Congress Cataloging-in-Publication Data:

Real estate sales exam / LearningExpress.
p. cm.
ISBN 1-57685-501-5
1. Real estate agents—Licenses—United States—Examinations, questions,
etc. 2. Real estate business—Licenses—United States—Examinations, ques-
tions, etc. 3. Real property—United States—Examinations, questions, etc.
I. LearningExpress (Organization)
HD278.R433 2003
333.33'076—dc21 2003013412
Printed in the United States of America
9 8 7 6 5 4 3 2 1
First Edition
ISBN 1-57685-501-5
For more information or to place an order, contact LearningExpress at:

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About the Contributors
Ralph Tamper, ABR, CREI, DREI, GRI, LTG, was 2000 Texas Real Estate Educator of the Year. He is President
and CEO of The Real Estate School. He acts as instructor and author of several real estate courses and materials.
Joseph Goeters has been in real estate since 1960, specializing in commercial brokerage and real estate develop-
ment. He has been teaching since 1980 and has authored and co-authored numerous books on real estate.
Peter Glover has been a real estate instructor for 23 years teaching all real estate disciplines. He is a broker and
owner of Pete Glover REALTOR offering both residential and commercial services.
Sherry Weston has almost a decade of experience as a licensed broker and she teaches pre-license and MCE real
estate courses.
Lloyd Hampton has been a consultant, broker, expert witness, and renowned speaker in the field of real estate
for more than 20 years.
v
Contents
1 The Real Estate Sales Exam 1

2 The LeaningExpress Test Preparation System 11
3 Real Estate Sales Exam 1 29
4 Real Estate Refresher Course 51
5 Real Estate Math Review 101
6 Real Estate Glossary 129
vii
C H A P T E R
1 The Real Estate

Sales Exam
CHAPTER SUMMARY
Congratulations! You are about to take a step that could mark your
entrance to an exciting new career—real estate. This chapter provides
an overview of the four major national exams, as well as how this book
can help you succeed on whatever exam you take!
I F YO U A R E planning to take a real estate licensing exam, this book can help you to get a top score
on your exam. It will show you how to put all the pieces of test preparation together. Not only that,
this book includes four complete practice exams covering the topics from most real estate sales exams.
It also has a real estate math review, a real estate glossary, and a CD-ROM to practice your exam on the com-
puter!
Your Upcoming Real Estate Exam
In most states, you will be required to pass an exam to become licensed as a real estate salesperson. How-
ever, the specific exam you will be required to take depends on the state in which you want to become licensed.
If you aren’t sure which real estate exam you need to take, contact the real estate commission in the state in
which you wish to be licensed for detailed information on their specific licensing requirements.
Some states, such as California, administer their own examination for prospective real estate licensees.
Other states use the services of an independent testing company. Four of the most commonly used
1
– THE REAL ESTATE SALES EXAM –
independent testing companies are listed below, AMP

along with their contact information. Number of
Topics Questions
APPLIED MEASUREMENT Listing Property 22
PROFESSIONALS, INC. (AMP)
8310 Neiman Road Selling Property 20
Lenexa, KS 66214 Property Management 9
800-345-6559 or 913-541-0400 Settlement/Transfer of Ownership 13
www.goamp.com
Financing 21
EXPERIOR ASSESSMENTS, LLC
Professional Responsibilities/
1360 Energy Park Drive
St. Paul, MN 55108 Fair Practice/Administration 15
651-647-1723 Total Questions 100
www.experioronline.com
PROMISSOR, INC. (ASI) Note: At least 10% of the questions on this exam will
3 Bala Plaza West, Suite 300
require the use of mathematics.
Bala Cynwyd, PA 19004-3481
610-617-9300
www.promissor.com Experior
PSYCHOLOGICAL SERVICES, INC. Number of
(PSI) Topics Questions
100 West Broadway, Suite 1100
Glendale, CA 91210-1202 Business Practices and Ethics 15
800-RE-EXAMS (800-733-9267)
www.psiexams.com
Agency and Listing 15
Property Characteristics,
The real estate exams used by these independ- Descriptions, Ownership,
ent testing companies to examine prospective real Interests, and Restrictions 15
estate professionals are in a multiple-choice question Property Valuation and
format, and are often given on the computer. Here’s the Appraisal Process 10
a sample list of the typical topics and approximate Real Estate Sales Contracts 15
number of multiple-choice questions in each topic Financing Sources 10
for the real estate written exams administered by Property Management 5
these four testing companies. Keep in mind that Closing/Settlement and
some states vary the total number of questions asked Transferring Title 15
in each topic, and will also have state-specific ques- Total Questions 100
tions added to the national exam for use in their
state. For example, in Texas an additional 30 ques-
tions that relate specifically to Texas state laws and
rules are included on the real estate licensing exam
administered by PSI.
2
Promissor Regardless of whether you take a state-admin-

Number of istered real estate exam or one administered by AMP,
Topics Questions Experior, Promissor, or PSI, you will need to know
the same basic real estate information. That is why
Real Property Characteristics,
this book can help you no matter in which state you
Definitions, Ownership,
want to become licensed. The topics on the practice
Restrictions, and Transfer 16
exams in this book reflect most of the same topics
Assessing and Explaining
on different national exams. The study skills, glos-
Property Valuation and the
sary, and math review also contain invaluable
Appraisal Process 12
information regardless of which exam you take. In
Contracts, Agency Relationships
this book, the practice exams will have the follow-
with Buyers and Sellers, and
ing topics and number of questions.
Federal Requirements 20
Financing the Transaction
and Settlement 20
LearningExpress
Leases, Rents, and
Real Estate Sales Exam
Property Management 12
Number of
Total Questions 80
Topics Questions
Note: Approximately 10% of the questions on this Financing 13

exam will require the use of mathematics. Settlement/Transfer of Property 13
Property Management 13
PSI Property Valuations/Appraisal 13
Number of Property Characteristics 13
Topics Questions Business Practices 12
Contracts/Agency Relationship 13
Property Ownership 10
Mathematics 10
Land Use Controls and Regulations 8
Total Questions 100
Valuation and Market Analysis 6
Financing 10
Laws of Agency 9
Mandated Disclosures 3
Contracts 10
Transfer of Property 6
Practice of Real Estate 6
Mathematics 9
Specialty Areas 3
Total Questions 80
3
About Licensing Requirements and Exams
By now you have realized that different states use different exams. However, even if two states use the same test-
ing company, the exams may cover different topics, cost different amounts, or have different passing scores. Usu-
ally, the most accurate and up-to-date information is available through your state’s licensing agency. That is why
it is essential to contact your state’s real estate organization before your exam. For your convenience, here’s a list
of the contact information for each state’s real estate licensing agency.
At the time of publication, the following information was correct. Please understand that websites or other
contact information may have changed.
State Licensing Agencies

ALABAMA COLORADO
Real Estate Commission Department of Regulatory Agencies
1201 Carmichael Way Division of Real Estate
Montgomery, AL 38106 1900 Grant Street, Suite 600
334-242-5544 Denver, CO 80203
www.arec.state.al.us 303-894-2166
www.dora.state.co.us/Real-Estate
ALASKA
Division of Occupational Licensing CONNECTICUT
Real Estate Commission The Connecticut Licensing Center
3801 “C” Street, Suite 722 Real Estate Division
Anchorage, AK 99503 165 Capital Avenue
907-269-8162 Hartford, CT 06106
www.dced.state.ak.us/occ/prec.htm 800-842-2649
www.ct-clic.com/
ARIZONA
Department of Real Estate DELAWARE
2910 North 44th Street, Suite 100 Real Estate Commission
Phoenix, AZ 85018 861 Silver Lake Boulevard, Suite 203
602-468-1414 Dover, DE 19904-2467
www.re.state.az.us 302-739-4522, ext. 219
www.state.de.us/research/profreg/realcomm.htm
ARKANSAS
Real Estate Commission FLORIDA
612 South Summit Street Division of Real Estate
Little Rock, AR 72201-4740 400 West Robinson Street
501-682-2732 Orlando, FL 32801
www.state.ar.us/arec/arecweb.html 407-423-6053
www.state.fl.us/dbpr/re/index.shtml
CALIFORNIA
Department of Real Estate GEORGIA
2201 Broadway Real Estate Commission
Sacramento, CA 95818 Suite 1000—International Tower
916-227-0931 229 Peachtree Street, N.W.
www.dre.cahwnet.gov Atlanta, GA 30303-1605
404-656-3916
www.grec.state.ga.us/
4
HAWAII LOUISIANA
Real Estate Commission Real Estate Commission
250 South King Street, Room 702 P.O. Box 14785
Honolulu, HI 96813 Baton Rouge, LA 70898-4785
808-586-2643 800-821-4529
www.state.hi.us/hirec www.lrec.state.la.us
IDAHO MAINE
Real Estate Commission Department of Professional and Financial Regulation
P.O. Box 83720 Office of Licensing and Registration
Boise, ID 83720-0077 35 State House Station
208-334-3285 Augusta, ME 04333
www.idahorealestatecommission.com 207-624-8521
www.state.me.us/pfr/olr
ILLINOIS
Office of Banks and Real Estate MARYLAND
Attention: Real Estate Division Real Estate Commission
500 East Monroe, Suite 200 500 North Calvert Street
Springfield, IL 62701 Baltimore, MD 21202
217-782-3414 410-230-6230
www.obre.state.il.us/realest/realmain.htm www.dllr.state.md.us/license/occprof/recomm.html
INDIANA MASSACHUSETTS
Real Estate Commission Real Estate Board
302 West Washington Street 239 Causeway Street, Suite 500
Indianapolis, IN 46204-2700 Boston, MA 02114
317-232-2980 617-727-2373
www.in.gov/pla/bandc/estate/ www.state.ma.us/reg/boards/re/default.htm
IOWA MICHIGAN
Professional Licensing and Regulation Division Department of Commerce
Real Estate Division BOPR—Office of Commercial Services
1918 S.E. Hulsizer Avenue P.O. Box 30243
Ankeny, IA 50021 Lansing, MI 48909
515-281-3183 517-373-0490
www.state.ia.us/government/com/prof/realesta/ www.michigan.gov/cis/
realesta.htm
MINNESOTA
KANSAS Department of Commerce
Real Estate Commission 133 East 7th Street
Three Townsite Plaza, Suite 200 St. Paul, MN 55101
120 S.E. 6th Avenue 651-296-6694
Topeka, KS 66603-3511 www.commerce.state.mn.us/
785-296-3411
www.ink.org/public/krec
MISSISSIPPI
Real Estate Commission
KENTUCKY 5176 Keele Street
Real Estate Commission P.O. Box 12685
10200 Linn Station Road, Suite 201 Jackson, MS 39236-2685
Louisville, KY 40223 601-987-3969
502-425-4273 www.mrec.state.ms.us/
www.krec.net
5
MISSOURI NEW YORK

Real Estate Commission Department of State
3605 Missouri Boulevard Division of Licensing Services
P.O. Box 1339 84 Holland Avenue
Jefferson City, MO 65102 Albany, NY 12208
314-751-2628 518-474-2651
www.ecodev.state.mo.us/pr/restate/ www.dos.state.ny.us/lcns/realest.html
MONTANA NORTH CAROLINA

Board of Realty Regulation Real Estate Commission
111 North Jackson 1313 Navaho Drive
Helena, MT 59601 P.O. Box 17100
406-444-2961 Raleigh, NC 27619-7100
www.discoveringmontana.com/dli/bsd/license/ 919-875-3700
license.htm www.ncrec.state.nc.us/
NEBRASKA NORTH DAKOTA

1200 “N” Street, Suite 402 314 East Thayer Avenue
Lincoln, NE 68508 P.O. Box 727
402-471-2004 Bismarck, ND 58502-0727
www.nol.org/home/NREC/index.htm 701-328-9749
www.governor.state.nd.us/boards/
NEVADA
Nevada Department of Business and Industry OHIO
Real Estate Division Division of Real Estate
788 Fairview Drive, Suite 200 77 South High Street, 20th Floor
Carson City, NV 89701-5453 Columbus, OH 43266-0547
775-687-4280 614-488-4100
www.red.state.nv.us/ www.com.state.oh.us/real/
NEW HAMPSHIRE OKLAHOMA

State House Annex, Room 434 4040 North Lincoln Boulevard, Suite 100
25 Capital Street Oklahoma City, OK 73105
Concord, NH 03301 405-521-3387
603-271-6658 www.state.ok.us/~orec/
www.state.nh.us/nhrec/license.html
OREGON
NEW JERSEY Real Estate Agency
Real Estate Commission 1177 Center Street N.E.
20 West State Street Salem, OR 97301-2505
CN-328 Fax: 503-373-7153
Trenton, NJ 08625 www.rea.state.or.us/
809-292-8280
www.nj.gov/dobi/rec_lic.htm
PENNSYLVANIA
Real Estate Commission
NEW MEXICO P.O. Box 2649
Real Estate Commission Harrisburg, PA 17105-2649
1650 University Boulevard, NE, Suite 490 717-783-3658
Albuquerque, NM 87102 www.dos.state.pa.us/bpoa/site/default.asp
505-841-9120
www.state.nm.us/nmrec/
6
RHODE ISLAND VERMONT

Department of Business Regulation Real Estate Commission
Division of Commercial Licensing and Regulation 109 State Street
Real Estate Montpelier, VT 05609-1106
233 Richmond Street, Suite 230 802-828-3228
Providence, RI 02903-4230 http://vtprofessionals.org/opr1/real_estate/
401-222-2255
www.dbr.state.ri.us/
VIRGINIA
Department of Professional and Occupational
SOUTH CAROLINA Regulation
Department of Labor Licensing and Regulation 3600 West Broad Street
Real Estate Commission Richmond, VA 23230-4917
P.O. Box 11847 804-367-8526
Columbia, SC 29211-1847 www.state.va.us/dpor/indexne.html
803-896-4400
www.llr.state.sc.us/POL/RealEstateCommission/
WASHINGTON
Department of Licensing
SOUTH DAKOTA Real Estate Program
Real Estate Commission P.O. Box 9015
118 West Capitol Olympia, WA 98507-9015
Pierre, SD 57501-0490 360-753-2250
605-773-3600 www.wa.gov/dol/bpd/refront.htm
www.state.sd.us/dcr/realestate
WEST VIRGINIA
TENNESSEE Real Estate Commission
Real Estate Commission 1033 Quarrier Street, Suite 400
500 James Robertson Parkway Charleston, WV 25301-2315
Suite 180, Volunteer Plaza 304-558-3555
Nashville, TN 37243-1151 www.state.wv.us/wvrec
615-741-2273
www.state.tn.us/commerce/boards/trec/index.htm
WISCONSIN
Bureau of Direct Licensing and Real Estate
TEXAS Department of Regulation and Licensing
Real Estate Commission 1400 East Washington Avenue
P.O. Box 12188 Box 8935
Austin, TX 78711-2188 Madison, WI 53708
512-459-6544 www.drl.state.wi.us
www.trec.state.tx.us/
WYOMING
UTAH Real Estate Commission
Department of Commerce 2020 Carey Avenue, Suite 100
Division of Real Estate Cheyenne, WY 82002-0180
P.O. Box 146711 307-777-7141
Salt Lake City, Utah 84114-6711 http://realestate.state.wy.us
801-530-6747
www.commerce.utah.gov/dre/index.html
7
The Right Questions
Once you’ve found your state’s agency, it’s important to know the right questions to ask. To find out everything
you need to know about your exam, use the following checklist of questions.
✓ Which exam is given in my state?

✓ What are the topics covered on this exam?
✓ How many questions are there?
✓ What are the state-specific real estate topics covered on this exam?
✓ Is the exam multiple-choice?
✓ Is the exam hand-written or is it given on the computer?
✓ How do I register?
✓ How much does the exam cost?
✓ How long will the exam take to complete?
✓ Can I use a calculator on the exam?
✓ If I can use a calculator, what kind of calculators are permitted?
✓ Where is the exam given?
✓ What day is the exam given?
✓ Can I reschedule my exam?
✓ What time is the exam?
✓ What do I have to bring to the exam?
✓ What is not allowed at the test centers?
✓ If the exam is given on the computer, will I be allowed to practice on a computer before the exam begins?
✓ How is the exam scored?
✓ What is the passing score?
✓ Are there separate passing scores for different parts of the exam?
✓ When will I receive my score report?
✓ What happens if I do not pass the exam?
✓ Can I retake my exam?
✓ If I have special needs, how do I arrange for them?
How This Book Can Help You
The process of preparing for a real estate exam is an overwhelming task. But this book guides you through sev-
eral manageable steps. The first step is to finish this chapter. Then, move on to Chapter 2, which explains how to
set up an individualized study plan and presents specific study strategies you can use during your study sessions.
You will find out the steps to take in order to maximize your chances for scoring high on your exam. You will also
find out when to take sample exams so you can check your scores and still have enough time to focus on the areas
8
in which you need more work. In addition, you will increase your understanding and retention of the real estate
material you are studying by using many different study strategies, not just one or two.
While you are reading Chapter 2, take the time to create an individualized study plan that will fit your needs
and schedule. This is a crucial step in the test-preparation process. After you finish reading Chapter 2, spend some
time using each different study strategy explained in that chapter.
Chapter 3 contains the first of four practice exams. You should take this practice exam before you begin study-
ing. That way, you will be able to find your strengths and weaknesses, and you will be able to focus your study-
ing on exactly the topics that are giving you the most trouble.
After you finish your first practice exam, you will find a Real Estate Refresher Course. This review covers
several real estate topics that will be on a real estate sales exam. Since you already know which topics on the first
exam gave you trouble, you can focus on those topics.
After the real estate refresher course comes the Real Estate Math Review. This contains a basic review of arith-
metic, algebra, geometry, and word problems. It also covers the types of math questions you will face on a real
estate sales exam.
Need help with real estate terms? Chapter 6 has a Real Estate Glossary with the most commonly tested and
used real estate terms. This glossary will not only help you prepare for your exam, but also in your career.
Once you have reviewed the course, the math, and the glossary, it’s time for more practice exams. There are
three more practice exams in this book. After every exam you should review which topics still give you the most
trouble and study accordingly. For more study tips, start reading Chapter 2.
9
C H A P T E R
The
2 LearningExpress
Test Preparation
System
CHAPTER SUMMARY
Taking a real estate sales exam can be tough. It demands a lot of prepa-
ration if you want to achieve a top score. Your career depends on your
passing the exam. The LearningExpress Test Preparation System,
developed exclusively for LearningExpress by leading test experts, gives
you the discipline and attitude you need to be a winner.
F ACT: T A K I N G T H E real estate licensing exam is not easy, and neither is getting ready for it.
Your future career as a real estate salesperson depends on your getting a passing score, but there
are all sorts of pitfalls that can keep you from doing your best on this exam. Here are some of
the obstacles that can stand in the way of your success:
■ being unfamiliar with the format of the exam

■ being paralyzed by test anxiety
■ leaving your preparation to the last minute
■ not preparing at all!
■ not knowing vital test-taking skills: how to pace yourself through the exam, how to use the process
of elimination, and when to guess
■ not being in tip-top mental and physical shape
■ messing up on test day by arriving late at the test site, having to work on an empty stomach, or
shivering through the exam because the room is cold
11
– THE LEARNINGEXPRESS TEST PREPARATION SYSTEM –
What’s the common denominator in all these test-taking pitfalls? One word: control. Who’s in control, you
or the exam?
Here’s some good news: The LearningExpress Test Preparation System puts you in control. In nine easy-to-
follow steps, you will learn everything you need to know to make sure that you are in charge of your preparation
and your performance on the exam. Other test-takers may let the test get the better of them; other test-takers may
be unprepared or out of shape, but not you. You will have taken all the steps you need to take to get a high score
on the real estate licensing exam.
Here’s how the LearningExpress Test Preparation System works: Nine easy steps lead you through every-
thing you need to know and do to get ready to master your exam. Each of the steps listed below includes both
reading about the step and one or more activities. It’s important that you do the activities along with the read-
ing, or you won’t be getting the full benefit of the system. Each step tells you approximately how much time that
step will take you to complete.
Step 1. Get Information 50 minutes

Step 2. Conquer Test Anxiety 20 minutes
Step 3. Make a Plan 30 minutes
Step 4. Learn to Manage Your Time 10 minutes
Step 5. Learn to Use the Process of Elimination 20 minutes
Step 6. Know When to Guess 20 minutes
Step 7. Reach Your Peak Performance Zone 10 minutes
Step 8. Get Your Act Together 10 minutes
Step 9. Do It! 10 minutes
Total 3 hours
We estimate that working through the entire system will take you approximately three hours, though it’s
perfectly OK if you work faster or slower. If you take an afternoon or evening, you can work through the whole
LearningExpress Test Preparation System in one sitting. Otherwise, you can break it up, and do just one or two
steps a day for the next several days. It’s up to you—remember, you are in control.
Step 1: Get Information
Time to complete: 50 minutes

Activity: Read Chapter 1, “The Real Estate Sales Exam”
Knowledge is power. The first step in the LearningExpress Test Preparation System is finding out everything you
can about the real estate sales exam given in your state. Once you have your information, the other steps in the
LearningExpress Test Preparation System will show you what to do about it.
12
Part A: Straight Talk About the Real Estate Sales Exam

Why do you have to take an exam, anyway? You have already been through your pre-license course; why should
you have to go through a rigorous exam? It’s simply an attempt on the part of your state to be sure you have the
knowledge and skills necessary to be a licensed real estate agent. Every profession that requires practitioners to
exercise financial and fiduciary responsibility to clients also requires practitioners to be licensed—and licensure
requires an exam. Real estate is no exception.
It’s important for you to remember that your score on your real estate sales exam does not determine how
smart you are or even whether you will make a good real estate agent. There are all kinds of things an exam like
this can’t test: whether you have the drive and determination to be a top salesperson, whether you will faithfully
exercise your responsibilities to your clients, whether you can be trusted with confidential information about peo-
ple’s finances. Those kinds of things are hard to evaluate, while a computer-based test is easy to evaluate.
This is not to say that the exam is not important! The knowledge tested on the exam is knowledge you will
need to do your job. And your ability to enter the profession you’ve trained for depends on your passing this exam.
And that’s why you are here—using the LearningExpress Test Preparation System to achieve control over the exam.
Part B: What’s on the Test

If you haven’t already done so, stop here and read Chapter 1 of this book, which gives you an overview of the four
major exams. Then, go to the Internet and read the most up-to-date information about your state’s exam directly
from the test developers.
Step 2: Conquer Test Anxiety

Activity: Take the Test Stress Quiz
Having complete information about the exam is the first step in getting control of the exam. Next, you have to
overcome one of the biggest obstacles to test success: test anxiety. Test anxiety not only impairs your perform-
ance on the exam itself, but also keeps you from preparing! In Step 2, you will learn stress management techniques
that will help you succeed on your exam. Learn these strategies now, and practice them as you work through the
exams in this book, so they will be second nature to you by exam day.
Combating Test Anxiety

The first thing you need to know is that a little test anxiety is a good thing. Everyone gets nervous before a big
exam—and if that nervousness motivates you to prepare thoroughly, so much the better. It’s said that Sir Lau-
rence Olivier, one of the foremost British actors of this century, felt ill before every performance. His stage fright
didn’t impair his performance; in fact, it probably gave him a little extra edge—just the kind of edge you need to
do well, whether on a stage or in an examination room.
13
Test Stress Quiz
You only need to worry about test anxiety if it is extreme enough to impair your performance. The following quiz
will provide a diagnosis of your level of test anxiety. In the blank before each statement, write the number that
most accurately describes your experience.
0 = Never 1 = Once or twice 2 = Sometimes 3 = Often
I have gotten so nervous before an exam that I simply put down the books and didn’t study for it.
I have experienced disabling physical symptoms such as vomiting and severe headaches because I was
nervous about an exam.
I have not showed up for an exam because I was scared to take it.
I have experienced dizziness and disorientation while taking an exam.
I have had trouble filling in the little circles because my hands were shaking too hard
I have failed an exam because I was too nervous to complete it.
Total: Add up the numbers in the blanks above.
Your Test Stress Score
Here are the steps you should take, depending on your score. If you scored:
0–2: your level of test anxiety is nothing to worry about; it’s probably just enough to give you that little extra
edge.
3–6: your test anxiety may be enough to impair your performance, and you should practice the stress man-
agement techniques listed in this section to try to bring your test anxiety down to manageable levels.
7+: your level of test anxiety is a serious concern. In addition to practicing the stress management techniques
listed in this section, you may want to seek additional help.
Above is the Test Stress Quiz. Stop and answer the questions to find out whether your level of test anxiety
is something you should worry about.
Stress Management Before the Test

If you feel your level of anxiety getting the best of you in the weeks before the test, here is what you need to do
to bring the level down again:
■ Get prepared. There’s nothing like knowing what to expect and being prepared for it to put you in con-
trol of test anxiety. That’s why you are reading this book. Use it faithfully, and remind yourself that you
are better prepared than most of the people taking the test.
■ Practice self-confidence. A positive attitude is a great way to combat test anxiety. This is no time to be
humble or shy. Stand in front of the mirror and say to your reflection, “I am prepared. I am full of self-
confidence. I am going to ace this test. I know I can do it.” Say it into a tape recorder and play it back
once a day. If you hear it often enough, you will believe it.
14
■ Fight negative messages. Every time someone starts telling you how hard the exam is or how it’s almost
impossible to get a high score, start saying your self-confidence messages above. Don’t listen to the nega-
tive messages. Turn on your tape recorder and listen to your self-confidence messages.
■ Visualize. Imagine yourself reporting for duty on your first day as a real estate salesperson. Think of
yourself talking with clients, showing homes, and best of all, making your first sale. Visualizing success
can help make it happen—and it reminds you of why you are going to all this work in preparing for the
exam.
■ Exercise. Physical activity helps calm your body down and focus your mind. Besides, being in good phys-
ical shape can actually help you do well on the exam. Go for a run, lift weights, go swimming—and do it
regularly.
Stress Management on Test Day

There are several ways you can bring down your level of test anxiety on test day. They will work best if you prac-
tice them in the weeks before the test, so you know which ones work best for you.
■ Deep breathing. Take a deep breath while you count to five. Hold it for a count of one, then let it out on
a count of five. Repeat several times.
■ Move your body. Try rolling your head in a circle. Rotate your shoulders. Shake your hands from the
wrist. Many people find these movements very relaxing.
■ Visualize again. Think of the place where you are most relaxed: lying on the beach in the sun, walking
through the park, or whatever. Now close your eyes and imagine you are actually there. If you practice in
advance, you will find that you only need a few seconds of this exercise to experience a significant
increase in your sense of well-being.
When anxiety threatens to overwhelm you right there during the exam, there are still things you can do to
manage the stress level:
■ Repeat your self-confidence messages. You should have them memorized by now. Say them silently to
yourself, and believe them!
■ Visualize one more time. This time, visualize yourself moving smoothly and quickly through the test
answering every question right and finishing just before time is up. Like most visualization techniques,
this one works best if you have practiced it ahead of time.
■ Find an easy question. Find an easy question, and answer it. Getting even one question finished gets you
into the test-taking groove.
■ Take a mental break. Everyone loses concentration once in a while during a long test. It’s normal, so you
shouldn’t worry about it. Instead, accept what has happened. Say to yourself, “Hey, I lost it there for a
minute. My brain is taking a break.” Put down your pencil, close your eyes, and do some deep breathing
for a few seconds. Then you will be ready to go back to work.
Try these techniques ahead of time, and see if they work for you!
15
Step 3: Make a Plan

Activity: Construct a study plan
Maybe the most important thing you can do to get control of yourself and your exam is to make a study plan.
Too many people fail to prepare simply because they fail to plan. Spending hours on the day before the exam por-
ing over sample test questions not only raises your level of test anxiety, it also is simply no substitute for careful
preparation and practice over time.
Don’t fall into the cram trap. Take control of your preparation time by mapping out a study schedule. On
the following pages are two sample schedules, based on the amount of time you have before you take your real
estate sales exam. If you are the kind of person who needs deadlines and assignments to motivate you for a proj-
ect, here they are. If you are the kind of person who doesn’t like to follow other people’s plans, you can use the
suggested schedules here to construct your own.
Even more important than making a plan is making a commitment. You can’t review everything you learned
in your real estate courses in one night. You have to set aside some time every day for study and practice. Try for
at least 20 minutes a day. Twenty minutes daily will do you much more good than two hours on Saturday.
Don’t put off your study until the day before the exam. Start now. A few minutes a day, with half an hour
or more on weekends, can make a big difference in your score.
16
Schedule A: The 30-Day Plan

If you have at least a month before you take your real estate sales exam, you have plenty of time to prepare—as
long as you don’t waste it! If you have less than a month, turn to Schedule B.
Time Preparation
Days 1–4 Skim over the written materials from your training program, particularly
noting 1) areas you expect to be emphasized on the exam and 2) areas
you don’t remember well. On Day 4, concentrate on those areas.
Day 5 Take the first practice exam in Chapter 3.
Day 6 Score the first practice exam. Use “Exam 1 for Review” on page 50 to
see which topics you need to review most. Identify two areas that you will
concentrate on before you take the second practice exam.
Days 7–10 Study the two areas you identified as your weak points. Don’t forget,
there is a Real Estate Refresher Course in Chapter 4, a Real Estate Math
Review in Chapter 5, and a Real Estate Glossary in Chapter 6. Use these
chapters to improve your score on the next practice test.
Day 11 Take the second practice exam in Chapter 7.
Day 12 Score the second practice exam. Identify one area to concentrate on
before you take the third practice exam.
Days 13–18 Study the one area you identified for review. Again, use the Refresher
Course, Math Review, and Glossary for help.
Day 19 Take the third practice exam in Chapter 8.
Day 20 Once again, identify one area to review, based on your score on the
third practice exam.
Days 20–21 Study the one area you identified for review. Use the Refresher Course,
Math Review, and Glossary for help.
Days 22–25 Take an overview of all your training materials, consolidating your
strengths, and improving on your weaknesses.
Days 26–27 Review all the areas that have given you the most trouble in the three
practice exams you have taken so far.
Day 28 Take the fourth practice exam in Chapter 9. Note how much you have
improved!
Day 29 Review one or two weak areas by studying the Refresher Course, Math
Review, and Glossary.
Day before the exam Relax. Do something unrelated to the exam and go to bed at a reason-
able hour.
17
Schedule B: The 10-Day Plan

If you have two weeks or less before you take the exam, use this 10-day schedule to help you make the most of
your time.
Time Preparation
Day 1 Take the first practice exam in Chapter 3 and score it using the answer
key at the end. Use “Exam 1 for Review” on page 50 to see which topics
you need to review most.
Day 2 Review one area that gave you trouble on the first practice exam. Use the
Real Estate Refresher Course in Chapter 4, the Real Estate Math Review in
Chapter 5, and the Real Estate Glossary in Chapter 6 for extra practice
in these areas.
Day 3 Review another area that gave you trouble on the first practice exam.
Again, use the Refresher Course, Math Review, and Glossary for extra
practice.
Day 4 Take the second practice exam in Chapter 7 and score it.
Day 5 If your score on the second practice exam doesn’t show improvement on
the two areas you studied, review them. If you did improve in those
areas, choose a new weak area to study today.
Day 6 Take the third practice exam in Chapter 8 and score it.
Day 7 Choose your weakest area from the third practice exam to review. use the
Refresher Course, Math Review, and Glossary for extra practice.
Day 8 Review any areas that you have not yet reviewed in this schedule.
Day 9 Take the fourth practice exam in Chapter 9 and score it.
Day 10 Use your last study day to brush up on any areas that are still giving you
trouble. Use the Refresher Course, Math Review, and Glossary.
Day before the exam Relax. Do something unrelated to the exam and go to bed at a reason-
able hour.
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Step 4: Learn to Manage Your Time
Time to complete: 10 minutes to read, many hours of practice!

Activity: Practice these strategies as you take the sample tests in this book
Steps 4, 5, and 6 of the LearningExpress Test Preparation System put you in charge of your exam by showing you
test-taking strategies that work. Practice these strategies as you take the sample tests in this book, and then you
will be ready to use them on test day.
First, you will take control of your time on the exam. It’s a terrible to know there are only five minutes left when
you are only three-quarters of the way through the test. Here are some tips to keep that from happening to you.
■ Follow directions. Some real estate sales exams are given on the computer. If a tutorial is offered before
the exam, you should take your time taking the tutorial before the exam. Read the directions carefully
and ask questions before the exam begins if there’s anything you don’t understand.
■ Pace yourself. If there is a timer on the screen as you take the exam, keep an eye on it. This will help you
pace yourself. For example, when one-quarter of the time has elapsed, you should be a quarter of the way
through the test, and so on. If you are falling behind, pick up the pace a bit. If you do not take your exam
on a computer, use your watch or the clock in the testing room to keep track of the time you have left.
■ Keep moving. Don’t waste time on one question. If you don’t know the answer, skip the question and
move on. You can always go back to it later.
■ Don’t rush. Though you should keep moving, rushing won’t help. Try to keep calm and work methodi-
cally and quickly.
Step 5: Learn to Use the Process of Elimination

Activity: Complete worksheet on Using the Process of Elimination
After time management, your next most important tool for taking control of your exam is using the process of
elimination wisely. It’s standard test-taking wisdom that you should always read all the answer choices before choos-
ing your answer. This helps you find the right answer by eliminating wrong answer choices. And, sure enough,
that standard wisdom applies to your exam, too.
Let’s say you are facing a question that goes like this:
19
Alicia died, leaving her residence in town and a separate parcel of undeveloped rural land to her brother
Brian and her sister Carrie, with Brian owning one-quarter interest and Carrie owning three-quarters
interest. How do Brian and Carrie hold title?
a. as tenants in survivorship
b. as tenants in common
c. as joint tenants
d. as tenants by the entirety
You should always use the process of elimination on a question like this, even if the right answer jumps out
at you. Sometimes the answer that jumps out isn’t right after all. Let’s assume, for the purpose of this exercise,
that you are a little rusty on property ownership terminology, so you need to use a little intuition to make up for
what you don’t remember. Proceed through the answer choices in order.
So you start with answer a. This one is pretty easy to eliminate; this tenancy doesn’t have to do with sur-
vivorship. If your real estate sales exam is given on a computer, you won’t be able to cross-out answer choices;
instead, make a mental note that answer choice a is incorrect.
Choice b seems reasonable; it’s a kind of ownership that two people can share. Even if you don’t remember
much about tenancy in common, you could tell it’s about having something “in common.” Make a mental note,
“good answer, I might use this one.”
Choice c is also a possibility. Joint tenants also share something in common. If you happen to remember
that joint tenancy always involves equal ownership rights, you mentally eliminate this choice. If you don’t, make
a mental note, “good answer” or “well, maybe,” depending on how attractive this answer looks to you.
Choice d strikes you as a little less likely. Tenancy by the entirety doesn’t necessarily have to do with two peo-
ple sharing ownership. This doesn’t sound right, and you have already got a better answer picked out in choice
b. If you are feeling sure of yourself, you can mentally eliminate this choice.
If you’re pressed for time, you should choose answer b. If you have got the time to be extra careful, you could
compare your answer choices again. Then, choose one and move on.
If you are taking a test on paper, like the practice exams in this book, it’s good to have a system for mark-
ing good, bad, and maybe answers. We’re recommending this one:
X = bad
✓ = good
? = maybe
If you don’t like these marks, devise your own system. Just make sure you do it long before test day—while you’re
working through the practice exams in this book—so you won’t have to worry about it just before the exam.
Even when you think you are absolutely clueless about a question, you can often use process of elimination
to get rid of one answer choice. If so, you are better prepared to make an educated guess, as you will see in Step
6. More often, the process of elimination allows you to get down to only two possibly right answers. Then you
are in a strong position to guess. And sometimes, even though you don’t know the right answer, you find it sim-
ply by getting rid of the wrong ones, as you did in the example above.
20
Try using your powers of elimination on the questions in the worksheet Using the Process of Elimination
below. The questions aren’t about real estate work; they’re just designed to show you how the process of elimi-
nation works. The answer explanations for this worksheet show one possible way you might use the process to
arrive at the right answer.
The process of elimination is your tool for the next step, which is knowing when to guess.
Using the Process of Elimination
Use the process of elimination to answer the following questions.
1. Ilsa is as old as Meghan will be in five years. The difference between Ed’s age and Meghan’s age is twice
the difference between Ilsa’s age and Meghan’s age. Ed is 29. How old is Ilsa?
a. 4
b. 10
c. 19
d. 24
2. “All drivers of commercial vehicles must carry a valid commercial driver’s license whenever operating a
commercial vehicle.” According to this sentence, which of the following people need NOT carry a com-
mercial driver’s license?
a. a truck driver idling his engine while waiting to be directed to a loading dock
b. a bus operator backing her bus out of the way of another bus in the bus lot
c. a taxi driver driving his personal car to the grocery store
d. a limousine driver taking the limousine to her home after dropping off her last passenger of the evening
3. Smoking tobacco has been linked to

a. increased risk of stroke and heart attack.
b. all forms of respiratory disease.
c. increasing mortality rates over the past ten years.
d. juvenile delinquency.
4. Which of the following words is spelled correctly?

a. incorrigible
b. outragous
c. domestickated
d. understandible
Answers
Here are the answers, as well as some suggestions as to how you might have used the process of elimination
to find them.
1. d. You should have eliminated answer a right away. Ilsa can’t be four years old if Meghan is going to be
Ilsa’s age in five years. The best way to eliminate other answer choices is to try plugging them in to
the information given in the problem. For instance, for answer b, if Ilsa is 10, then Meghan must be
21
Using the Process of Elimination (continued)
5. The difference in their ages is 5. The difference between Ed’s age, 29, and Meghan’s age, 5, is 24.
Does 24 = 2 times 5? No. Then answer b is wrong. You could eliminate answer c in the same way and
be left with answer d.
2. c. Note the word not in the question, and go through the answers one by one. Is the truck driver in choice
a “operating a commericial vehicle”? Yes, idling counts as “operating,” so he needs to have a com-
mercial driver’s license. Likewise, the bus operator in answer b is operating a commercial vehicle; the
question doesn’t say the operator has to be on the street. The limo driver in d is operating a com-
mercial vehicle, even if it doesn’t have passenger in it. However, the cabbie in answer c is not oper-
ating a commercial vehicle, but his own private car.
3. a. You could eliminate answer b simply because of the presence of the word all. Such absolutes hardly
ever appear in correct answer choices. Choice c looks attractive until you think a little about what you
know—aren’t fewer people smoking these days, rather than more? So how could smoking be respon-
sible for a higher mortality rate? (If you didn’t know that mortality rate means the rate at which peo-
ple die, you might keep this choice as a possibility, but you would still be able to eliminate two answers
and have only two to choose from.) And choice d is not logical, so you could eliminate that one, too.
And you are left with the correct choice, a.
4. a. How you used the process of elimination here depends on which words you recognized as being
spelled incorrectly. If you knew that the correct spellings were outrageous, domesticated, and under-
standable, then you were home free. You probably knew that at least one of those words was wrong!
Step 6: Know When to Guess

Activity: Complete worksheet on Your Guessing Ability
Armed with the process of elimination, you are ready to take control of one of the big questions in test-taking:
Should I guess? The first and main answer is yes. Some exams have what’s called a “guessing penalty,” in which a
fraction of your wrong answers is subtracted from your right answers—not all real estate sales exams work like
that. Usually, the number of questions you answer correctly yields your raw score. So you have nothing to lose
and everything to gain by guessing.
The more complicated answer to the question “Should I guess?” depends on you—your personality and your
“guessing intuition.” There are two things you need to know about yourself before you go into the exam:
■ Are you a risk-taker?

■ Are you a good guesser?
22
You will have to decide about your risk-taking quotient on your own. To find out if you are a good guesser,
complete the worksheet below, Your Guessing Ability. Frankly, even if you are a play-it-safe person with lousy intu-
ition, you’re still safe in guessing every time. The best thing would be if you could overcome your anxieties and
go ahead and mark an answer. But you may want to have a sense of how good your intuition is before you go into
the exam.
Your Guessing Ability
The following are ten really hard questions. You are not supposed to know the answers. Rather, this is an assess-
ment of your ability to guess when you don’t have a clue. Read each question carefully, just as if you did expect
to answer it. If you have any knowledge at all of the subject of the question, use that knowledge to help you
eliminate wrong answer choices.
1. September 7 is Independence Day in 5. Which of the following is NOT one of the Five
a. India. Classics attributed to Confucius?
b. Costa Rica. a. the I Ching
c. Brazil. b. the Book of Holiness
d. Australia. c. the Spring and Autumn Annals
d. the Book of History
2. Which of the following is the formula for deter-
mining the momentum of an object? 6. The religious and philosophical doctrine that
a. p = mv holds that the universe is constantly in a strug-
b. F = ma gle between good and evil is known as
c. P = IV a. Pelagianism.
d. E = mc2 b. Manichaeanism.
c. neo-Hegelianism.
3. Because of the expansion of the universe, the d. Epicureanism.
stars and other celestial bodies are all moving
away from each other. This phenomenon is 7. The third Chief Justice of the U.S. Supreme
known as Court was
a. Newton’s first law. a. John Blair.
b. the big bang. b. William Cushing.
c. gravitational collapse. c. James Wilson.
d. Hubble flow. d. John Jay.
4. American author Gertrude Stein was born in 8. Which of the following is the poisonous portion
a. 1713. of a daffodil?
b. 1830. a. the bulb
c. 1874. b. the leaves
d. 1901. c. the stem
d. the flowers
23
Your Guessing Ability (continued)
9. The winner of the Masters golf tournament in Answers

1953 was Check your answers against the correct answers
a. Sam Snead. below.
b. Cary Middlecoff. 1. c.
c. Arnold Palmer. 2. a.
d. Ben Hogan. 3. d.
4. c.
10. The state with the highest per capita personal 5. b.
income in 1980 was 6. b.
a. Alaska. 7. b.
b. Connecticut. 8. a.
c. New York. 9. d.
d. Texas. 10. a.
How Did You Do?
You may have simply gotten lucky and actually known the answer to one or two questions. In addition, your guess-
ing was more successful if you were able to use the process of elimination on any of the questions. Maybe you
didn’t know who the third Chief Justice was (question 7), but you knew that John Jay was the first. In that case,
you would have eliminated answer d and therefore improved your odds of guessing right from one in four to one
in three.
According to probability, you should get 212 answers correct, so getting either two or three right would be
average. If you got four or more right, you may be a really terrific guesser. If you got one or none right, you may
be a really bad guesser.
Keep in mind, though, that this is only a small sample. You should continue to keep track of your guessing
ability as you work through the sample questions in this book. Circle the numbers of questions you guess on as
you make your guesses; or, if you don’t have time while you take the practice exams, go back afterward and try
to remember which questions you guessed on. Remember, on an exam with four answer choices, your chances
of getting a right answer is one in four. So keep a separate “guessing” score for each exam. How many questions
did you guess on? How many did you get right? If the number you got right is at least one-fourth of the number
of questions you guessed on, you are at least an average guesser, maybe better—and you should always go ahead
and guess on the real exam. If the number you got right is significantly lower than one-fourth of the number you
guessed on, you would, frankly, be safe in guessing anyway, but maybe you would feel more comfortable if you
guessed only selectively, when you can eliminate a wrong answer or at least have a good feeling about one of the
answer choices.
24
Step 7: Reach Your Peak Performance Zone
Time to complete: 10 minutes to read; weeks to complete!

Activity: Complete the Physical Preparation Checklist
To get ready for a challenge like a big exam, you have to take control of your physical, as well as your mental, state.
Exercise, proper diet, and rest will ensure that your body works with, rather than against, your mind on test day,
as well as during your preparation.
Exercise
If you don’t already have a regular exercise program going, the time during which you are preparing for an exam
is actually an excellent time to start one. And if you are already keeping fit—or trying to get that way—don’t let
the pressure of preparing for an exam fool you into quitting now. Exercise helps reduce stress by pumping won-
derful good-feeling hormones called endorphins into your system. It also increases the oxygen supply through-
out your body, including your brain, so you will be at peak performance on test day.
A half hour of vigorous activity—enough to raise a sweat—every day should be your aim. If you are really
pressed for time, every other day is OK. Choose an activity you like, and get out there and do it. Jogging with a
friend always makes the time go faster, or take a radio.
But don’t overdo it. You don’t want to exhaust yourself. Moderation is the key.
Diet
First of all, cut out the junk. Go easy on caffeine and nicotine, and eliminate alcohol and any other drugs from
your system at least two weeks before the exam. Promise yourself a binge the night after the exam, if need be.
What your body needs for peak performance is simply a balanced diet. Eat plenty of fruits and vegetables,
along with protein and carbohydrates. Foods that are high in lecithin (an amino acid), such as fish and beans,
are especially good “brain foods.”
The night before the exam, you might “carbo-load” the way athletes do before a contest. Eat a big plate of
spaghetti, rice and beans, or whatever your favorite carbohydrate is.
Rest
You probably know how much sleep you need every night to be at your best, even if you don’t always get it. Make
sure you do get that much sleep, though, for at least a week before the exam. Moderation is important here, too.
Extra sleep will just make you groggy.
If you are not a morning person and your exam will be given in the morning, you should reset your inter-
nal clock so that your body doesn’t think you are taking an exam at 3:00 A.M. You have to start this process well
before the exam. The way it works is to get up half an hour earlier each morning, and then go to bed half an hour
earlier that night. Don’t try it the other way around; you will just toss and turn if you go to bed early without
having gotten up early. The next morning, get up another half an hour earlier, and so on. How long you will have
25
to do this depends on how late you are used to getting up. Use the Physical Preparation Checklist on the next page
to make sure you are in tip-top form.
Step 8: Get Your Act Together
Time to complete: 10 minutes to read; time to complete will vary

Activity: Complete Final Preparations worksheet
You are in control of your mind and body; you are in charge of test anxiety, your preparation, and your test-taking
strategies. Now it’s time to take charge of external factors, like the testing site and the materials you need to take
the exam.
Find Out Where the Exam Is and Make a Trial Run

Do you know how to get to the testing site? Do you know how long it will take to get there? If not, make a trial
run, preferably on the same day of the week at the same time of day. Make note, on the worksheet Final Prepa-
rations on page 28, of the amount of time it will take you to get to the exam site. Plan on arriving 30–45 minutes
early so you can get the lay of the land, use the bathroom, and calm down. Then figure out how early you will
have to get up that morning, and make sure you get up that early every day for a week before the exam.
Gather Your Materials

The night before the exam, lay out the clothes you will wear and the materials you have to bring with you to the
exam. Plan on dressing in layers; you won’t have any control over the temperature of the examination room. Have
a sweater or jacket you can take off if it’s warm. Use the checklist on the Final Preparations worksheet to help you
pull together what you will need.
Don’t Skip Breakfast

Even if you don’t usually eat breakfast, do so on exam morning. A cup of coffee doesn’t count. Don’t do dough-
nuts or other sweet foods, either. A sugar high will leave you with a sugar low in the middle of the exam. A mix
of protein and carbohydrates is best: cereal with milk and just a little sugar, or eggs with toast, will do your body
a world of good.
26
Physical Preparation Checklist
For the week before the exam, write down 1) what physical exercise you engaged in and for how long and 2)
what you ate for each meal. Remember, you are trying for at least half-an-hour of exercise every other day (prefer-
ably every day) and a balanced diet that’s light on junk food.
Exam minus 7 days Exam minus 3 days

Exercise: _________________for ____ minutes Exercise: _________________for ____ minutes
Breakfast: ________________________________ Breakfast: ________________________________
Lunch: ________________________________ Lunch: ________________________________
Dinner: ________________________________ Dinner: ________________________________
Snacks: ________________________________ Snacks: ________________________________
Exam minus 6 days Exam minus 2 days

Lunch: ________________________________ Lunch: ________________________________
Dinner: ________________________________ Dinner: ________________________________
Snacks: ________________________________ Snacks: ________________________________
Exam minus 5 days Exam minus 1 day

Lunch: ________________________________ Lunch: ________________________________
Dinner: ________________________________ Dinner: ________________________________
Snacks: ________________________________ Snacks: ________________________________
Exam minus 4 days

Exercise: _________________for ____ minutes
Breakfast: ________________________________
Lunch: ________________________________
Dinner: ________________________________
Snacks: ________________________________
Step 9: Do It!
Time to complete: 10 minutes, plus test-taking time

Activity: Ace Your Real Estate Sales Exam!
Fast forward to exam day. You are ready. You made a study plan and followed through. You practiced your test-
taking strategies while working through this book. You are in control of your physical, mental, and emotional state.
27
Final Preparations
Getting to the Exam Site
Location of exam: ____________________________________
Date: _______________________________________________
Departure time: ______________________________________
Do I know how to get to the exam site? Yes _____ No _____

If no, make a trial run.
Time it will take to get to exam site: _____________________
Things to lay out the night before
Clothes I will wear _____
Sweater/jacket _____
Watch _____
Photo ID _____
No. 2 pencils _____
Calculator _____
____________ _____
____________ _____
You know when and where to show up and what to bring with you. In other words, you are better prepared than
most of the other people taking a real estate sales exam with you. You are psyched.
Just one more thing. When you are done with the exam, you will have earned a reward. Plan a celebration.
Call up your friends and plan a party, or have a nice dinner for two—whatever your heart desires. Give yourself
something to look forward to.
And then do it. Go into the exam, full of confidence, armed with test-taking strategies you have practiced
until they’re second nature. You are in control of yourself, your environment, and your performance on the exam.
You are ready to succeed. So do it. Go in there and ace the exam. And look forward to your future career as a real
estate salesperson!
28
C H A P T E R
3 Real Estate Sales

Exam 1
CHAPTER SUMMARY
This is the first of four practice exams in this book. Take this exam to
see how you would do if you took the exam today and to find out what
your strengths and weaknesses are.
I F YO U P R E F E Rto take a practice exam on a computer, use the CD-ROM included at the back of this
book. Taking the exams on computer is good practice for the real exam. On the other hand, if using
a computer isn’t convenient, taking the exams on paper will accomplish the same goal—letting you
know in which areas you are strong and in which areas you need more work.
Take this exam in as relaxed a manner as possible, without worrying about timing. You can time your-
self on the other three exams. You should, however, make sure that you have enough time to take the entire
exam in one sitting. Find a quiet place where you can work without interruptions.
The answer sheet you should use is on the following page, and then comes the exam. After you have
finished, use the answer key and explanations to learn your strengths and your weakness. Then use the scor-
ing section at the end of this chapter to see how you did overall.
29
– REAL ESTATE SALES EXAM 1 –
Real Estate Sales Exam 1 Answer Sheet
1. a b c d 35. a b c d 69. a b c d
2. a b c d 36. a b c d 70. a b c d
3. a b c d 37. a b c d 71. a b c d
4. a b c d 38. a b c d 72. a b c d
5. a b c d 39. a b c d 73. a b c d
6. a b c d 40. a b c d 74. a b c d
7. a b c d 41. a b c d 75. a b c d
8. a b c d 42. a b c d 76. a b c d
9. a b c d 43. a b c d 77. a b c d
10. a b c d 44. a b c d 78. a b c d
11. a b c d 45. a b c d 79. a b c d
12. a b c d 46. a b c d 80. a b c d
13. a b c d 47. a b c d 81. a b c d
14. a b c d 48. a b c d 82. a b c d
15. a b c d 49. a b c d 83. a b c d
16. a b c d 50. a b c d 84. a b c d
17. a b c d 51. a b c d 85. a b c d
18. a b c d 52. a b c d 86. a b c d
19. a b c d 53. a b c d 87. a b c d
20. a b c d 54. a b c d 88. a b c d
21. a b c d 55. a b c d 89. a b c d
22. a b c d 56. a b c d 90. a b c d
23. a b c d 57. a b c d 91. a b c d
24. a b c d 58. a b c d 92. a b c d
25. a b c d 59. a b c d 93. a b c d
26. a b c d 60. a b c d 94. a b c d
27. a b c d 61. a b c d 95. a b c d
28. a b c d 62. a b c d 96. a b c d
29. a b c d 63. a b c d 97. a b c d
30. a b c d 64. a b c d 98. a b c d
31. a b c d 65. a b c d 99. a b c d
32. a b c d 66. a b c d 100. a b c d
33. a b c d 67. a b c d
34. a b c d 68. a b c d
30
Real Estate Sales Exam 1
1. A developer includes restrictive covenants in 5. Title to real property is conveyed by involun-

the deeds for all properties within a subdivi- tary alienation in all of the following EXCEPT
sion. These covenants may dictate all of the fol- a. a tax deed.
lowing EXCEPT the b. a certificate of title.
a. owner’s use of the property. c. eminent domain.
b. style of architecture. d. a will.
c. appearance of outbuildings and fences.
d. ethnic character of future owners. 6. What will the amount of taxes payable be if the
property’s assessed value is $85,000 and the tax
2. Jessie Petersen makes a written offer to buy rate is 50 mils in a community where the
Sam Lewis’s house for $120,000. She confides equalization factor is 120%?
in Sam’s agent, George Everly, that if necessary a. $10,200
she’d pay $10,000 more, but she doesn’t want b. $5,100
Sam to know that. George should c. $3,460
a. present the offer to Sam but respect Jessie’s d. $4,250
confidentiality.
b. warn Jessie that he must pass on to Sam any- 7. In inflationary times, a property manager
thing useful he knows. would NOT want a long-term lease based on
c. refuse to convey the lower offer to Sam. a. graduated payments.
d. explain to Jessie why the house isn’t worth b. the consumer price index.
more than $120,000. c. a fixed rate.
d. a cost-of-living index.
3. FHA mortgage insurance premium is calcu-
lated at a rate of 12% annually. How much is the 8. The buyer of a cooperative apartment receives
premium for the month in which the remain- shares in the cooperative and a
ing principal owed is $92,347? a. proprietary lease.
a. $0.05 b. bargain and sale deed.
b. $12.00 c. joint tenancy.
c. $38.48 d. limited partnership.
d. $46.17
9. A lender is providing 90% of the financing for
4. Ownership of a property that could be termi- a new house. If the house appraises for
nated upon the happening of a specific event is $75,000, what is the buyer’s down payment?
known as a. $7,500
a. a reverter. b. $67,500
b. a fee estate. c. $9,000
c. an easement. d. $750
d. a life estate.
31
10. Which of the following is a requirement for 14. In a loan closing, proper signatures on the
a valid agency relationship? promissory note create
a. written agreement a. the indebtedness of the borrower.
b. compensation b. the lien on the property.
c. mutual consent c. the transfer of ownership to a trustee.
d. brokerage license d. recordation of the lien on the land
records.
11. What is 75% of $250,000?
a. $187,500 15. The Civil Rights Act of 1866 prohibits dis-
b. $182,500 crimination in real estate based on
c. $62,500 a. race.
d. none of the above b. race and gender.
c. handicap and country of origin.
12. Which of the following statements best d. gender and religion.
describes a real estate agent’s liabilities con-
cerning environmental hazards? 16. A buyer is obtaining a conventional loan
a. Residential real estate agents do not need that requires 29/33 ratios. He earns $75,000
to know about environmental conditions. a year, and has a $450 car payment. What is
b. A real estate licensee could be liable if he his maximum PITI payment?
or she should have known about a condi- a. $1,612.50
tion, even if the seller neglected to dis- b. $1,812.50
close it. c. $21,750.00
c. Disclosure of environmental hazards is d. $2,475.00
the responsibility of the seller.
d. Unless the buyer asks, the real estate agent 17. The federal ban on discrimination based on
doesn’t have to worry about it. familial status is intended to provide equal
access to rentals for
13. A purchase in which the seller holds title a. unmarried couples.
until a specified number of payments have b. people with children.
been made is known as a c. single tenants.
a. contract for deed. d. the elderly.
b. deferred transfer mortgage.
c. future delivery purchase. 18. The legal right to pass over your neighbor’s
d. land sales mortgage. land is an
a. encroachment.
b. estate in land.
c. easement.
d. example of eminent domain.
32
19. A heating and cooling engineer is drawing 22. When the appraiser estimates the value of
up the specifications for the HVAC system an investment property, the potential gross
in a new building. The floor space measures income includes all of the following
200′ × 150′ and the ceiling is 12′ high. How EXCEPT
much air space does the engineer have to a. payment of full rental prices by all tenants
heat and cool? with full occupancy.
a. 33,333 square yards b. licensing fees by vendors and
b. 300,000 square feet concessionaires.
c. 13,333 cubic yards c. parking and storage fees.
d. 36,000 cubic feet d. settlement by the state for the loss of land
by eminent domain.
20. The holder of a life estate may do all of the
following EXCEPT 23. Martha James lives in one side of a two-
a. pay the property taxes and special family house. She wants to advertise the
assessments. other side as non-smoking. Can she legally
b. maintain the property. do so?
c. mortgage the life interest. a. Yes, because the right to smoke is not pro-
d. direct the disposition of the property at tected by law.
the end of the measuring life. b. Yes, because she occupies part of the
house herself.
21. Ken Laughton’s house is “for sale by owner.” c. No, because a property owner cannot
Robert Hall falls in love with it during an advertise discriminatory practices.
open house, tells Ken he’ll pay the full asking d. No, because she can only legally discrimi-
price, and promises to send Ken an earnest nate on the basis of credit and income.
money check for $5,000. Ken accepts the
offer. The contract between them is 24. An owner is planning to build on newly
a. enforceable by court action if either tries purchased property. Zoning laws state that
to back out. no improvement may exceed 50 feet in
b. invalid because it lacks consideration. height, architectural guidelines limit
c. valid only if there were witnesses. improvements to 45 feet in height, and the
d. unenforceable. deed restriction states the maximum height
to be 30 feet. What is the tallest building the
owner can legally construct?
a. 50 feet
b. 45 feet
c. 30 feet
d. The new building can be any size the
owner wants.
33
25. When determining reproduction cost, the 29. A seller principal asks a salesperson to do
appraiser may use any of the following something in a particular way. The broker
EXCEPT disagrees with the seller and instructs the
a. price-per-square-foot method. salesperson to handle the matter differently.
b. cubic-foot method. Whose instruction should the salesperson
c. unit-in-place method. follow?
d. consumer-price-index method. a. the seller
b. the broker
26. Tenancy by the entirety is a special form of c. the buyer
ownership available only to d. none of the above
a. sole owners.
b. corporations. 30. In the market or sales data approach to
c. married couples. appraisal, the sales prices of similar, recently
d. limited partners. sold properties are
a. assessed.
27. Agent Converse has just returned from a b. analyzed.
closing for a property that sold for $125,000. c. adjusted.
The property was listed by Sporty’s Real d. added.
Estate Company. Converse received 2.5% of
the sale price total commission for the 31. Which of the following is the simplest form
transaction from the closing agent. Converse of ownership?
is on a 55/45 split with his company. About a. severalty
how much commission will Converse b. joint tenancy
receive? c. community property
a. $6,250 d. tenants in common
b. $3,750
c. $1,719 32. To increase the effective yield on a $250,000
d. $1,406 loan by 14% when one discount point is
equivalent to an increase in the APR of 18%,
28. Charlie’s Cheeseburgers is located in a small how much would the lender collect at settle-
building in an area that is now zoned for ment in loan discount?
office development. Charlie was allowed to a. $2,500
remain because he has a b. $3,125
a. delicious product that will appeal to c. $5,000
nearby office workers. d. $6,250
b. non-conforming use.
c. variance.
d. special use permit.
34
33. The formula for determining the value of c. The Browns can hold the Smiths to a June
investment property is 16 closing.
a. net operating income ÷ capitalization rate d. The Smiths can sue for specific perform-
= value. ance on June 15.
b. potential gross income ÷ capitalization
rate = value. 37. You’re the buyer’s agent for Robert and Deb-
c. effective gross income × capitalization bie, who will be selling their present home
rate = value. with you, in the purchase of 1234 Main
d. cost of replacing the property × capitaliza- Street, listed by ABC Realty. What is your
tion rate = value. agency relationship with all parties?
a. Robert and Debbie is your customer; no
34. IRS Form 8300 must be filed at what point relationship exists with seller of 1234
in a real estate transaction? Main St.
a. at time of closing b. The seller of 1234 main St. is your client;
b. when monies are deposited in broker’s you are in a dual-agent relationship with
escrow account Robert and Debbie.
c. when a buyer brings more than $10,000 in c. Robert and Debbie are your clients; the
cash to the closing or as earnest money seller of 1234 Main St. is your customer.
d. never d. You’re a dual agent to all parties.
35. Which of the following terms best describes 38. Amy Reed, a salesperson for ABC Realty, is
the parties to a purchase-and-sales contract? required by contract to attend meetings,
a. mortgagee-mortgagor dress in a uniform, and prospect for four
b. vendor-vendee hours per day. She receives a biweekly pay-
c. grantor-grantee check, less withholdings for taxes and Social
d. optioner-optionee Security. Amy’s relationship with the firm is
that of
36. The Smiths offer to buy the Brown’s house a. an employee.
for $125,000, with the closing scheduled for b. an independent contractor.
June 15. The Browns sign a written accept- c. a manager.
ance, with the provision that the closing is to d. a consultant.
be on June 16. At this point, which of the
following can occur?
a. The Smiths can back out of buying the
house with no penalty.
b. The Browns can hold the Smiths to a June
15 closing.
35
39. At a general meeting of a brokers’ trade 43. A planned development consists of

association, several members begin talking a. structures such as factories or hotels that
about fees and business practices. This sort have been converted to residential use.
of activity could be considered b. residential apartment units that share
a. a violation of the Sherman Anti-Trust Act. common elements, such as hallways and
b. activity prohibited by the Better Business recreational areas, within a larger
Bureau. building.
c. an appropriate activity within the c. a high-rise building that includes apart-
association. ments as well as commercial units, such as
d. a good way for brokers to learn about the movie theaters and stores.
different practices nationwide. d. parcels owned separately and areas owned
in common for use by parcel owners.
40. The death or incapacity of the principal will
a. terminate the agency. 44. A single-family property located in an
b. accelerate the payment of the fee. industrial area has minimum value because
c. cancel any purchase agreements in effect. of the principle of
d. extend the expiration date of the listing to a. diminishing returns.
an indefinite date. b. contribution.
c. competition.
41. The correct formula for estimating value d. conformity.
using the cost approach is
a. cost to reproduce + depreciation – value 45. The lender’s underwriting criteria would
of land = value. accept a housing expense to income ratio of
b. depreciation + value of land – cost to 33% and a ratio of total debt service of up
reproduce = value. to a maximum of 38% of monthly gross
c. cost to reproduce – depreciation + value income. The applicant has an outstanding
of land = value. college loan payable at the rate of $250.00
d. value of land + cost to reproduce + depre- per month and a car payment of $450.00
ciation = value. monthly. Gross annual income is established
at $100,000 per annum. What is the maxi-
42. Rita Morgan has $86,576 left on her 8.5% mum PITI the lender will approve?
mortgage. Her monthly payment is set at a. $2,750.00
$852.56 for principal and interest (she pays b. $2,566.67
her own taxes and insurance). How much of c. $2,666.67
her next payment will go to reduce the d. $2,716.54
principal?
a. $116.76
b. $239.31
c. $613.25
d. $735.80
36
46. A tenant in a strip mall pays a monthly 50. If a homeowner has a first mortgage loan
rental that includes all property mainte- balance of $63,250, a second mortgage bal-
nance charges, utilities, and cleaning serv- ance of $12,000, and unpaid taxes of $3,015,
ices. This is known as a how much equity does he have in his
a. net lease. $100,000 home?
b. percentage lease. a. $25,000
c. ground lease. b. $21,735
d. gross lease. c. $100,000
d. $24,750
47. The cost approach is best suited for estimat-
ing the value of 51. After John Rawlings bought his apartment,
a. a large tract of land. he started receiving his own property tax
b. the income generated by a commercial bills. This indicates that he has bought into a
property. a. condominium.
c. a historic building. b. cooperative.
d. a condominium apartment. c. leasehold.
d. syndicate.
48. While the objective in the cost approach
generally is to estimate the value of both 52. The party most likely to sue for specific per-
land and improvements, the land typically is formance in the purchase of real estate is the
appraised using the a. buyer.
a. income approach. b. seller.
b. gross rent multiplier approach. c. broker.
c. market data approach. d. mortgage insurance company.
d. option approach.
$4.05
53. Property taxes are assessed annually at
100
49. A borrower obtains a $100,000 mortgage at of value. If the assessed value of a property
7.5%. If the monthly payment of $902.77 is is $100,000, how much are the taxes for the
credited first to interest and then to princi- year?
pal, what will the balance of the principal a. $4,000
(rounded to the nearest dollar) be after the b. $5,040
borrower makes the first payment? c. $4,050
a. $99,772 d. $405
b. $99,722
c. $99,097
d. $99,375
37
54. Mils are often used in calculating 58. If a jurisdiction requires private property for
a. mortgage interest. public use, the first step begins with
b. property tax rates. a. an amicable negotiation.
c. real estate commissions. b. seeking an injunction against transfer of
d. fire insurance premiums. the property to a third party.
c. obtaining a writ of attachment.
55. The difference between the market value of d. beginning condemnation proceedings.
a property and the sum of the liens against it
is called 59. The annual real estate taxes on a property
a. equity. are $2,400. The seller pays taxes in arrears in
b. leverage. two installments, on June 1 and October 1.
c. cash asset. If the closing is scheduled for August 28,
d. pledge. what taxes will be due and how will the
information appear on the HUD 1?
56. Closing occurs on October 10. Annual prop- a. Credit seller $1,596 and debit buyer
erty taxes of $4,500 are paid at the end of $1,596.
the year. What is the correct entry for the b. Credit buyer $2,400 and debit seller
closing statement for the proration of taxes? $2,400.
a. $375 c. Debit seller $804 and credit buyer $804.
b. $3,500 d. Credit buyer $2,796 and debit seller
c. $3,750 $2,796.
d. $350
60. The obligation of protecting any deposits
57. A homeowners association decides that the entrusted to an agent is an example of the
subdivision’s community center should be fiduciary duty of
sold for economic reasons. Before attempt- a. competence.
ing to find an investor, the association b. disclosure.
decides it needs guidance on an appropriate c. accounting.
asking price and hires an appraiser. Which d. obedience.
approach is the appraiser likely to find most
appropriate to appraise this property?
a. the sales comparison approach
b. the income approach
c. the gross rent multiplier approach
d. the cost approach
38
61. One effect of a clause in a sales agreement 65. The seller offers to pay 3 points on the
that states that “time is of the essence” might buyer’s 80% loan. If the house sells for
be that $250,000, what is the expense to the seller?
a. the seller can take care of matters at their a. $2,400
convenience. b. $6,000
b. the buyer must deal with the details of the c. $3,000
contract as they occur. d. $2,000
c. the agent must see that the contract has
been fulfilled prior to closing. 66. A house sold for $82,000 and was assessed at
d. all parties must attend to those details 90%. If property taxes are $4.30 per $100 of
called for in the agreement in a timely value, what are the annual taxes?
manner. a. $3,773.40
b. $4,300.00
62. Which of the following would most likely be c. $3,526.00
considered incurable depreciation? d. $3,173.40
a. a broken window
b. a roof with curled and cracked shingles 67. If a commercial building producing an
c. improvements beyond those of other annual gross income of $136,000 is sold for
homes in the area $888,000, what is its GIM?
d. rotted fencing a. 0.153
b. 15.3
63. The penalty for a first violation of Federal c. 12.07
Fair Housing Laws can be as much as d. 6.53
a. $1,000.
b. $5,000. 68. A buyer paid $5,000 for an option to pur-
c. $10,000. chase a property within 180 days for
d. $100,000. $200,000. Within a month, the buyer made
an offer to buy the property immediately for
64. Escrow monies can be defined as and $180,000. Which of the following is true in
include this situation?
a. promissory notes. a. The option money is forfeited.
b. earnest money. b. The owner may accept the offer for
c. security deposits. $180,000.
d. all of the above. c. The buyer is in default of the option
agreement.
d. Both parties are in violation of contract
law.
39
69. A landlord is NOT allowed to charge a ten- 73. The provisions of the Real Estate Settlement
ant extra rent because the tenant has a Procedures Act (RESPA) apply to
a. dog. a. one- to four-family residential mortgage
b. second car. loans.
c. child. b. all residential mortgage loans.
d. RV. c. all mortgages except home equity loans.
d. installment contracts.
70. Net operating income is found by
a. multiplying effective gross income by the 74. Which of the following effects, if any, does
cap rate. zoning have on property values?
b. dividing effective gross income by the cap a. Values are unchanged because owners
rate. have the freedom to develop land as they
c. subtracting market income from the wish.
appraiser’s estimate of potential gross b. Value is enhanced because of the principle
income. of conformity.
d. subtracting yearly operating expenses c. Value is diminished because of the lack of
from effective gross income. creative use of land.
d. Value is not related to zoning; it is a prod-
71. Zoning regulations establish the permitted uct of supply and demand.
uses of land as well as
a. building heights, setbacks, and density. 75. A seller may control the use of a property
b. the price of improvements, appurte- after sale and limit the buyer’s future enjoy-
nances, and amenities. ment by means of
c. restrictions on ownership. a. a seizen covenant.
d. property rights. b. deed restrictions.
c. court action.
72. How many cubic yards of space are there in d. a habendum clause.
a room 27 feet long, 18 feet wide, and 9 feet
high? 76. Charlie has the right to cross Tommy’s prop-
a. 4,374 cubic meters erty to get to his property. What is the right
b. 162 cubic yards called?
c. 4,374 cubic feet a. a license
d. 162 cubic feet b. an easement by prescription
c. an appurtenant easement
d. an easement in gross
40
77. Consideration to bind a contract may be in 81. Agent Grajewski will use which of the fol-
the form of lowing procedures to assist the sellers of
a. cash or cash equivalent only. 1234 Gold Avenue in setting their listing
b. anything that the parties agree upon as price?
long as it has monetary value. a. a professional appraisal
c. money, promises, or services. b. a Comparative Market Analysis (CMA)
d. thoughtful treatment of the other party’s c. a Broker Price Opinion
feelings. d. a Wide-Area Guess (WAG)
78. The federal government requires a leaflet 82. A broker obtains an exclusive listing. Until
about possible lead paint contamination to the broker fulfills that contract, it is best
be given to any potential purchaser or ten- described as
ant of a residence built before a. executory.
a. 1995. b. partial performance.
b. 1987. c. having been executed.
c. 1981. d. a unilateral agreement.
d. 1978.
83. The remaining balance on Shari Larson’s
79. Which of the following would be included mortgage is $185,500. The interest rate is
in a spot survey of a single lot? 8.5% and the monthly payment is
a. the location of any improvements $1,426.50. How much of her next monthly
b. identification of any public transit payment will be applied to principal?
services a. $1,426.50
c. directions to shopping areas b. $112.54
d. the zoning classifications of adjacent c. $1,313.96
properties d. $43.79
80. Broker Murphy has finalized the negotiation 84. When may a broker functioning as an inter-
on his listing at 1000 Cash Avenue. He mediary appoint one licensee to communi-
received earnest money of $5,000 for the cate with the seller and another licensee to
deal. What must he do with the earnest communicate with the buyer?
money? a. when in the judgment of the broker it is
a. put the check in the deal file and turn it best to make such appointments
over to the closing agency when it closes b. when written permission to do so has
b. put the check in his company’s escrow been obtained from the parties
account c. when the parties have given verbal
c. put the check in his company’s operating approval to make such appointments
account d. when the seller has given written consent
d. put the check in his personal account for the broker to do so
41
85. When representing a buyer in a real estate 89. A variety of land uses will add to property
transaction, the agent must disclose to the value as long as the uses are in
seller all of the following EXCEPT a. conformity.
a. the buyer’s motivating circumstances. b. balance.
b. the agent’s relationship with the buyer. c. progression.
c. any agreement to compensate the agent d. regression.
out of the listing broker’s commission.
d. any potential for the agent to benefit from 90. A prospect for the lease of a commercial
referring the parties to a subsidiary of the property feels the need for adversarial repre-
agent’s firm for transaction-related sentation and hires a broker to negotiate the
services. lease on his behalf. The contract entered
into between the prospect and the broker is
86. Pledging property for a loan without giving called
up possession of the property itself is a. an authorization to negotiate.
referred to as b. a buyer-broker agreement.
a. hypothecation. c. a property management agreement.
b. alienation. d. a cooperative brokerage agreement.
c. defeasance.
d. novation. 91. Of the following, which lien has the lowest
priority?
87. To secure a loan, the borrower conveys legal a. property taxes
title to the property to a disinterested third b. a mortgage or trust deed
party for safekeeping. In this situation, the c. unsecured judgment
document required is a d. a special assessment
a. general warranty deed.
b. trust deed. 92. A salesperson negotiates a sale and obtains a
c. involuntary conveyance. written contract signed by all parties. The
d. mortgage. sale closes but the seller refuses to pay the
broker a commission. The broker is not will-
88. All of the following are required to create a ing to sue the seller for the commission
valid mortgage lien EXCEPT a because the seller is his favorite brother-in-
a. legal description of the property being law. The salesperson may
secured. a. sue the seller.
b. signature by the mortgagor. b. sue the broker only.
c. statement of the debt. c. force the broker to sue the seller.
d. credit life policy. d. place a lien against the seller’s property
for the amount of the commission.
42
93. A developer received a loan that covers sev- 97. A property or neighborhood’s life cycle will
eral parcels of real estate and provides for include the stages of
the release of the mortgage lien on each par- a. development, use, stability, and termination.
cel when it is sold and an agreed-upon b. growth, deterioration, and rebuilding.
amount of the original loan is paid. This c. growth, equilibrium, and decline.
type of loan arrangement is called a d. purchase, resale, and condemnation.
a. package loan.
b. wraparound loan. 98. Attorney Sam gave agent Molly $100 to
c. blanket loan. shows his appreciation for the referral of
d. purchase-money loan. Molly’s client. This type of transaction is
a. legal and a good business practice for
94. The lender charges 2 discount points to the future business.
buyer. How much does this increase the b. illegal, since it’s considered a kickback
buyer’s closing costs on his $135,000 home under RESPA.
if his LTV is 80%? c. illegal; the monies should have been given
a. $2,000 to Molly’s broker.
b. $2,070 d. legal; this program had been worked out
c. $2,160 by Molly’s broker and the attorney.
d. $1,600
99. When an owner sells a principal residence,
95. ABC Realty has just listed the property at the capital gain is calculated by
3545 Jayhawk Drive. ABC Realty just a. subtracting selling expenses from the sales
received a lis pendens concerning the prop- price.
erty. What does ABC Realty have? b. subtracting the sales price from the origi-
a. a preliminary title policy nal purchase price.
b. a bill for services from the seller’s attorney c. reducing the net sales price by the prop-
c. a notice that a legal action has been filed erty’s adjusted cost basis.
that could affect the subject property d. subtracting the selling expenses from the
d. a revised tax assessment original purchase price.
96. When property is appraised as part of the 100. RESPA requires all of the following EXCEPT
loan application process, a copy of the that the
appraisal a. buyer receives the HUD information
a. belongs to the buyer who paid for it. booklet from the lender.
b. is confidential and for the lender’s use b. lender makes a good-faith estimate of
only. closing costs for the buyer.
c. is furnished to the seller only upon writ- c. buyer is offered a loan that is 14% below
ten request. market rate.
d. must be shared with all the parties. d. closing will be conducted using the HUD
1 Uniform Settlement Statement.
43
Answers completion of the task assigned in the

agreement; licensure is immaterial in
1. d. Restrictive covenants that would be in agency.
violation of the law are illegal. 11. a. Convert 75% to a decimal and multiply;
2. b. Jessie is entitled to honest treatment, so $250,000 × .75 = $187,500.
Sam should explain that he owes her no 12. b. A real estate agent should always disclose
confidentiality and that he does owe a any possible environmental conditions
duty of notice to Sam. that would have any affect on the property
3. c. The annual premium on $92,347 would or on the buyer’s intended use.
be $461.74 ($92,347 × 0.005). One 13. a. Property purchased on the installment
month’s premium is $38.48 ($461.74 plan with the seller holding title for at
÷ 12). least one year after the date of sale is a
4. d. The death of the life tenant terminates the contract for deed.
ownership. 14. a. It is the note that creates the debt in an
5. d. The devise, a will or clause in a will, con- agreement between the borrower and
veys property voluntarily. lender.
6. b. Calculate the tax by multiplying the 15. a. The law that followed the close of the
assessed value times the equalization fac- Civil War extended equal rights in real
tor divided by 1,000 multiplied by the mill property to members of all races.
rate; $85,000 × 1.20 = $102,000 ÷ 1,000 = 16. a. $75,000 ÷ 12 = $6,250 monthly income.
102 × 50 = $5,100. $6,250 × .29 = $1812.50 front end
7. c. With a fixed-rate lease, the property man- qualifier.
ager would not have the ability to raise the $6,250 × .33 = 2062.50 – $450 debt =
rent as the market dictates. $1612.50 back end qualifier.
8. a. A co-op apartment is personal property, The maximum PITI (Principal, Interest,
not real estate, and no deed is involved. Taxes, and Insurance) is the lower of these
The owners become shareholders in the two qualifiers.
overall organization and have a propri- 17. b. Familial status refers to a parent or
etary lease to their apartments. guardian who lives with one or more chil-
9. a. The down payment is the difference dren under the age of 18.
between the sales price and the loan 18. c. An easement is the right to use the land of
amount. 100% – 90% = 10% down pay- another for a specific purpose such as a
ment. Convert 10% to a decimal and mul- right-of-way.
tiply. $75,000 × .10 = $7,500 19. c. Air space is three-dimensional and is
10. c. Of the listed suggestions only mutual con- measured length × width × height = cubic
sent is required. Agency is sometimes feet. The number of cubic feet is divided
formed by the behavior of the parties; by 27 to arrive at cubic yards.
compensation is generally a result of the
44
20. d. Within the terms of the life estate, the 30. c. Sale prices of comparable properties are
holder’s interest ends at the death of the adjusted to match the specifications of the
person (typically, the holder) against subject property.
whose life the life estate is measured. 31. a. Severalty is the simplest because there is
21. d. According to the statute of frauds, all con- only one person involved. All other forms
tracts for the sale of real estate must be in involve multiple owners.
writing to be enforceable. 32. c. 0.25 ÷ 0.125 = 2 points; $250,000 × 2% =
22. d. Income from all accounts is considered. $5,000.
Settlements or sale of land are not figured 33. a. Net operating income is divided by the
into the calculation. appropriate capitalization rate to arrive at
23. a. No law offers equal protection for the value of the property.
smoking. 34. c. The IRS requires IRS Form 8300 be filed
24. c. When there is a conflict in limitations on on all cash payments over $10,000.
the development of property, the most 35. b. a refers to lender/borrower parties, c
restrictive applies. defines parties in a transfer of property,
25. d. Reliable methods of determining repro- and d refers to parties in a unilateral
duction costs are the square-foot method contract.
(most common), cubic-foot method, 36. a. When the Browns made a counteroffer, it
unit-in-place method, and quantity- constituted a rejection of the original
survey method. offer. The Smiths are now free and may
26. c. Tenancy by the entirety, available in most accept or reject the counteroffer.
non-community property states, is auto- 37. c. Under the Law of Agency, Robert and
matically assumed when a married couple Debbie are your clients; the seller of 1234
purchases real estate together unless they Main St. is your customer. You owe a duty
specify some other form of ownership. of fairness to all parties.
27. c. The company received 2.5% of the sale 38. a. This is a description of the typical charac-
price, and Converse receives 55% of the teristics of employee status.
company’s dollars; $125,000 × .025 = 39. a. Any discussion of fees between competi-
$3,125 × .55 = $1,718.75 tors could be viewed as an attempt to con-
28. b. Despite the change in zoning, Charlie will spire to set the cost of real estate
be allowed to maintain his business as a brokerage services, a violation of anti-
non-conforming use. He will not be trust law.
allowed to expand it, however. 40. a. Death or incapacity or either party termi-
29. b. The broker is a single agent of the seller nates the agency by operation of law.
and the salesperson is a subagent of the 41. c. The formula is: cost to reproduce – depre-
seller. ciation + value of land = value.
45
42. b. A year’s interest on the present debt 50. d. $63,250 loan balance + $12,000 loan bal-
would be $7,358.96 ($86,576 × 0.085). A ance = $75,250 total debt; $100,000 value
month’s interest is $613.25 ($7,358.96 ÷ of home – $75,250 debt = $24,750 equity.
12). The principal portion of her payment Taxes are an expense prorated at closing,
is $239.31 ($852.56 – $613.25). and are not considered a debt.
43. d. A planned development includes individ- 51. a. A condominium is owned in fee simple
ually owned lots and other lots or areas just as a single house would be. By con-
owned in common. trast, the owner of a cooperative apart-
44. d. The principle of conformity states that to ment receives shares in a corporation that
retain value the property should be owns the whole building and pays prop-
located within an area of similar erty taxes on it.
properties. 52. a. While a seller’s problems might be solved
45. b. ($100,000 ÷ 12) × 0.38 is $3,166.67 – with money damages, a buyer might pre-
($150 + $450) = $2,566.67 fer forcing the seller to sell, because each
46. a. A net lease is one that includes rent plus parcel of real estate is unique.
operating expenses within the rental 53. c. $4.05 ÷ 100 = $.0405; .0405 × $100,000 =
price. $4,050
47. c. The cost approach is preferable when 54. b. Mils, each one-tenth of a cent, are some-
appraising unique properties. times used to express the tax rate per dol-
48. c. Land is appraised by comparing the sub- lar of assessed value.
ject property to recent sales of comparable 55. a. The difference between market value and
parcels of land. debt is equity.
49. b. You must determine the monthly interest; 56. b. Use a banker’s statutory year (12 months
that is done by multiplying the loan times 30 days per month = 360 days per
amount by the annual interest rate, then year) since a calendar year is not specified
divide the annual interest amount by 12 in the problem. $4,500 ÷ 12 = $375
to get the monthly amount. Then subtract monthly tax amount; $375 ÷ 30 = $12.50
the monthly interest amount from the daily tax amount; January through Sep-
monthly payment amount to determine tember = 9 months, so 9 × $375 = $3,375;
the amount to be applied to the principal. October 1 through October 10 = 10 days,
Subtract the amount to be applied to so 10 × $12.50 = $125; $3,375 + $125 =
principal from the beginning balance to $3,500 total proration.
determine the remaining loan amount. 57. d. Unique properties are most accurately
$100,000 × .075 = $7,500 ÷ 12 = $625; appraised by employing the cost approach
902.77 – $625.00 = 277.77; $100,000 – to value.
$277.77 = $99,722.23 58. a. The jurisdiction attempts to purchase the
property.
46
59. d. $2,400 ÷ 2 = $1,200; $2,400 ÷ 12 = $200; 68. b. Either party is permitted to attempt to
$2,400 ÷ 36 = $7; Half year at $1,200 plus renegotiate the terms of the transaction.
7 months at $200 equals $1,400; 28 days at 69. c. The Fair Housing Amendments Act of
$7 equals $196 for a total $2,796 to be 1988 added the presence of children in a
credited to buyer and debited to seller on family as a protected class.
the HUD 1. 70. d. A property’s net operating income is
60. c. The agent must be able to account for and derived by first estimating its potential
produce anything of value entrusted to gross income, then deducting estimated
their care. This includes advances of mar- vacancy and collection losses to derive
keting fees, earnest money deposits, and effective gross income, and finally sub-
escrows. tracting yearly operating expenses from
61. d. Any party who fails to take care of his effective gross income.
responsibilities in a timely manner is sub- 71. a. Under the police powers given by the
ject to being held in default of the state, local jurisdictions regulate and con-
contract. trol the use of the land through enacting
62. c. This is an example of regression, an exter- and enforcing zoning laws. These laws
nal factor, caused by the lower priced also address issues such as building
homes in the area. External factors are heights and setbacks.
always incurable. 72. b. Convert feet to yards, (3 feet = 1 yard),
63. c. HUD’s penalty for a first offense can be then multiply: 27 ft × 18 ft × 9 ft = 4,374
$10,000. The Justice Department may fine cu ft; 4374 cu ft ÷ 27 = 162 cu yd. The
for a pattern of repeat violations up to question asks for an answer in terms of
$100,000. cubic yards rather than cubic feet, so the
64. d. All of the items are examples of escrow conversion completes the answer.
monies. 73. a. RESPA covers federally related one- to
65. b. Convert 80% to a decimal and multiply. four-family mortgage loans, including
$250,000 × .80 = $200,000 loan amount. equity loans.
Convert 3% to a decimal and multiply. 74. b. Careful zoning will increase property
$200,000 × .03 = $6,000 cost of points. appreciation.
66. d. Convert 90% to a decimal and multiply. 75. b. A deed restriction is a restrictive covenant
$82,000 × .90 = $73,800 loan amount; running with the land.
$4.30 ÷ 100 = $.0430; $73,800 × $.0430 = 76. c. Charlie has an appurtenant easement
$3,173.40 annual taxes. from Tommy. This allows Charlie to get to
67. d. The gross income multiplier (GIM) is his property. Charlie is said to be the
found by dividing the sales price by the dominant parcel and Tommy is the
gross annual income; $888,000 ÷ servient parcel.
$136,000 = 6.529, rounded to 6.53.
47
77. c. If the parties agree, consideration need benefit of the lender. The trustee will
not be valuable in order to be considered reconvey ownership after the borrower
“good” enough. has satisfied the debt.
78. d. Lead-based paint has not been used since 88. d. A valid mortgage must be in writing,
1977. signed by the mortgagor, and contain a
79. a. A spot survey discloses any improvements legal description of the secured property
on a property, as well as any encroach- and a statement of the debt owed.
ments or easements. 89. b. A range of land uses will contribute to
80. b. All earnest monies held for others must be value when they are in advantageous
held in an escrow account, not in anyone’s proportions.
personal account, deal file, or company 90. b. A contract wherein the broker represents
operating account. a buyer or tenant is called a buyer broker
81. b. The comparative market analysis is the agreement or an exclusive right to repre-
process by which professional agents assist sent agreement.
a seller in establishing a listing price. 91. c. Property taxes, special assessments, and
82. a. A contract that is not yet completely per- secured liens have priority over all others.
formed is described as executory. When 92. b. Only the broker may sue the principal.
all of its terms and conditions have been 93. c. This type of loan is normally used to
met, it is then referred to as executed. finance developments, in that it has a par-
83. b. ($185,500 × 0.085) ÷ 12 = $1,313.96 tial release clause, thus allowing the take
interest for month $1,426.50 – $1,313.96 out of individual properties as they are
= $112.54 sold off.
84. b. The broker (intermediary) who wishes to 94. c. Convert 80% to a decimal and multiply;
make appointments must obtain written $135,000 × 0.80 = $108,000 loan amount;
permission from the parties to do so and $108,000 × 2% = $2,160 cost of points.
must give them written notice of who is 95. c. A lis pendens is a legal notice that a legal
being appointed to the seller and who is suit has been filed or is being filed that
being appointed to the buyer. could have an affect on the property, but
85. a. The duty of confidentiality extends to the case hasn’t been heard therefore the
buyer clients. effect on the property cannot be
86. a. Hypothecation is the pledging of some- determined.
thing as collateral or security for payment 96. a. The Equal Credit Opportunity Act pro-
of a loan. vides that the borrower is entitled to a
87. b. A trust deed involves three persons: the copy of the appraisal if the buyer paid for
borrower (trustor), the lender (benefici- it; in Michigan, the buyer must get the
ary), and a trustee who holds title for the lender’s permission to get a copy of the
appraisal.
48
97. c. A building or neighborhood will undergo 99. c. Taxable capital gain from the sale of a
a period of growth in which it is first principal residence is calculated by sub-
developed, followed by a period of rela- tracting the adjusted cost basis from the
tively little change before the effects of net proceeds of sale.
deterioration result in its decline. 100. c. The RESPA regulations have nothing to
98. b. This type of transaction is in violation of do with rates.
the Real Estate Settlement Procedures Act
(RESPA).
49
Scoring
Remember that this practice exam is not correlated Review below, which shows which of the categories
exactly to your state’s real estate sales exam. In gen- each question falls into.
eral, to evaluate how you did on this practice exam, Use your score in conjunction with the
find the number of questions you got right, and LearningExpress Test Preparation System in Chap-
divide by 100 (the number of questions on this ter 2 of this book to help you devise a study plan
exam). This will give you your score as a percentage. using the Real Estate Refresher Course in Chapter 4,
You should hope to score at least a 70% on this prac- the Real Estate Math Review in Chapter 5, and the
tice exam. Real Estate Glossary in Chapter 6. You should plan
For now, what’s much more important than to spend more time on the sections that correspond
your overall score is how you did on each of the areas to the questions you found hardest and less time on
tested by the exam. You need to diagnose your the lessons that correspond to areas in which you did
strengths and weaknesses so that you can concen- well.
trate your efforts as you prepare. The question types Once you have spent some time reviewing,
are mixed in the practice exam, so in order to tell take the second practice exam in Chapter 7 to see
where your strengths and weaknesses lie, you will how much you’ve improved.
need to compare your answer sheet with Exam 1 for
EXAM 1 FOR REVIEW

Topic Question Numbers
Financing 3, 14, 32, 42, 45, 49, 55, 83, 86, 87, 88, 93, 96
Settlement/Transfer of Property 4, 20, 26, 31, 51, 58, 59, 73, 79, 85, 95, 99, 100
Property Management 7, 15, 17, 23, 28, 46, 63, 67, 69, 70, 89, 90, 97
Property Valuations/Appraisal 6, 22, 25, 30, 33, 41, 44, 47, 48, 54, 57, 62, 81
Property Characteristics 1, 5, 8, 18, 19, 24, 43, 71, 74, 75, 76, 78, 91
Business Practices 2, 10, 12, 13, 27, 34, 38, 40, 60, 64, 80, 98
Contracts/Agency Relationships 21, 29, 35, 36, 37, 39, 52, 61, 68, 77, 82, 84, 92
Mathematics 9, 11, 16, 50, 53, 56, 65, 66, 72, 94
50
C H A P T E R
Real Estate
4 Refresher
Course
CHAPTER SUMMARY
If you want to review real estate concepts for your exam, this is the
chapter you need. Using this chapter, you can review just what you
need to know for the test.
H OW YO U U S E this chapter is up to you. You may want to proceed through the entire course
in order, or perhaps, after taking the first practice exam, you know that you need to brush
up on just one or two areas. In that case, you can concentrate only on those areas.
Following are the major sections of the real estate refresher course and the page on which you can begin
your review of each one.
Real Estate Principles and Practices
Property Characteristics page 53

■ Classes of Property page 53
■ Land Characteristics page 54
■ Encumbrances page 54
■ Types of Ownership page 56
51
– REAL ESTATE REFRESHER COURSE –
■ Descriptions of Property page 58

■ Government Rights in Land page 60
■ Public Controls page 61
■ Environmental Hazards and Regulations page 62
■ Private Controls page 62
■ Water Rights page 63
■ Property Condition Disclosure Forms page 64
■ Need for Inspection page 64
■ Material Facts page 64
Property Valuation/Appraisal page 64

■ Value page 64
■ Methods of Estimating Value/Appraisal Process page 66
■ Competitive Market Analysis page 69
Financing page 70
■ General Concepts page 70
■ Types of Loans page 72
■ Sources page 72
■ Government Programs page 73
■ Mortgages page 74
■ Financing/Credit Laws page 75
Contracts/Agency Relationships page 76

■ General page 76
■ Listing Agreements page 76
■ Buyer-Broker Agreements page 77
■ Offers/Purchase Agreements page 77
■ Counteroffers/Multiple Counteroffers page 78
■ Leases as Contracts page 81
■ Options page 81
■ Rescission and Cancellation Agreements page 81
■ Broker-Salesperson Agreements page 81
■ Law, Definition, and Nature of Agency Relationships, Type of Agencies, and Agents page 82
■ Creation of Agency and Agency Agreements page 82
■ Responsibilities of Agent to Seller/Buyer as Principal page 86
■ Termination of Agency page 87
■ Commission and Fees page 87
52
Settlement/Transfer of Property page 87

■ Title Insurance page 88
■ Deeds page 88
■ Settlement Procedures page 90
■ Tax Aspects page 92
■ Special Processes (e.g. Probate, Foreclosure) page 92
Business Practices page 92

■ Fair Housing and Anti-discrimination Laws page 92
■ Advertising page 95
Property Management page 96

■ Property Management and Landlord/Tenant and Commercial/Income Property page 96
■ Common Interest Ownership Properties page 98
■ Subdivisions page 99
Note: Mathematics will be covered in Chapter 5.
Real Estate Principles and Practices

Property Characteristics
Classes of Property
All property that can be owned and subsequently inherited is legally known as hereditaments. Land and that which
is permanently attached to the land are identified as real property. Items not attached to land are known as per-
sonal property or chattels.
When an item of personal property or a chattel is permanently attached to real estate it becomes real prop-
erty and is identified as a fixture. Fixtures become appurtenances and remain with the property when ownership
transfers to a new owner. An exception occurs when a commercial tenant installs a business fixture to be used in
the business for which the space has been leased. Trade fixtures remain the property of the tenant and may be
removed by the tenant at the end of the lease. The tenant is obligated to repair any damage caused by the removal
of a trade fixture.
The determination of a fixture is made by asking and answering the following questions.
1. How is the item attached?

2. Have the improvements been modified to accommodate the item?
3. What was the intent of the attachor?
4. Is there a contractual agreement that defines the item as a fixture or as a chattel?
53
Land Characteristics
Land is the Earth’s surface (surface rights), the minerals and water below the surface (subsurface rights), and
the air space above the surface (air rights). Ownership of land has long been regarded as the basis of all wealth.
From a physical standpoint, each parcel of land is unique. It cannot be moved. It is immobile. One must
go to the land. It cannot be brought to him or her. Although its features can be modified by man and by the forces
of nature, it is indestructible. Each parcel is unique and unlike any other which makes it non-homogeneous.
Land also has four economic characteristics.
1. Scarcity—There is a limited amount of the Earth’s surface. Value comes to land when people want to live
on it, work on it, or develop it for recreational purposes.
2. Modification—The value of land is increased or decreased by the changes made to surrounding parcels
of land.
3. Fixity—Investment permanence is created by the fact that land and improvements require long periods
of time to pay for themselves.
4. Situs—Location preference is the single most important economic characteristic that influences the
value of any given parcel of land.
Encumbrances
Anything that obstructs or impairs the use of a property is known as an encumbrance and creates a cloud on
title of the fee simple holder’s rights in the property. Common encumbrances include but are not limited to
encroachments, easements, or liens.
Encroachments are unauthorized intrusions of the improvements of one property on the surface or in the
air space of an adjoining parcel.
Easements grant a right to use a portion of a property owner’s land for a specific purpose. An easement
appurtenant may grant ingress and egress to an adjoining parcel of land thus creating a dominant estate (the
parcel that benefits from the easement) and a servient estate (the parcel across which the easement passes).
Dominant Estate Parcel A
Servient Estate Parcel B Access Road Easement
An easement in gross does not benefit any one parcel of real estate but rather benefits a number of parcels
to bring such things as utilities.
54
Utility Easement—Easement in Gross
Liens are claims against property that secure payment of a financial obligation owed by the property or the
property owner. They come in many varieties.
Liens may be created voluntarily or by operation of law. A lien on real property is voluntary if it is imposed
with the consent of the property owner. It is involuntary if it can be imposed without the consent of the prop-
erty owner.
A mechanic’s lien is an example of an involuntary lien. State law specifies the requirements for creating and
enforcing a mechanic’s lien. In general, a mechanic’s lien is available to anyone who provides material or labor
for an improvement to real estate, including design services. An architect, surveyor, contractor, carpenter, plumber,
electrician, landscaper, and many other participants in the construction process are all entitled to a mechanic’s
lien if they have not been paid for their services or materials.
There are statutory time periods for:
■ providing notice to the property owner of the right to file a mechanic’s lien
■ filing the lien
■ foreclosing on the lien in the event that the underlying debt is not repaid
When a mechanic’s lien is properly created, it takes priority over all other subsequent liens, except for tax
liens.
Foreclosure (sale) of the real estate may be postponed by the property owner during a court hearing on
the merits of the case, provided the property owner posts a bond to ensure payment to the claimant. Foreclosure
will also be covered in “Financing.”
A judgment is a determination of a court that may impose an obligation for payment on a property owner.
If the judgment is unpaid, a writ of attachment specifies the property that the sheriff will be ordered to sell by a
writ of execution.
Tax liens are available to federal, state, and local taxing authorities. Enforcement is usually by tax sale; after
the sale, the purchaser receives a tax deed. Tax liens take precedence over all other liens.
A federal tax lien is imposed by the Internal Revenue Service for non-payment of federal income tax, gift
tax, or other taxes.
A state tax lien is imposed for non-payment of state income tax, sales tax, use tax, or other tax.
A property tax or special assessment tax lien is imposed for non-payment of state or local tax.
55
Other encumbrances might include:
■ marital rights
■ rights of parties in possession
■ outstanding option to purchase
■ judgments against the owner
■ unpaid tax liens
Types of Ownership
The primary responsibility of a property seller is to convey marketable title, an ownership interest that a well-
informed buyer can reasonably be expected to accept and that the buyer can transfer in a future transaction. There
are several ways in which the buyer can be assured of acceptable title.
A title search will reveal the chain of title, the history of conveyances and encumbrances that can be found
in the public records. The title search begins with the name of the present owner and the instrument that estab-
lishes title in that owner as the grantee. Working back through what is called the grantee index, the name of the
grantor to the present owner is found on the deed in which that owner is the grantee. In this way, the person exam-
ining the title can go back to the first recorded document of the property. Then, as a method of checking the valid-
ity of the search through the grantee index, the searcher moves forward through the grantor index from the first
recorded document, verifying that the chain is complete and accurate.
There are many different entities that can acquire ownership in real property: an individual, a group of indi-
viduals, a large corporation, a government entity (at any level of government), and more. In addition, there are
many different forms of ownership. Estate in severalty (sole ownership) occurs when property is held by one
person or a single legal entity. The individual’s interest is severed from everyone else’s. Tenancy in common involves
two or more individuals who own an undivided interest in real property without rights to survivorship (the right
of a surviving joint tenant to receive a co-owner’s share of interest upon the death of the co-owner). Undivided
means that each tenant has an interest in the entire property.
The interest in the estate can vary among the tenants. One party can have 40%, another 25%, and another
35%. If a deed conveying property is made out to two people but does not stipulate their relationship, they are
presumed (as in many states) to be tenants in common with equal interest. A party can freely dispose of his or
her interest by sale, gift, devise, or descent.
Joint tenancy also involves two or more people but includes a right of survivorship. Four unities must exist
to create a valid joint tenancy.
1. Unity of time. All tenants must acquire their interest at the same moment. Thus, no new tenants can be
added at a later time.
2. Unity of title. All tenants must acquire their interest from the same source—the same deed, will, or other
conveyance.
3. Unity of interest. Each tenant has an equal percentage ownership.
56
4. Unity of possession. Each tenant enjoys the same undivided interest in the whole property and right to
occupy the property.
Joint tenancy also includes the right of survivorship. On the death of a joint tenant, the tenant’s interest
in the property is extinguished and is absorbed by the remaining joint tenant(s). The last survivor becomes the
sole owner.
Tenancy by the entirety is a form of joint tenancy specifically for married couples in non-community prop-
erty states. Tenancy by the entirety requires the four unities above and one more: unity of person. The legal prem-
ise is that a husband and wife are an indivisible legal unit. Thus, neither can dispose of the property independently;
both must sign the deed in order to transfer the property. Tenancy by the entirety, like tenancy in common, pro-
vides the right of survivorship for the remaining spouse.
Partnerships are very popular forms of ownership, especially for properties held as investments. There are
two main types of partnerships.
In a general partnership (or regular partnership), all the partners have joint and severable liability for any
and all debts of the partnership.
In a limited partnership, the limited partners are not liable for the obligations of the partnership. How-
ever, there must be one or more general partners who carry the personal liability for the financial obligations of
the partnership. In both types of partnerships, the partners may have differing interests depending on their con-
tribution to the partnership.
A partnership is different from a joint venture. In a joint venture, two or more entities join together to develop
a real estate project. For example, a landowner, a developer, a lender, and a major tenant participate in a joint ven-
ture to develop an office building or a shopping center. A joint venture is created to accomplish a single business
venture. Partnerships are created to pool resources and conduct business for profit on an ongoing basis.
Corporations can hold title to real estate, but a corporation is not a popular vehicle for holding investment
property because the income is effectively taxed twice. The corporation pays taxes on any income from the prop-
erty, and then the stockholders pay taxes again when the after-tax income is distributed to them in the form of
dividends. Partnerships, on the other hand, do not pay income taxes. They simply file an information return and
distribute all of the pre-tax income to the partners. The partners then pay taxes according to their individual tax
brackets.
To avoid double taxation but retain some of the benefits of a corporation, investors may use a Real Estate
Investment Trust (REIT). Passive investors—those who do not participate in the management of their properties—
are likely to use REITs. A REIT will typically hold a wide variety of investment properties: office buildings, shop-
ping centers, apartments, warehouses, and even raw land.
There are other important types of trusts. For instance, an inter vivos trust is created during the lifetime
of one individual for the benefit of another. (Inter vivos means during the lifetime in Latin.)
A land trust is often created to conceal the identity of the owner(s). Land is the only asset of the trust; the
title is conveyed to the trustee. A land trust is usually used when investors want to speculate on land but would
prefer that their identity not be revealed. When you acquire real estate, you get a bundle of rights that constitute
57
your interest in real property. The highest and best form of ownership in real property is called a fee simple estate.
The owner of a fee simple estate has the right to:
■ occupy, rent, or mortgage the property

■ sell, dispose of, or transfer ownership of the property
■ build on the property (or destroy buildings already part of the property)
■ mine or extract oil, gas, and minerals
■ restrict or allow the use of the property to others
A leasehold estate gives the holder of the estate a right to occupy the property until the end of the lease
when the right will revert to the fee simple holder.
Descriptions of Property
In order to convey real property, the deed must include an unmistakable description of the property. To satisfy
the requirement for legal description in the deed, one of four methods may be used.
1. Metes and Bounds. A metes and bounds land description identifies a parcel by specifying its shape and bound-
aries. Typically, a convenient natural or artificial object is identified to locate the beginning corner of the subject
tract, and a compass direction is specified. The surveyor, moving in a clockwise direction from the point of begin-
ning, sets the center of a circle compass on each corner of the parcel to find the direction of travel to each suc-
cessive corner of the subject tract.
A legal description of a property using the metes and bounds method might read something like: “From
the pecan tree ten inches in diameter on the west bank of Salado Creek N4° 11′ 18″E, 139.58′ to a point of begin-
ning.” This description would instruct the surveyor on how to begin the metes and bounds survey.
A reference like the pecan tree mentioned above is seldom used any more. Surveyors now use permanent
monuments. At the corner where the survey begins, a monument in the form of an iron pipe or bar one or two
inches in diameter is driven into the ground. Concrete or stone monuments may also be used.
To guard against the possibility that the monument might later be destroyed or removed, it is referenced by
means of a connection line to a nearby permanent reference mark established by a government survey agency.
2. Rectangular Survey System. The rectangular survey system (also known as the government survey system
or U.S. public lands survey system) was authorized by Congress in order to systematically divide the land north
and west of the Ohio River into six-mile squares, now called congressional townships.
This method is based on the system of mapping lines first imagined by ancient geographers and navigators:
the east-west latitude lines and the north-south longitude lines that encircle the Earth.
Certain longitude lines were selected to act as principal meridians. For each of these, an intercepting lati-
tude line was selected as a base line. Land is referenced to a principal meridian and a base line. Every six miles
east and west of each principal meridian, parallel survey lines are drawn. The resulting six-mile wide columns
are called ranges and are numbered consecutively east and west of the principal meridian.
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Every six miles north and south of a base line, township lines are drawn. They intersect with the range lines
and produce six mile by six mile, mapped squares called townships. Each tier or row of townships thus created
is numbered with respect to the base line. Each 36-square mile township is divided into 36 one-square mile units
called sections, which are numbered 1 through 36, starting in the upper-right corner of the township. Any two
sections with consecutive numbers share a common boundary.
Each square mile section contains 640 acres (43,560 square feet). Any parcel of land smaller than a full 640-
acre section is identified by its position in the section. This is done by dividing the section into quarters and halves.
This is an example of a legal description using the rectangular survey system method: “The E 12 of the SE 14
of the NE 14 of Section 28.”
3. Recorded Plat. Reference by recorded plat provides the simplest and most convenient method of land descrip-
tion. The vast majority of residential properties are described by this method. When a tract of land is ready for
subdividing into lots for homes and businesses, a plat, or map, that shows the location and boundaries of indi-
vidual building lots is filed in the map records at the county court house of the county where the property is located.
When the surveyor’s plat is filed in the public recorder’s office, it becomes notice that a metes and bounds
survey has been made and a map has been prepared to show in detail the boundaries of each parcel of land. Each
parcel is then assigned a lot number. Each block in the tract is given a block number, and the tract itself is given
a name or number. A large subdivision may be further divided into sections.
The following diagram is an example of a legal description using the recorded plat method: “Lot 13, Blk. 4,
Sec 3 of Briargrove Hills Subdivision.”
N
Meridian
6 5 4 3 2 1
7 8 9 10 11 12
18 17 16 15 14 13
19 20 21 22 23 24
30 29 28 27 26 25
W 31 32 33 34 35 36 Baseline E
Numbered sections of the township

that is located at Tier 1 North, Range 1 East
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Land can also be described by reference to documents other than maps. For instance, if a tract of land was
conveyed by deed some years ago and the deed was recorded, the reference can be made to that recorded deed
when the property is to be conveyed again. An example of this kind of legal description is, “All the land described
in the deed from Abraham Jacobs to Regina Murrow recorded in Book 5106, page 146, county of Kent, state of
Oregon, at the public recorder’s office for said county and state.”
4. Assessor’s Parcel Number. In some states, the assessor’s parcel number, also known as the appraisal district’s
account number, is used to describe land. An appraisal district is responsible for determining the appraised (or
market) value of every parcel of real estate in a county. The appraisal district assigns a parcel number to each par-
cel of land in the county to aid in the assessment of property for tax purposes. These parcel numbers are public
information, so real estate brokers, appraisers, and investors can and do use them extensively to assist in identi-
fying real properties.
Though the appraiser’s maps are public records, they should not be relied upon as the final authority. The
appraisal district’s parcel number is never used as a legal description in a deed.
Government Rights in Land
Escheat
When a person dies and leaves no heirs and no instructions as to how to dispose of his real and personal prop-
erty, or when property is abandoned, the ownership of the property reverts to the state. This reversion to the state
is called escheat from the Anglo-French word meaning to fall back.
Taxation
The government has the right to collect property taxes from property owners to provide funds for services such
as schools, fire and police protection, parks, and libraries. The federal government does not tax property, relying
on income taxes for operating revenues, but cities, counties, and in some cases the state levy taxes on real prop-
erty. These taxes are levied according to the value of the property and are called ad valorem taxes.
To encourage property owners to pay their taxes in full and on time, the government retains the right to
seize ownership of real estate upon which taxes are delinquent and to sell the property to recover the unpaid taxes.
The taxing authority must depend upon a judicial foreclosure to collect delinquent taxes.
Property taxes are calculated as
Taxes = Assessed value ÷ $100 × tax rate
In some states, tax rates are established as an amount per $100 of assessed valuation. The assessed value is
established by the County Appraisal District (CAD).
The federal government (and, in some cases, state governments and even city governments) raises money
through income taxes. Real property is affected by these taxes in several ways:
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■ taxation of cash flows from investment properties (passive activity income)

■ taxation of profits from the sale of real properties (capital gains income)
■ depreciation deductions on investment properties
Capital gains on the sale of a principal residence are treated differently from profits on the sale of invest-
ment property. The first $250,000 ($500,000 for a married couple filing jointly) of capital gain on the sale of a
principal residence is tax exempt. The owner must occupy the home two out of five years preceding the date of
sale to qualify. A homeowner could sell a residence every two years, and, as long as no sale produced more than
$250,000 in profits, no capital gains tax would be due.
Depreciation, a loss in the estimated value of a property, is another factor that affects property taxes. If you
own an investment property, you deduct all operating expenses and interest on the mortgage from your income.
Then you also are allowed to take another deduction for depreciation, which is now called cost recovery in the
tax code. The premise is that the real property’s improvements are deteriorating and losing value.
If the property is an apartment or residential property, you can deduct the value of the structure over a life
1
of 272 years. Only the building and other improvements can be depreciated; land cannot be depreciated, because
the land does not deteriorate physically. Assuming the building is valued at $850,000, one year’s depreciation would
be $850,000 divided by 27.5 years, or $30,909 per year. Suppose you had an income (minus expenses and inter-
est) of $20,000 last year. Your investment lost value in the amount of $30,909 and only netted you $20,000. $30,909
– $20,000 = $10,909 negative income. You owe no taxes. In fact, you can even carry over the negative amount
into subsequent tax years. To review your math skills, see Chapter 5.
When the property is sold, you will have to recapture cost recovery deductions taken. The recapture will be
subtracted from the adjusted basis and affect the capital gains calculation.
The cost recovery deduction is allowed on investment properties, but not on residences. However, if you
changed your residence and rented your old house, you could then consider it an investment property.
Public Controls
Police Power
The government’s right to control the owner’s use of private property is called police power. The government
may enact laws and enforce them to protect the safety, health, morals, and general welfare of the public. Exam-
ples of the government’s exercise of police power applied to real estate include:
■ planning and zoning laws

■ building, health, and fire codes
■ rent controls
These laws restrict the property owner’s use of their land but do not constitute a taking (see Eminent
Domain). Consequently, there is no payment to the property owner who suffers a loss of value through the exer-
cise of police power.
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Eminent Domain
The right of government to take ownership of privately held land is called eminent domain. Typically, land is
taken for schools, freeways, parks, public housing, urban renewal, and other social and public purposes. Certain
non-government entities, such as public utilities, may also take ownership of private property for public benefit.
When direct negotiations with the property owner are unsuccessful, the legal proceeding involved in exer-
cising the right of eminent domain is called condemnation. The property owner must be paid the fair market
value of the property taken.
When only a portion of a parcel of land is being taken, severance damages may be awarded in addition to
payment for land actually being taken.
An inverse condemnation is a proceeding brought about by a property owner demanding that a govern-
ment entity purchase his land. A property owner might choose this proceeding if his land has been adversely affected
by the taking of neighboring land. For instance, homeowners at the ends of airport runways may try to force air-
port authorities to buy their homes because of the noise of aircraft during takeoffs.
Damage awards may also be made when land is not taken but its usefulness is reduced because of a nearby
condemnation. The award would be considered consequential damages. An example of this would be when land
is taken for a sewage treatment plant. Privately owned land downwind suffers a loss in value owing to the preva-
lence of foul odors, so the property owner might be awarded consequential damages.
Environmental Hazards and Regulations

Environmental regulations exist at both federal and state levels. Some of the most important federal laws in this
area include:
■ Clean Water Act

■ Clean Air Act
■ National Environmental Policy Act
■ Toxic Substances Control Act
■ Safe Drinking Water Act
■ Residential Lead-Based Paint Hazard Reduction Act
Private Controls
The government is not the only entity that can control land. Developers often create restrictive covenants or deed
restrictions to control everything from the type and size of the homes built in a subdivision to landscaping require-
ments. Developers can also control what can be parked in a driveway, how high a fence can be built, and whether
or not a property owner can run a home-based business on the premises.
Homeowner associations may be created that require every homeowner to maintain membership. Home-
owners can be required to pay assessments to the association and may be subject to foreclosure if they become
delinquent.
Private restrictions are designed to preserve a quality of life and to enhance the value of residential prop-
erties. Many of the issues addressed in zoning laws, such as building lines and single-family occupancy versus multi-
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family occupancy may be addressed by the Deed Restrictions or Restrictive Covenants placed on the property by
the developer. Restrictions are also termed conditions, covenants, and restrictions (CC&Rs). In practice, the
term restriction can refer to any a condition, covenant, or restriction.
■ A condition stipulates an action that a property owner must perform or refrain from performing.
■ A covenant is a promise of a property owner.
■ A restriction stipulates a forbidden activity or property use.
Water Rights
Water rights are defined by state law and depend on the water source and use. On a navigable body of water, the
property owner’s boundary will extend to the water’s edge or the mean (average) high water line. On a non-
navigable body of water, the property owner’s boundary will extend to the center of the body of water.
Littoral rights are defined as the rights of a landowner whose property borders on a non-flowing body of
water, such as a lake, ocean, or other body of still water. Owners of riparian land (property bordering a flowing
stream) may have riparian rights, the rights to use the flowing water.
According to the natural flow doctrine, the owner of riparian land is entitled to the ordinary flow of water
but may not impede the use of the ordinary flow by a downstream owner.
According to the doctrine of reasonable use, individual owners of riparian land have the right to reason-
able use of the water that does not prevent use by other owners. States following this principle usually assign a
higher priority to some uses, such as the domestic use of water on a residential property.
The doctrine of prior appropriation has been used by many western states to give priority to the first users
of water for economic reasons.
The doctrine of beneficial use allows the first users of a body of water to retain their priority, but imposes
the limitation that the water be used for beneficial purpose within a reasonable time.
Water permits issued by the state are used to ration scarce water resources in areas of growing population,
particularly in western states.
Use of underground (subterranean) water is vital in many states that have insufficient water from surface
sources for residential, agricultural, and commercial uses.
Percolating water drains from the surface to underground strata. The states have modified the traditional
English rule that there was no limitation on the amount of water a landowner could remove.
The doctrine of correlative rights limits the amount of water that can be taken to a proportionate share
based on each owner’s share of the surface area.
Underground streams confined to well-defined channels can be difficult to establish. If the location of an
underground stream can be determined by a non-invasive method, the type of distribution applied to surface
water will be followed.
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Property Condition Disclosure Forms

Many states have adopted various property disclosure forms that real estate sellers and their agents are required
to furnish to prospective buyers either prior to signing a purchase agreement or at some point prior to closing.
Failure to provide the required disclosure may result in a voidable or unenforceable purchase contract.
Licensees should always remember to refrain from making any representations about the physical condi-
tion of the property and should always recommend that purchasers have the property evaluated by professional
inspectors selected and hired by the purchaser.
Need for Inspection

Many conditions (latent structural defects) can exist and may go undetected by the untrained eye. At a minimum,
a purchaser should have a professional evaluation done to determine the condition of the structure and the mechan-
ical systems of the property. Failure to do so could result in a buyer facing expensive unexpected repairs soon after
closing and a seller and the real estate agents facing legal action brought by an unhappy buyer.
Material Facts
In every jurisdiction, agents have a duty to disclose all known material facts about a property being offered for
sale. A material fact is any bit of information that a purchaser would take into consideration when making a deci-
sion to purchase or not to purchase, or when making decisions about how much to pay.
Property Valuation/Appraisal
Value
Value is ever changing and its movement up and down is influenced by basic economic truths. The actions of
buyers and sellers dictate values.
Value, Price, and Cost

Appraisals are most often used to estimate a property’s market value. Market value can be defined as the price
that a buyer will be likely to pay and that a seller will be likely to accept, when:
■ both parties are aware of the condition of the property

■ neither party is acting under duress
■ financing for the transaction is typical of what is available locally
Market value is an estimate of value only. The estimate is not necessarily what a property will actually sell for.
A property’s cost is the expense to its owner of buying or improving it. A property’s sales price is what some-
one else pays for it. The sales price can be less than the cost of the land and improvements. This happens when
a property owner over-customizes or over-improves a property, failing to take into account the likely needs of a
prospective purchaser.
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There are a number of other types of property value, including the following ones listed.
Assessed value: determination by the County Appraisal District (CAD) for property tax purposes.
Book value: depreciated cost basis used for accounting and tax purposes.
Insurance value: the maximum amount that an insurer will be willing to pay for an insured loss.
Investment value: the amount that an investor is willing to pay for the right to receive the cash flow pro-
duced by the property.
Loan value: the maximum loan that can be secured by the property.
Salvage value: what the component parts of a building or other improvements will be worth following
demolition or removal.
Characteristics of Property That Affect Value

Any factor in the climate, terrain, or other natural feature of an area that affects value is called an environmen-
tal factor. The effects of environmental factors, such as high pollution from fires following a drought, can be global
or local.
Externalities are factors outside of the property that affect property value. An example of an externality is
any government action, such as the mortgage interest deduction for homeowners, taken to increase housing afford-
ability, and thus purchases. The life cycle of a property also affects value. The term life cycle applies both to indi-
vidual properties and to neighborhoods. The initial period of development (growth or integration) becomes a
period of equilibrium (when properties are at their highest and best use). Equilibrium is followed by decline
(disintegration), when property values go down as maintenance requirements increase and are not met. In areas
that undergo the substantial expense of building renovation, a period of revitalization may occur.
Finally, value is affected by supply and demand. As the number of properties available for sale goes up rel-
ative to the number of potential buyers, prices will fall. As the number of properties declines while the number
of potential buyers remains the same or increases, prices will rise.
Principles of Value
Many principles of value underlie the appraisal process, including the following:
Anticipation: the expectation that property value will rise over time.
Assemblage (plottage): bringing a group of adjoining parcels under the same ownership, which may
make them more valuable for a particular purpose, such as construction of a residential or commercial
development.
Change: forces to which all property is subject, including:
Physical: changes caused by the elements, which can occur gradually or over a brief period of time.
Political: regulations that affect property use.
Economic: employment level, business start-ups, expansions and failures, and other factors that influ-
ence the level of prosperity of a region.
Social: demographic and other trends that affect the demand for property.
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Conformity: individual properties in a residential neighborhood tend to have a higher value when
they are of similar architecture, design, age, and size; the same principle applies generally to com-
mercial properties.
Competition: a result of increased demand as well as a cause of increased demand. For example, even
though a regional mall may offer many stores selling similar products, it will benefit all store owners
by bringing more shoppers to the area.
Highest and best use: the legally allowed property use that makes maximum physical use of a site and
generates the highest income.
Law of decreasing returns: in effect when property improvements no longer bring a corresponding
increase in property value.
Law of increasing returns: in effect as long as property improvements bring a corresponding increase in
property value.
Progression: the benefit to a property of being located in an area of more desirable properties; a small,
plain house on a street of mansions will benefit from proximity to them.
Regression: the detriment to a property of being located in a neighborhood of less desirable properties; a
large, over-improved house on a street of small, plain houses will have a lower value than it would in a
neighborhood of comparable houses.
Substitution: the principle that the typical buyer will want to pay no more for a property than would be
required to buy another, equivalent property; this principle, when applied to income-producing prop-
erty, is called opportunity cost. In addition, an investor will want to pay no more for real estate than
for another investment offering the same likely risk and potential reward.
Theory of distribution: consideration of the contribution to value of each of the four factors of
production—land (rent), labor (salaries), capital (interest), and management (profit). When these fac-
tors are in balance, property value will be at its highest.
Methods of Estimating: Value/Appraisal Process

Typically, an appraiser uses three different approaches in developing a final estimate of the value of a property:
market data approach, cost approach, and income approach. In the final reconciliation, the appraiser gives the
most weight to the value that would be most appropriate for that property.
Market Data Approach (Direct Sales Comparison)

If the property being appraised is a single-family residence, the most important determinant of value is the price
that other similar properties have commanded in the open market. In using the market data approach, the
appraiser will select comparables (comps) to compare to the subject property (the property being appraised).
For example, if several comparable properties sold for $100,000, the subject would most likely sell for about
$100,000 as well. An appraiser would prefer to have at least three comps for a market data appraisal.
Features that should be considered in choosing comps include:
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■ size
■ proximity to the subject
■ quality of construction
■ age
■ number of bedrooms, bathrooms, and total rooms
■ date of sale, preferably within the last six months
■ similarity of features such as fireplaces, pools, spas, patios, and so on
The ideal comparable would be a house that sold very recently and is the same size; in the same condition;
the same age; on the same block in the same subdivision; with the same number of bedrooms, bathrooms, and
total rooms; and with all of the same features as the subject. Typically, an appraiser will use only sales within the
last six months.
Obviously the chances of finding such a comparable are not very good. So the appraiser must secure the
best comparables available and make adjustments to bring the comparables as close to the subject as possible.
For example, Comparable A has three bedrooms and sold for $100,000. The subject has four bedrooms. In this
subdivision, historically, one more bedroom has added $6,000 to the purchase price of a home. So the appraiser
would assume that Comparable A, if it had had four bedrooms instead of three, would have sold for $6,000 more,
or $106,000.
In analyzing the adjusted comparable sales, the appraiser would give the most weight to the comparable with
the fewest adjustments.
Cost Approach
When the property is not an income-producing property and it is difficult to find a market comparables, the cost
approach to value is often used. This approach is most often used with unique properties. For instance, if you
had to appraise a mosque located in Nagodoches, Texas, you would have a hard time finding three comparable
properties in the same area. The cost approach would also be useful in appraising properties such as a college cam-
pus, an abandoned fire station, or a state capitol building.
The formula for determining value using the cost approach is as follows
Value = Replacement or Reproduction Cost – Accrued Depreciation + Land Value
The appraiser begins by estimating the replacement cost of the improvements. Replacement cost is the cost,
at today’s prices and using today’s methods of construction, for an improvement having the same or equivalent
usefulness as the subject property. Or, the appraiser may estimate the reproduction cost, the cost of creating an
exact replica of the improvements.
This would show the value of a new building. Since the subject property is not new, adjustments must be
made for depreciation. The amount of adjustment depends on the amount and type of depreciation. There are
three types of depreciation.
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1. Physical deterioration results from wear and tear through use, such as wall-to-wall carpet that has been
worn thin, or a dishwasher, garbage disposal, or water heater that must be replaced. Nature, neglect, van-
dalism, and other factors contribute to physical deterioration.
2. Functional obsolescence results from outmoded equipment, faulty or outmoded design, inadequate
structural facilities, or over-adequate structural facilities.
3. Environmental or economic depreciation results from factors outside of the property over which the
owner has no control.
Physical and functional obsolescence can be either curable or incurable. Curable obsolescence can be fixed
at reasonable cost. Examples include worn carpeting, or outdated kitchen appliances. Incurable obsolescence can-
not be fixed at a reasonable cost. For example, an illogical room layout or a kitchen that is too small for the size
of the house would be considered incurable obsolescence.
The value of the land must also be considered in determining value by the cost approach. The value of the
land is established as though it were vacant, using the market data approach. While land value can decrease, land
does not depreciate in the sense that it is subject to physical or functional obsolescence.
Income Approach
If a property produces income in the form of rent and other revenues, its value is estimated by analyzing the amount
and stability of the income it can produce. The income approach, used to value properties such as apartment
projects, shopping centers, and office buildings, considers the monetary returns a property can be expected to
produce and then converts that amount into a value the property should sell for if placed on the market. This is
called capitalization of the income stream. To capitalize means to convert future cash flows to a present value.
The formula for determining value by the income approach is
Value = Net Operating Income ÷ Capitalization Rate
The income is the net income that the property produces after paying all maintenance and operating expenses
of the building. The capitalization rate (cap rate) is determined by the appraiser as a function of the market and
the type and location of the property.
Purpose and Use of Appraisal

An appraisal is defined under federal law as “a written statement used in connection with a federally related trans-
action that is independent and impartially prepared by a licensed, certified appraiser that states an opinion of the
defined value of an adequately described property as of a specific date that is supported by the presentation and
analysis of relevant market information.” The real estate practitioner defines appraisal more simply as “the act or
process of estimating value.”
Market value or fair market value is the highest price that a property will bring if all of the following apply:
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1. The payment is made in cash or its equivalent.

2. The property is exposed on the open market for a reasonable length of time.
3. The buyer and seller are fully informed as to market conditions and the uses to which the property may
be put.
4. Neither buyer nor seller is under abnormal pressure to conclude a transaction.
5. The seller is capable of conveying marketable title.
Role of Appraiser
There are seven major steps in the appraisal process:
1. State the problem. The nature of the appraisal assignment must be clearly understood. The assignment
may be to find a market value of the subject property. If so, that should be stated.
2. Determine the kinds and sources of data necessary.
■ What are the characteristics of the subject property?
■ What economic or other factors will play a role in determining property value?
■ What approach(es) will be most appropriate in this appraisal, and what kind of data will be necessary?
3. Determine the highest and best use of the site.

4. Estimate the value of the site.
5. Estimate the property’s value by each of the appropriate approaches (market data, cost, and/or
income).
6. Reconcile the different values reached by the different approaches to estimate the property’s most prob-
able market value. This process is called reconciliation or correlation.
7. Report the estimate of value to the client in writing. There are several types of documents that may be
prepared.
■ The narrative appraisal report provides a lengthy discussion of the factors considered in the appraisal
and the reasons for the conclusion of value.

■ The form report is used most often for single-family residential appraisals. A Uniform Residential
Appraisal Report (URAR) is required by various agencies and organizations. Computerized appraisal
generation is possible and is increasingly expected by banks and other lenders.
■ Reports may be written in other formats, which are defined by the Uniform Standards of Profes-
sional Appraisal Practice (USPAP). The self-contained report is as complete as the narrative
appraisal report and should include explanations of the methods used during appraisal and the
appraiser’s conclusion. The summary report is less detailed than the self-contained report, and the
restricted report, which reveals only minimal information and should be used only by clients, is less
detailed than the summary report. Using either of the two latter types of reports will require the con-
sent of the client.
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Competitive Market Analysis

Real estate licensees do not generally prepare appraisals, although licensed brokers are permitted to do so pro-
vided they follow the uniform standards. Licensees must be careful to state that a Comparative Market Analysis
(CMA) is not an appraisal and should not be regarded as such. All CMAs must include a notice to this effect.
The CMA is a tool used by the licensee to enable prospective sellers or buyers to identify a range of value
in a given neighborhood. It identifies the properties currently listed, those that have been on the market without
success and have expired, and those that have sold.
The client can then choose an asking or offering price that is realistic and within the range. Sellers who estab-
lish an asking price above the upper end of the range will make their property invisible to many of the best poten-
tial buyers for their properties. Buyers who offer too little, or “low ball,” will often insult the sellers and make it
impossible to negotiate with them.
Financing
General Concepts
Mortgages, Deeds of Trust, and Their Provisions

A mortgage is a pledge of property to secure the repayment of a debt. If the debt is not repaid as agreed between
the lender and borrower, the lender can force the sale of the pledged property and apply the proceeds to repay-
ment of the debt.
Leaving the borrower in possession of the pledged property is known as hypothecation. The borrower con-
veys title to the lender but retains the use of the property. This conveyance of title in the mortgage agreement is
conditional. The mortgage states that if the debt is repaid on time, title returns to the borrower. This is known
as a defeasance clause.
Lenders require that borrowers pledge the real estate as collateral for a mortgage loan. If the borrower defaults
on the loan, the lender can terminate the borrower’s interest in a property through a judicial process called fore-
closure. Traditionally, because the borrower had possession of the property, this process was the only way for a
lender to seek satisfaction in the event of a default. However, a judicial foreclosure requiring court action can be
time-consuming and very costly.
Some states provide for an alternative to traditional foreclosure in order to avoid the typical drawbacks of
the process. One form of mortgage document is the deed of trust, sometimes called a trust deed. In a deed of
trust, a third party is given the power of sale by the borrower. The deed provides for a non-judicial foreclosure
when all statutory requirements are followed. The process of non-judicial foreclosure is smoother and less time-
consuming than traditional foreclosure, and is therefore appealing to a lender.
The other major document that a borrower signs, besides the deed of trust, is the promissory note. This is
a promise to pay the loan off according to a schedule of payments at a certain interest rate over a specified period
of time.
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The two documents are closely related. The deed of trust stipulates what will happen in the event of a default
in the terms of the promissory note. In fact, it is standard practice to record only the deed of trust because it is
tied so closely to the promissory note.
Real estate can be pledged as collateral for a loan using any of the following four methods.
1. The standard or regular mortgage is the most common type used today. The borrower conveys title to
the lender as security for the debt. The mortgage contains a statement that the mortgage will become
void if the debt it secures is paid in full and on time.
2. An equitable mortgage is a written agreement that does not follow the form of a regular mortgage, but is
still considered by the courts to be one. An equitable mortgage can arise in a number of ways. For exam-
ple, a prospective buyer generally gives the seller a money deposit along with an offer to purchase prop-
erty. If the seller refuses the offer and also refuses to return the deposit, the court will hold that the
purchaser has an equitable mortgage in the amount of the deposit against the seller’s property.
3. In some cases, the borrower may convey the deed to the pledged property to the lender as a deed as secu-
rity for a loan. If the loan is repaid in full and on time, the borrower can force the lender to convey the
real property back to him or her. Like the equitable mortgage, a deed used as security is treated according
to its intent, not its label.
4. A deed of trust is a three-party agreement including a borrower, a lender, and a neutral third party. The
key aspect of this method is that the borrower executes a deed to the trustee rather than to the lender. If
the borrower pays the debt in full and on time, the trustee delivers a release of liability to the borrower.
Qualifying the Buyer for Financing

In commercial loans, lenders look only to the income from the property for repayment, so they are not particu-
larly concerned about the borrower’s income. However, in residential loans, the borrower’s income is of prime
importance because that is what will be used to repay the loan. The borrower’s income is analyzed from the stand-
point of its quantity and durability. Also, the borrower’s willingness to pay is of prime importance.
To evaluate the borrower’s quantity of income, the lender calculates the front ratio: the ratio of the requested
monthly payment to the borrower’s gross income. The monthly payment is the sum of all housing costs: princi-
pal, interest, taxes, and insurance (PITI). Most conventional lenders will not let the front ratio exceed 28%. For
example, if a borrower’s monthly income is $5,000, the monthly housing costs could not be more than 28% of
$5,000, or $1,400.
The lender is also concerned about other fixed obligations the borrower may already have. Fixed obliga-
tions include any payments that the borrower is required to make on a regular basis, such as car payments, bank
loans, credit cards, open charge accounts, and so on. The lender calculates the ratio of housing cost plus other
fixed obligations to gross monthly income. Most lenders will not let this ratio exceed 36%. So if the borrower makes
$5,000 a month, the amount of housing costs plus fixed obligations could not exceed 36% of $5,000, or $1,800.
Lenders want to be assured that a borrower will be able to pay back the loan in a timely manner. Depend-
ing on the kind of property for which the loan is being sought, lenders make various analyses to determine the
creditworthiness of the borrower.
71
Unimproved land is the most difficult loan to underwrite because it produces little or no income to use to
pay back the loan. Also, since the borrower does not occupy the property, there may be little incentive to pay back
the loan in the event of financial difficulties.
Income producing properties are analyzed on their ability to generate enough cash flow to pay back the loan.
The property’s net operating income must cover the debt service (the amount of money required to make reg-
ular payments on the loan).
The lender typically requires a certain debt coverage ratio, depending on the type of property and the qual-
ity of the income. The debt coverage ratio is equal to the net operating income of the property divided by the
debt service on the loan. For instance, if a property had a net operating income of $120,000 and the lender required
a debt coverage ratio of 1.2, the maximum debt service the lender would allow would be $100,000.
$120,000 ÷ 1.2 = $100,000
To review your math skills, see Chapter 5.
Types of Loans
The most common residential loan is amortized, or paid off, in equal monthly installments that include princi-
pal and interest. During a time of reasonable interest rates, the borrower will most often choose a fixed interest
rate for the life of the loan.
The most popular time period for fixed rate loans is 15 or 30 years; however, other loan terms are also avail-
able. Borrowers who choose a shorter time frame save a sizable amount of money in interest payments.
In some instances a loan will be structured as an amortized loan with a term of 30 years, but the loan will
balloon after a certain period. That is, the loan becomes due and payable before the end of the amortization term.
The loan may balloon in five, seven, or ten years, or however long the lender stipulates. A balloon loan usually
charges a lower interest rate than a regular fixed rate loan. Since the lenders don’t have to wait 30 years to get their
money back, they can afford to charge a lower interest rate because the inflation risk is reduced.
Balloon loans are frequently used in seller financing, since the seller typically does not want to wait for 30
years to be paid in full. Buyers may find a balloon loan attractive if they know that they are going to be selling
the property before the loan is due.
During times of high interest rates, a borrower may prefer an adjustable rate loan. The lender will give the
borrowers a lower-than-market interest rate for a certain period of time, typically a year. Then the rate is adjusted
each year (or whatever time period is agreed upon) to adjust for inflation. The most common type of adjustable
rate loan is a one-year adjustable plan.
The rate is adjusted at the specified time based on some predetermined indicator, such as Treasury Bill rates.
For the borrower’s protection, there is usually a cap, or limit, on the amount the rate can be increased in any given
year or over the life of the loan.
Sources
The sources of loanable funds and the financing arrangements available to a prospective borrower increase each
year. Loans can even be arranged on the Internet and by brokers and real estate salespersons.
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Even though the choices grow daily, there are two major types of loans:
1. loans that are insured or guaranteed by an agency of government

2. loans that are funded in the private sector
The loans that are neither insured nor guaranteed by an agency of government (loans funded in the pri-
vate sector) are known as conventional loans.
A significant number of residential loans are originated by mortgage bankers and mortgage brokers. Reg-
ulated financial institutions, including commercial banks, savings and loans, mutual savings banks, and credit
unions, provide a significant amount of funds for residential loans.
Whether the loan is from a bank or a mortgage company, the loan will most likely be sold to investors through
the secondary mortgage market. The major purchasers of home loans are:
■ Federal National Mortgage Association (Fannie Mae)

■ Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)
■ Government National Mortgage Association (GNMA or Ginnie Mae)
These entities buy so many loans that they virtually control how the loan origination or primary market
operates. A loan that meets Fannie Mae’s guidelines is called a conforming loan. Most conventional loans will
use uniform instruments for:
■ loan applications
■ appraisal reporting forms
■ closing statements
In addition, there is a limit to the loan amount of a conforming loan. This limit changes from year to year.
In 2003, the maximum amount of a conforming loan was $322,700.
Government Programs
Decades ago, the federal government established a number of programs to get as many people into homes as pos-
sible. Two examples are the Federal Housing Administration (FHA) and the Department of Veteran Affairs (VA)
loans. Both are designed to reduce the lender’s risk when low down payment loans are made.
FHA mortgage insurance requires the payment of a premium, a sum of money paid in addition to the
amount of the loan. In 2003, the premium was 2.25% of the loan amount; payable at the time the loan is funded.
In addition, an annual premium of 0.5% of the loan balance is payable over the life of the loan. FHA insurance
covers the entire loan balance for the life of the loan.
The VA program is designed to encourage lenders to make loans to veterans. Basically, the VA guarantees a
portion of the loan in sufficient amount to entice lenders to make loans. Depending on eligibility, a veteran may
be able to borrow 100% of the purchase price up to approximately $200,000. Rather than a premium, the VA charges
73
a funding fee. The amount of the funding fee ranges from 1.25% to 3%, depending on the amount of down pay-
ment and the veteran’s service status.
Mortgages
A mortgage is a pledge of property made by a mortgagor (the borrower) to pledge collateral (the property) that
may be sold at auction (foreclosure) when the borrower defaults and fails to fulfill the promises made in the mort-
gage instrument. The mortgage (pledge of the collateral) is given for the benefit of the mortgagee (the lender).
Caution! Remember that in real estate terminology words ending in “or” refer to the person giving something
(The borrower gives the pledge.) and the words ending in “ee” refer to the person receiving something (The lender
receives the benefit of the pledge of the collateral.). Forget about the fact that the lender gives the money, it is the
pledge of collateral that is important in this discussion.
When a lender makes a loan the borrower signs a promissory note that promises to repay the loan and defines
the terms of the repayment.
A mortgage pledges the property as collateral when duly executed by the borrower. When all payments have
been made per the terms of the note, the lender (mortgagee) will issue a Release of Lien that should be recorded
to remove the encumbrance affecting the title to the property.
A defaulting borrower faces penalties of varying severity. Late charges will be incurred if the borrower is
late in making a payment. If the borrower remains in default, an acceleration clause may be invoked by the lender.
An acceleration clause gives the lender the right to collect the balance of the loan immediately. Finally, if the debt
remains unpaid, the formal process of foreclosure will begin.
The process of foreclosure will depend on the terms of the mortgage instrument. If it contains a “Power of
Sale” clause, a non-judicial foreclosure may take place providing all statutory requirements are followed. In the
absence of a “Power of Sale” clause, a judicial process will be required.
On a default by the borrower, the traditional remedy for the holder of a mortgage was strict foreclosure in
which the property could be sold immediately. The modern requirement is a foreclosure action that must be
brought in court following statutory notice and other requirements unless a deed of trust instrument provides
for a non-judicial foreclosure.
If the security instrument is a mortgage with power of sale (deed of trust), the property may be sold with-
out a court hearing. In this case, state law still applies, and there will be specific notice and procedural require-
ments. Even after the property has been sold at public auction, there may be a right of redemption for the borrower
within a statutory time period.
If the proceeds of the foreclosure sale do not cover the amount owed on the loan, some states allow the lender
to obtain a deficiency judgment against the borrower. This means that other assets can be claimed by the lender
to satisfy the remaining indebtedness. Other states provide homeowners with anti-deficiency protection in the
event that the proceeds of sale on loan default do not cover the amount owed. This means that the lender has no
recourse except the real estate.
In the case of a deed of trust, the trustee is authorized to sell the property in the event of a default to pay
off the remaining debt. When the property is sold, a trustee’s deed is given to the new owner. As with a mort-
gage foreclosure, state law will dictate whether or not the lender is entitled to seek a deficiency judgment in the
event that the proceeds of a forced sale do not cover the amount owed.
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Financing/Credit Laws
Truth-in-Lending Act and Regulation Z

The Federal Consumer Credit Protection Act, also known as the Truth-in-Lending Act (TIL), went into effect
in 1969. It is implemented by the Federal Reserve Board. Also known as Regulation Z, the act requires that bor-
rowers be clearly shown how much they are paying for credit in both dollar terms and percentage terms before
committing to the loan. The borrower is also given the right to rescind the transaction under certain conditions.
The act requires certain disclosures in advertising anything that involves financing. If an advertisement con-
tains any one of the TIL list of financing terms (called trigger terms), the ad must also include five disclosures.
The following are some of the trigger terms:
■ amount of down payment

■ amount of any additional payments
■ number of payments
■ period of payments
■ dollar amount of any finance charge
■ statement that there is no financing
If the ad contains any of the trigger terms above, then the ad must also include these disclosures:
■ cash price or the amount of the loan

■ amount of down payment or a statement that none is required
■ number, amount, and frequency of repayments
■ annual percentage rate
■ deferred payment price or total payments
Equal Credit Opportunity Act

The Equal Credit Opportunity Act, a federal law that has been in effect since 1975, prohibits discrimination in
the granting of credit on the basis of age, sex, race, color, marital status, religion, and national origin. It also pro-
hibits discrimination against applicants who receive all or part of their income from public assistance.
Factors that can legitimately be considered are the applicant’s income, stability of the source of the income,
total assets and liabilities, and credit rating (past history of use of credit).
Fair Credit Reporting Act

Congress enacted the Fair Credit Reporting Act in 1970 to protect consumers from the reporting of inaccurate
credit information to credit reporting agencies. This legislation is administered by the Federal Trade Commis-
sion. It requires that if a buyer of real estate is denied credit because of an unfavorable credit report, the lender
refusing to make the loan must reveal to the buyer the identity of the credit agency reporting the information
that was the basis of the rejection. Most negative items are to be dropped from the report after a period of seven
years; an exception is bankruptcy information, which may be held for ten years.
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Contracts/Agency Relationships
General
A contract is a legally enforceable agreement between two parties to do something (performance) or to refrain
from certain acts (forbearance). To create a real estate contract there are seven requirements. A contract must:
1. involve legally competent parties.

2. be in writing as required by the Statute of Frauds. (One notable exception is a lease for one year or less.)
3. be signed by the parties to the agreement.
4. have a lawful objective.
5. include consideration. (Does not need to be money.)
6. mention offer and acceptance and notification of the acceptance.
7. contain a legal description of the property.
Listing Agreements
A real estate transaction that makes use of the services of one or more real estate licensees usually begins with an
agreement between property owner and licensee to list the property for sale, lease, or trade.
The listing agreement includes:
■ identity of the parties

■ legal description of the property
■ object of the agreement (property sale, exchange, lease)
■ term (length of time) of the agreement
■ definition of the agent’s role and list of the agent’s obligations
■ statement of compensation to which the agent is entitled on fulfilling his or her obligations
■ safety clause stipulating that the agent’s compensation is to be paid if a sale is transacted with a buyer
who was introduced to the property owner by the agent, within a stated period after termination of the
listing agreement
■ authorization for the agent to use the local multiple listing system, Internet listing system, or other mar-
keting forum
■ authorization for the use of subagents or for the broker to function as an intermediary
■ authorization for the agent to retain a key to the property or to use a lock box or other means of prop-
erty entry in the owner’s absence
■ authorization to receive a deposit or other funds on behalf of the buyer and stipulation as to how those
funds are to be handled
■ arbitration or mediation provision to be used in the event of a contract dispute
■ statement of compliance with all applicable fair housing laws
■ any other provision required by law
■ signature of seller and signature of broker or the broker’s sales associate (general agent)
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Legal Requirements
In order to be enforceable, a listing agreement must be signed by both the real estate licensee and the property
owner (or the property owner’s representative acting under a power of attorney or a court order).
Fiduciary Duties and Representations

Once a listing is signed, the broker is obligated to all of the fiduciary duties that an agent owes to a principal. The
owner owes the agent honesty, availability, indemnification, and compensation.
Terminating a Listing
A listing agreement is terminated under the same conditions as other contracts. Those conditions include:
■ performance of the agreed-upon terms

■ mutual rescission of the parties
■ passage of the agreed-upon time
■ death of the seller or broker
■ abandonment
■ breach of a fiduciary duty
Buyer-Broker Agreements
In recent years it has become common for buyers to appoint exclusive agents to represent them in real estate trans-
actions. The contract that appoints an Exclusive Buyer Agent should contain the basic elements found in a list-
ing agreement with a few minor changes. The subjects to be addressed include but are not limited to:
■ the name of the client and the agent

■ a definition of the market area
■ how the agent will be compensated
■ the term of the agreement
■ the authority of the agent
■ the duties of the agent
■ the duties of the client
■ provisions for dispute resolution
■ notices relating to Fair Housing, Anti-trust, and so on.
■ signatures of the parties
Offers/Purchase Agreements
The sales contract (sometimes called an earnest money contract) is arguably the most important document used
in a real estate transaction. Since a defective contract can allow either buyer or seller to end the transaction, real
estate practitioners must be thoroughly familiar with contract law.
A contract is a legally enforceable agreement to do or not do a certain thing. Most contracts are based on
promises by the parties involved to act in some manner. Examples of such acts would be to pay money, to pro-
77
vide services, or to deliver title. However, a contract can also contain a promise to forbear (not to act) by one or
more of its parties. For example, a lender may agree not to foreclose on a delinquent mortgage loan if the bor-
rower agrees to a new payment schedule.
A contract may be either express or implied.
■ An express contract occurs when the parties to the contract declare their intentions either orally or in
writing. Leases and contracts to purchase real estate are examples of express contracts. The Statute of
Frauds requires that all documents affecting title to or an interest in real estate be expressed in writing
except for a lease of one year or less.
■ An implied contract is created by the actions of the parties rather than by words. An example of an
implied contract is the agreement between you and a restaurant when you walk in and sit down. The
presence of tables, silverware, and menus implies that you will be served food. When you order, you
imply that you are going to pay the bill.
A contract may be bilateral or unilateral.
■ A bilateral contract results when a promise is exchanged for a promise. A bilateral contract is essentially
an agreement that says, “I will do this, and you will do that.” A real estate sales contract is a good example
of a bilateral contract.
■ A unilateral contract results when a promise is exchanged for performance. It is essentially an agreement
that says, “I will do this if you do that.” If the sales manager offers a bonus if you sell $3,000,000 worth of
real estate, you are not obligated to sell $3,000,000 worth of real estate—but the sales manager is obli-
gated to pay you the bonus if you do.
A contract can be construed by the courts to be valid, void, voidable, or unenforceable.
■ A valid contract meets all the requirements of law. It is binding upon its parties and legally enforceable
in a court of law.
■ A void contract has no legal effect and, in fact, is not a contract at all. Even though the parties may have
intended to enter into a contract, no legal rights are created and no party is bound. The word void means
the absence of something.
■ A voidable contract binds one party but not the other. For example, when one party is guilty of fraud,
the other party may void the contract. But if the offended party wishes to fulfill the contract, then the
party who committed fraud is still bound to the terms of the contract. A contract with a minor is void-
able at the option of the minor party.
■ An unenforceable contract is one that may once have been valid, but its enforcement is barred by a
statute of limitations or a change of law.
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Counteroffers/Multiple Counteroffers
Purpose of Offer and Counteroffer

The real estate sales contract begins as a written offer from buyer to seller and will typically include:
■ identity of all parties to the transaction

■ full legal description of the real estate, as well as a listing of any personal property to be included
■ sales price, including the amount of down payment and an indication of how the remainder of the price
will be paid at closing
■ financing contingency giving details of the type of financing the buyer hopes to obtain and stipulating a
deadline for release of the contingency
■ statement that the transaction is contingent on a sale of other property of the buyer (The seller will want
a deadline for release of the contingency, particularly if a non-contingent offer is made while the transac-
tion is pending.)
■ name of the escrow agent for the transaction and by whom the fee for this service will be paid
■ list of property inspections to be made and by whom, including deadlines for the inspections as well as
the appropriate notifications to buyer and/or seller (The seller will want a limit on expenditures for any
pest control treatment or necessary repairs.)
■ list of applicable categories of disclosure required by state and federal law, which may include location in
a flood, earthquake or other zone, and the presence of hazardous materials, such as lead-based paint
■ provision for arbitration or mediation of disputes that may arise between the parties
■ remedies, including suit for specific performance, money damages, or acceptance of liquidated damages,
in the event one of the parties breaches the agreement
■ statement of compliance with the federal Foreign Investment in Real Property Tax Act (FIRPTA)
■ statement of compliance with all applicable Fair Housing Laws
■ statement of compliance with any other state or federal law not already mentioned
■ provision for a final walk-through by the buyer to ensure that the property has been adequately main-
tained before closing
■ statement of who will bear the risk of loss in the event of property damage or destruction between the
time the contract is signed and the transaction is closed
■ statement of the agency representation and commission owed
■ signature of the buyer(s) and space for signature of the seller(s)
An offer will expire (end) if it is not accepted by the deadline specified in its terms. If no deadline is spec-
ified, a reasonable time period will be implied. An offer can be withdrawn at any time prior to the offeror being
notified of its acceptance.
Any change to the terms of an offer is a counteroffer and has the effect of rejecting the initial offer and mak-
ing a new offer. The offer and acceptance must both be made voluntarily (without coercion) and without
misrepresentation.
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Valid Methods of Communicating Offers

Although verbal negotiations may appear to save time and to be efficient, a licensee needs to remember that agree-
ments for the sale of real estate must be reduced to writing to be enforceable. The Statute of Frauds requires that
there be a written offer and written acceptance. As soon as the written acceptance is obtained, the offeror must
be notified of the acceptance. The notification is accomplished by delivering a copy of the accepted document to
the offeror.
Remember that a party making an offer or a counteroffer may revoke that offer or counteroffer at any time
prior to acceptance by the other party. Revocation of a written offer or counteroffer must be made in writing to
be effective.
When one party fails to perform as required by the contract, a breach of contract or default has occurred.
The wronged or innocent party has six possible remedies.
1. Accept partial performance. If the purchaser was expecting 25 acres to be conveyed, but the survey
showed that there were only 23.57 acres in the tract, the purchaser may accept the property as is.
2. Rescind the contract unilaterally. The wronged party can simply rescind or cancel the contract and
return to the status prior to executing the contract.
3. Sue for specific performance. Specific performance means doing exactly what the contract requires. The
party seeking specific performance must have acted in good faith and not committed a material breach
of the contract.
4. Sue for money damages. For example, if a seller cannot perform, but the buyer has already spent a large
amount of money on inspections, appraisals, and so on, the buyer could sue to recover the money spent.
5. Accept liquidated money damages. This remedy, available only to the seller, means retaining the earnest
money.
6. Mutually rescind the contract. Sometimes both parties are better off just walking away from the con-
tract and canceling the agreement. A mutual rescission must be expressed in writing.
Before closing a real estate transaction, the parties involved must be assured that certain conditions are met.
By signing a contract, the parties affirm their mutual agreement. Once they are bound to the terms of the agree-
ment, they can then take the time to ensure that these conditions are met. If there was no contract, and the par-
ties were not bound to honor their agreement, one or both of the parties might spend considerable time and money
on a transaction that could fall through.
There are three basic contingencies.
1. Buyer’s ability to obtain suitable financing. When buyers start looking at properties, they typically meet
with a lender to determine what loan amount they would likely qualify for. Once they have selected a
specific property, they must get lender approval for a loan on that property. This takes time, so it is
important to have the property tied to a specific contractual agreement.
2. Buyer’s approval of title matters. Buyers generally will not take the time and effort to examine the title
until they have a firm agreement from the seller.
80
3. Buyer’s acceptance of the property condition. A property may appear to be in good condition when the
buyer initially views it, but the buyer will likely require a thorough inspection of the property after nego-
tiating with the seller. The inspection, too, will take time to complete.
Leases as Contracts
A lease is a contract wherein a property owner (lessor) transfers the rights of possession, quiet enjoyment, and
use to the tenant (lessee) for a period of time thus creating a leasehold estate. When property ownership trans-
fers during the term of a lease, the lease remains binding upon the new owner.
This topic will be discussed in more detail under “Property Management” on page 96.
Options
An option is a unilateral contract. An option to purchase enables a purchaser to purchase a property at a set price
within a given time frame. An option to terminate grants a purchaser the unrestricted right to terminate a con-
tract without penalty within a given time frame.
To create a valid option, the property owner must be paid some cash (valuable consideration) and time is
of the essence.
Rescission and Cancellation Agreements

Contracts usually come to an end by completion of the objective of the contract or by expiration of the term spec-
ified in the agreement. On occasion, the parties will decide to end the agreement and to restore each other to the
position enjoyed prior to entering into the agreement. This is identified in legal terms as mutual rescission.
Agency appointments may be ended early by termination or withdrawal. If a property owner has entered
into an exclusive right-to-sell listing agreement and decides to terminate, he or she may withdraw the listing and
request that the agent stop marketing the property. If the owner then sells the property during the term of the
listing, the broker is still entitled to receive the agreed upon compensation.
The seller may terminate with the agreement and consent of the agent. To effect a termination the broker
may require some compensation to cover expenses incurred through the date of the termination. If all parties
can reach agreement, the termination becomes a mutual rescission. When an agreement cannot be reached, the
property owner should seek legal counsel before attempting to fire the agent and the agent should seek legal coun-
sel before quitting or renouncing the agency appointment.
With regard to leases and purchase agreements, the parties may cancel an agreement through mutual rescis-
sion or may create a substitute agreement to replace the original contract. The substitution of a new agreement
for an existing contract is known as a novation. The new agreement should reference the agreement that it is replac-
ing and clearly state that it replaces the original agreement.
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Broker-Salesperson Agreements
Most salespersons function as Independent Contractors rather than as employees of the broker. The federal tax
code requires that the broker and salesperson enter into a written contract to create the working relationship. The
agreement should clearly stipulate that the salesperson is an independent contractor and that:
■ he or she has paid his or her own licensing fees

■ he or she is free to work on his or her own time schedule
■ he or she may perform the tasks of the business where he or she wishes
■ compensation is based solely on production and that no salary, hourly wages, or benefits are paid or
provided
■ the salesperson is responsible for paying quarterly federal income tax payments and the full 15.3% of
gross wages for F.I.C.A. taxes
The agreement also needs to define compensation amounts and issues such as payment of commissions gen-
erated prior to termination of the agreement but not yet paid.
Law, Definition and Nature of Agency Relationships,

Type of Agencies, and Agents
When one person agrees to act on behalf of another, an agency relationship is established. Agency relationships
are regulated by a body of laws collectively known as the Law of Agency. An agency is a legal, fiduciary relationship
where the agent works for and under the direction and control of a principal or client. Two kinds of agency rela-
tionships are common in real estate practice.
1. General agency—Real estate brokers typically have licensees who act as their agents in working with
their principals.
2. Special agency—A principal to a transaction (the seller or buyer) secures the advice and assistance of a
real estate broker and the broker’s associates.
Creation of Agency and Agency Agreements

An agency relationship is established when a buyer or seller delegates authority to a broker, and the broker accepts
the authority to act on behalf of the principal. Although the delegation may be given orally, the best method of
establishing an agency relationship is by an express written agreement called a listing agreement or a buyer rep-
resentation agreement. There is more information about listing agreements under “Contracts.”
There are four basic types of listing agreements in common use.
1. Exclusive right to sell, from the broker’s point of view, is the best type of listing. During the period set out in
the listing agreement, the listing broker has the exclusive right to produce a ready, willing, and able buyer at the
price and terms agreed upon in the listing agreement. If any other person—including the seller or another broker—
procures a buyer, the listing broker is still entitled to the commission stipulated in the listing agreement. How-
ever, if another broker procures a buyer, most listing brokers are happy to share the commission with the procuring
82
broker. With this type of listing, brokers will exert maximum effort in marketing property, since they have strong
assurance that they will be compensated.
Under the exclusive right to sell agreement, the listing broker is entitled to a commission when the broker
procures a buyer who will meet the seller’s price and terms even if the seller then refuses to sell the property.
2. An exclusive agency listing is similar to an exclusive right to sell listing except that it gives the seller the right
to sell the property without paying the broker a commission. This agreement is nevertheless an exclusive agency
agreement because the seller cannot give the listing to another broker.
The Residential Real Estate Transaction

Listing Broker and Subagent
The
Sellers
The Listing
Special Agency
Salesperson
The General Agency

Listing
Broker
No Agency
Multiple Listing Service

(MLS)
No Agency
The Selling
Broker
(Drive-Around General Agency
Broker)
The Selling
No Agency (or Drive-
Around)
The Buyer Salesperson
3. An open listing is simply an agreement that a commission will be paid if the broker is the procuring cause in
producing a ready, willing, and able buyer. A seller may enter into an open listing with an unlimited number of
brokers. The only real benefit to the brokers is that they know they will be compensated if they are the procur-
ing cause of the sale. In residential transactions, brokers rarely accept open listings, since there is a strong possi-
bility that another broker or the seller will find a buyer. However, the seller of a multi-million dollar commercial
property is not as likely to give an exclusive listing. So a commercial real estate broker would be more likely to
accept an open listing, since such a broker typically has a group of clients with whom he or she has worked in
the past to whom the broker can present the property.
83
The Residential Real Estate Transaction

Listing Broker and Buyer’s Broker
The
Sellers
The Listing
Special Agency
Salesperson
The General Agency

Listing
Broker
No Agency
Multiple Listing Service

(MLS)
No Agency
The Selling
Broker
(Drive-Around General Agency
Broker)
The Selling
Special Agency (or Drive-
Around)
The Buyer Salesperson
4. A net listing can be an exclusive or a non-exclusive listing. It offers the property owner a guaranteed net amount
at closing, with the listing broker taking any part of the purchase price over that amount. Net listings often leave
brokers open to charges of fraud or misconduct, and should therefore be avoided if possible.
For example, the owner might say to a broker,“I want $100,000 for my property. You can keep anything over
that amount that the property sells for.” The broker knows that the property will sell for $120,000 in this market,
so he feels he has a great opportunity. But when the broker brings in an offer for $120,000 and the transaction
closes, the broker may be sued for violating his fiduciary duty of loyalty to the client. The broker should have
informed the seller of the true market value of the property.
So the broker might instead present the property at $106,000, thinking he will then earn a reasonable com-
mission. A prospective buyer offers $98,000. Complying with the legal requirement to present all offers, the bro-
ker submits the offer and the seller accepts. The broker is then left without a commission and wondering why he
ever took a net listing.
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Listing Procedures
Disclosing Agency Relationships

The law requires that when an agent first has substantive dialogue with a prospective buyer or seller for the pur-
poses of discussing, listing, or showing property, the agent must present the statutory information concerning
possible agency relationships and available brokerage services. This is critical if the agent is acting as a subagent
of the seller, so that the buyer will not reveal any information that would give an advantage to the seller.
Evaluating Property
An agent needs to be totally honest with the client who is getting ready to sell or purchase a property. A Com-
parative Market Analysis (CMA) should be prepared to help the seller client or buyer client identify the “right”
asking or offering price. The agent should advise the seller on how to get the property ready to show to its best
advantage and to be attractive to buyers. Although the agent must never take on the role of property inspector,
an agent should also point out potential problem areas relating to the structural and mechanical systems of the
property improvements.
Disclosure of Property Conditions

Both property owners and real estate licensees are required to reveal any material facts about the property that
may be known to one or the other but may not easily be observed by an untrained person. These deficiencies are
known as latent structural defects or property defects.
In a growing number of states, a real estate licensee is responsible for conducting a reasonable visual inspec-
tion of property to be listed, noting any defects or conditions that could affect the property’s value or desirabil-
ity (termed “red flags”) and revealing those facts to prospective buyers. Part of this process includes questioning
the property owner about conditions that may not be apparent in a visual inspection.
In some states, the owner of a previously occupied single-family residential dwelling unit must complete a
statement disclosing the condition of the property to the best of the owner’s knowledge.
Fraud and Misrepresentation

A broker or salesperson commits fraud when the licensee deliberately deceives the consumer. For instance, a bro-
ker might encourage a consumer to part with something of value or to enter into a contract that the consumer
would not have entered into had truthful information been provided. Misrepresentation, more correctly called
innocent misrepresentation, is unintentional rather than deliberate.
Often, real estate professionals are found guilty of one of the above because of what they fail to reveal. Fail-
ure to disclose a property defect constitutes fraud or misrepresentation by omission. Giving wrong informa-
tion constitutes fraud or misrepresentation by commission.
Brokers and salespersons must avoid making any representation when they do not have the correct answer.
Instead, real estate professionals should guide buyers and sellers to a source from which the buyer or seller may
obtain the information they need to make an intelligent and informed decision.
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Authority
Ostensible authority or apparent authority may establish an agency relationship. This occurs when a principal
gives a third party reason to believe that another person is the principal’s agent even though that person is unaware
of the appointment. If the third party accepts the principal’s representation as true, the principal may have estab-
lished ostensible authority and therefore may be bound by the acts of his agent.
Agency can also be established by ratification. For example, a broker might bring an offer to a property owner
who had no knowledge of the broker’s attempt to sell his property. If the owner accepts the offer (which gener-
ally entitles the broker to a commission), then it could be held that an agency was created when negotiations started.
An agency by estoppel can result when a principal fails to maintain due diligence over an agent and the agent
exercises powers not granted to her. If this causes a third party to believe the agent has these powers, an agency
by estoppel has been created.
Within any agency relationship, implied authority can sometimes be exercised. Implied authority can arise,
for example, from custom in the industry. If a broker lists a house, there may not be an express agreement con-
cerning advertising the property in the newspaper. However, because this is a customary practice, the broker may
have the implied authority to advertise. In some states, express authority in writing is required to be able to erect
a “For Sale” sign or to share one’s agency with another licensee.
Responsibilities of the Agent to the Seller/Buyer as Principal

Accepting an appointment as a seller’s or buyer’s agent imposes obligations and creates liabilities. A licensee who
fails to fulfill his fiduciary duties or oversteps the bounds of the agent’s authority may face disciplinary action by
the state’s licensing authority or even a civil suit brought by an unhappy buyer or seller. The agent appointed by
a listing agreement or a buyer representation agreement is a special agent and has not been granted the author-
ity to speak or sign on behalf of the principal or client.
It is very important to know when and if an agency relationship has been created. When someone becomes
an agent for another person, a dramatic change in duties and obligation occurs. The agency creates a fiduciary
relationship, requiring that the agent exhibit trust, honesty, and good business judgment when working on behalf
of the principal. This fiduciary relationship imposes the following duties:
■ Obedience (also called faithful performance). The agent must obey all legal instructions given by the
principal, applying best efforts and diligence in carrying out the objectives of the agency (for example,
selling the property).
■ Loyalty. The agent must put the interests of the principal above his or her own interests. This is perhaps
the most difficult duty for the agent, which may be why failure of the agent to uphold this duty causes so
many lawsuits.
■ Disclosure. The agent must keep the principal informed on all pertinent facts. Since just about anything
relating to the transaction could be pertinent to a principal, the agent basically is obligated to investigate
and disclose everything related to the situation.
■ Confidentiality. The agent must keep confidential information about the principal and the principal’s
motivations and financial interests.
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■ Accounting. The agent may not place the principal’s funds in the agent’s own account. This practice,
called commingling, is grounds for suspension or revocation of the broker’s real estate license.
■ Reasonable care. The agent must exercise competence and expertise. The agent must not be party to any
fraud or misrepresentation likely to affect the sound judgment of the principal.
Termination of Agency
Agencies are created when the principal or client delegates authority to the agent and the agent accepts the appoint-
ment. Most agencies come to a successful, happy conclusion through completion of the purpose of the agency—
the property sells and the transaction closes. On occasion, the agent is not successful within the time established
in the listing or buyer representation agreement, and the agency ends because the agreement expires. Other events
that can terminate an agency are:
■ destruction of the property

■ condemnation of the property
■ mutual agreement (rescission) by the parties
■ bankruptcy of the owner
■ death or incapacity of the principal or the agent (NOTE: The death of a subagent would not affect the
status of the agency.)
Commission and Fees

Compensation paid by sellers and buyers is always negotiable between the parties and can be calculated and paid
in a variety of ways.
1. Success fees (contingent fees) are usually paid at the closing of the transaction and are usually a percent-
age of the sales price or a flat fee. The agent gets paid only if the transaction closes.
2. Non-contingent fees may be calculated on an hourly basis or on a fee for specific or limited services
basis. Some brokers require a non-refundable retainer fee before beginning work for the principal.
Federal antitrust laws prohibit price fixing! Licensees should exercise caution to make certain that they do
not say anything about fees that might give someone the idea that fees are standard or fixed in a particular market.
Settlement/Transfer of Property
The real estate agent does not create the instruments that transfer title. The real estate agent does assist the buyer
and the seller in defining and setting down what, when, and how the title of the property will be transferred in
an agreement of purchase. Most real estate closings involve transferring title from the seller (grantor) to the buyer
(grantee) by the delivery of a general warranty deed, executed by the seller and delivered to the buyer. A gen-
eral warranty deed is an instrument by which the grantor guarantees the grantee that the title being conveyed is
free from other claims or encumbrances.
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Title Insurance
Title insurance has become the most common method of protecting the property buyer. A title company issues
a preliminary title report or title commitment. It will indicate the present condition of the title based on exam-
ination of the documents contained in the public records as well as any exceptions to the coverage that the title
company is willing to provide. The title company will defend the buyer’s title in a title dispute covered by the policy.
Title insurance is necessary to indemnify the new owner against financial loss in the event an error was made
when the title was searched and examined. There is no guarantee that the finished abstract, or its certification, is
completely accurate. Many problems can arise in the recorded chain of ownership. For example:
■ What if a recorded deed in the title chain is a forgery?

■ What if a minor or an otherwise legally incompetent person executed a deed?
■ What if a document was misfiled, or there were undisclosed heirs, or a missing will later came to light, or
there was confusion because of similar names on documents?
These situations can result in substantial losses to property owners and lenders, yet the fault may not lie with
the title closer, abstracter, or attorney so there is no one to sue for damages. The solution has been the organiza-
tion of private companies to sell insurance against losses arising from title defects such as those above as well as
from errors in title examination.
Essentials of Title Insurance

Numerous details must be handled between the time a buyer and seller sign a sales contract and the day the title
is conveyed to the buyer. Ask yourself:
■ What is the status of the title? It must be checked thoroughly.

■ What is the property tax status? Are the taxes up to date? Are there any special assessments? What is the
tax bill for the current year?
■ Are there any judgments against the seller that may encumber the property? Are there any liens that must
be paid off?
The most expeditious method of preparing for the closing is to place all of these matters in the hands of a
neutral third party. Since the title insurance provider has a high level of interest in having these matters handled
correctly, it makes sense that it should be chosen as the closing agent or escrow agent, as noted previously.
Deeds
A deed is a written document that conveys property from the grantor (owner) to the grantee (buyer). State law
dictates the form that a deed must take. There are a number of requirements for a valid deed.
■ It must be in writing.
■ The grantor(s) must be of sound mind (legally capable).
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■ It must identify the parties, preferably by full name and marital status (single, married, widow, and so
on).
■ It must identify the property by legal description.
■ It must contain a granting clause—also called words of conveyance—that contains the appropriate
words (“I hereby grant and convey”).
■ It must be signed by the grantor(s).
■ It must be delivered to and accepted by the grantee. A deed held by a third party until the grantor dies,
for instance, will have no effect during the grantor’s life and on the grantor’s death will be invalid. Even
after a valid delivery, the fact that the deed is in the hands of the grantee does not mean that it is
accepted. Many charitable donations of real estate have ultimately been rejected because of the high cost
of their maintenance or remediation (as in the case of contaminated property).
There are many different types of deeds.
■ A bargain and sale deed states the consideration paid by the grantee. There may or may not be a war-
ranty that the grantor actually has an interest in the described property.
■ A gift deed requires no consideration to be paid by the grantee.
■ A grant deed (using the words “I grant and convey” or similar) carries three implied promises of the
grantor:
1. The grantor has good title.
2. There are no encumbrances other than those noted.
3. The grantor will convey any after-acquired title (ownership interest received after the grant deed is
delivered) to the grantee.
■ A quitclaim deed transfers whatever interest the grantor may own but does not warrant that the grantor
actually has any interest in the described property.
■ A sheriff ’s deed conveys title to property sold at public auction following a judicial foreclosure sale or
other court action.
■ A tax deed conveys title to property sold at public auction to cover unpaid taxes.
■ A trust deed (deed of trust) is used to make real estate security for the repayment of a debt. The trust
deed conveys conditional title from the trustor (property owner) to the trustee to be held for the benefit
of the named beneficiary (the lender).
Recording Title
In most states, a deed must be acknowledged (signed before a notary public or other official) in order to be
recorded (made a part of the public records of the county in which the property is located).
A recorded deed provides constructive notice or legal notice of the conveyance. Recording establishes the
priority of interests in or claims against a property.
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Settlement Procedures
Each person attending the closing, the point in a real estate transaction when the buyer receives a deed and the
seller receives the purchase price, is responsible for bringing certain documents.
The seller is typically responsible for some or all of the following:
■ the deed
■ recent property tax certificates
■ insurance policies
■ termite inspections
■ survey maps
■ keys, garage door openers, and the like
If an income-producing property is being sold, then the seller may also need to bring:
■ leases
■ operating statements
■ estoppel letters from the tenants
■ maintenance contracts
The buyer needs to bring adequate monies in the form of a cashier’s check or other form of good funds and
may need to provide a(n):
■ survey
■ insurance policy
■ flood insurance policy
■ termite certificate
As the closing proceeds, many signatures are required. Both the buyer and the seller sign a closing statement.
The seller signs the deed, and the buyer signs the note, the deed of trust, and numerous other documents required
by the lender.
The closing agent or closing officer has several responsibilities at the closing or settlement meeting, including:
■ monitoring all the signatures and making copies of the documents for the buyer, seller, and brokers
■ distributing checks, if so authorized by the lender (in a process called table funding, since funds are dis-
tributed at the closing table); table funding is now authorized in the majority of real estate closings
■ sending the deed and deed of trust for recording to the county court house of the county in which the
property is located
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Most lenders require that termite inspections be made prior to closing. Since the property is their collat-
eral, they want to be assured that the property will not be destroyed by termites. Lenders also insist on an appraisal
to ensure that their collateral is sufficient value to cover the loan. Finally, lenders typically require insurance poli-
cies to cover the property from fire, casualty, flood, or wind damage.
Also at the closing, documents may have to be presented on mandatory disclosures, such as the presence of
lead-based paint in a house built before 1978.
Purpose of Closing/Settlement
Immediately before closing, buyers typically do a final walk-through of the property they are about to purchase.
The buyer’s broker (if any) will typically accompany the client. The purpose of the walk-through is to verify the
condition of the property after the sellers have moved out and to determine if any items have been improperly
removed.
In addition to the buyer and seller, the following people usually attend a closing:
■ attorneys for the seller and buyer, to ascertain that everything promised in the sales contract has been
carried out
■ real estate brokers
■ title company closer (serving as the escrow agent), who will conduct the closing
Legal Requirements (includes RESPA)

Congress passed the Real Estate Settlement and Procedures Act (RESPA) in response to consumer complaints
regarding real estate closing costs and procedures. The purpose of RESPA is to regulate and standardize real estate
settlement practices when federally related first-mortgage loans are made on one- to four-family residences, con-
dominiums, and cooperatives.
Almost all residential transactions come under RESPA because most home loans are sold in the secondary
mortgage market to federally related organizations. The most important of these are:
■ Federal National Mortgage Association (Fannie Mae)

■ Government National Mortgage Association (GNMA or Ginnie Mae)
■ Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)
One of the most important provisions of RESPA is a prohibition of kickbacks and fees for services not per-
formed during the closing. Prior to the act, attorneys and closing agents in some areas routinely channeled title
business to certain title companies in return for a fee. This increased closing costs to the buyer without adding
services. RESPA requires that there must be a justifiable service rendered for each closing fee charged.
The act also prohibits the seller from requiring that the buyer purchase title insurance from a particular title
company.
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Finally, RESPA places restrictions on the amount of advance property tax and insurance payments a lender
can collect and place in an impound or reserve account. The amount that may be collected in advance is limited
to one-sixth, or two months’ worth, of annual property taxes.
Tax Aspects
In many jurisdictions a transfer tax is assessed when ownership of real estate occurs. The tax is based on the sales
price and is calculated in mils or dollars per $100, $500, or $1,000.
Legal vs. Equitable Title

Equitable title is an interest held by a purchaser (vendee) under a purchase contract or a contract for deed. The
vendee may demand that legal title be transferred upon full payment of the contract purchase price.
Legal title is title that is fully vested in the owner as evidenced by a deed, will, or court document. Legal title
to land and its appurtenances encompasses the entire bundle of rights that an owner possesses. The best title or
greatest bundle of rights that an individual can own and hold is fee simple ownership.
Special Processes
Probate
Probate is the legal process of finalizing the affairs of a deceased person and distributing the real and personal
property left by the decedent. A person who dies with a will, testate, will have his property distributed as speci-
fied in the will. A person who dies without having written a will, intestate, will have his property administered
and distributed by the probate court under the provisions of the state’s Law of Decent and Intestate Succession.
Foreclosure
Foreclosure is covered in “Financing.”
Business Practices
Fair Housing and Anti-Discrimination Laws

In addition to the U.S. Constitution, there are two major federal laws that prohibit discrimination in housing.
The Civil Rights Act of 1866 states that “all citizens of the United States shall have the same right in every
State and every Territory, as is enjoyed by the white citizens thereof to inherit, purchase, lease, sell, hold, and con-
vey real and personal property.” In 1968, the Supreme Court affirmed that the 1866 act prohibits “all racial dis-
crimination, private as well as public, in the sale of real property.” The 1866 law prohibits discrimination based
on skin color. Later laws and rulings prohibit discrimination based on race.
The Federal Fair Housing Act (Title VIII of the Civil Rights Act of 1968) makes it illegal to discriminate
on the basis of race, color, religion, sex, or national origin in connection with the sale or rental of housing or vacant
land offered for residential construction or use. The law specifically prohibits the following discriminatory acts:
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■ refusing to sell to, rent to, or negotiate with any person who is a member of a protected class, or other-
wise making a dwelling unavailable to such a person
■ changing terms, conditions, or services for different individuals as a means of discrimination against a
member of a protected class
■ practicing discrimination through any statement or advertisement that restricts the sale or rental of resi-
dential property
■ representing to any person, as a means of discrimination, that a dwelling is unavailable for sale or rental
■ making a profit by inducing owners of housing to sell or rent by representing that persons of a protected
category are moving into the neighborhood
■ altering the conditions of a home loan to any person, or otherwise denying such a loan as a means of
discrimination
■ denying persons membership or limiting their participation in any multiple-listing service, real estate
broker’s organization, or other facility related to the sale or rental of dwellings
A protected class is any group of people designated as such by the Department of Housing and Urban Devel-
opment (HUD) in consideration of federal and state civil rights legislation. Protected classes currently include
color, race, religion or creed, ancestry or national origin, gender, handicap, and familial status.
The Fair Housing Amendment defines a handicapped person as one who meets one of the following criteria:
■ has a physical or mental impairment that substantially limits one or more major life activities
■ has a record of having such an impairment
■ is regarded as having such an impairment
The current use of illegal substances is not considered a handicap under the law. However, a person under-
going treatment for drug abuse is considered handicapped. AIDS and HIV-positive status are defined as handicaps.
Protected familial status applies to any household with one or more individuals under the age of 18 living
with a parent or legal guardian. This status also applies to anyone who is pregnant or is in the process of obtain-
ing legal custody of an individual under the age of 18. In other words, it is illegal to discriminate against families
with children.
The most common violations of federal fair housing laws involve steering, blockbusting, advertising, and
less favorable treatment.
Steering (also called channeling) is the practice of directing home seekers to or away from particular neigh-
borhoods based on race, color, religion, sex, national origin, handicap, or familial status. Steering includes both
efforts to exclude minorities from one area of a city and efforts to direct minorities to minority or changing areas.
Steering accounts for many of the complaints filed against real estate agents under the Fair Housing Act.
Examples of steering include:
■ showing only certain neighborhoods

■ slanting property descriptions
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■ downgrading neighborhoods
■ implying that certain properties are no longer available when in reality they are available
Blockbusting (also called panic peddling) is the illegal practice of inducing panic selling in a neighborhood
for financial gain. Blockbusting typically starts when someone induces one homeowner to sell cheaply by imply-
ing that an impending change in the racial or religious composition of the neighborhood will cause property val-
ues to fall. The first home thus acquired is sold at a mark-up to a minority family. The process quickly snowballs
as residents panic and sell at progressively lower prices.
Less favorable treatment occurs when members of a protected category are provided with fewer services
and less information than other people. This violation involves the claim that a minority client received inferior
service, was unable to negotiate, or was offered different terms and conditions than a comparable non-minority
client. Less favorable treatment is often very subtle, but it has the same discriminatory effects as steering or
blockbusting.
Two types of housing are covered by the 1968 Fair Housing Act: single-family houses and multifamily
dwellings.
A single-family house is covered if one of the following is true.
■ It is owned by a private individual who uses a real estate broker or other person in the business of selling
or renting dwellings or who advertises the dwelling.
■ It is not owned by private individuals.
■ It is owned by a private individual who owns more than three such houses or who, in any two-year
period, sells more than one dwelling in which the individual was not the most recent resident.
A multifamily dwelling is covered if one of the following is true.
■ It consists of five units or more.

■ It consists of four or fewer units, and the owner does not reside in one of the units.
The act does not cover:
■ rentals of rooms or units in owner-occupied multifamily dwellings of two to four units, as long as dis-
criminatory advertising and the services of a real estate agent are not used
■ restricting the sale, rental, or occupancy of dwellings owned or operated by a religious organization for a
non-commercial purpose to persons of the same religion, as long as membership in that religion is not
restricted on account of race, color, or national origin
■ restricting the rental or occupancy of lodgings operated by a private club for its members for other than
commercial purposes
■ housing for the elderly that meets certain Department of Housing and Urban Development (HUD)
guidelines
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A person who believes he or she has been discriminated against can pursue one of three avenues.
He or she can:
1. file a written complaint with HUD.

2. file a civil action directly in a U.S. District Court or state or local court.
3. file a complaint with the U.S. Attorney General.
The burden of proof is on the person filing the complaint. A person found guilty of a fair housing viola-
tion may face:
■ an injunction to stop the sale or rental of the property to someone else, making it available to the
complainant
■ monetary fines for actual damages caused by the discrimination
■ unlimited punitive damages
■ court costs
■ criminal penalties against those who coerce, intimidate, threaten, or interfere with a person’s buying,
renting, or selling of housing
■ state penalties including the loss of the real estate license
Antitrust Compliance
The Sherman Antitrust Act prohibits certain business practices that could place unfair restrictions on free com-
petition in the marketplace. Prohibitions against restraint of trade that directly affect the real estate industry include
the following:
■ There can be no price fixing. Agency fees or commission are always subject to negotiation between a
principal and an agent. Agents for different companies are not allowed to agree to predetermined fees or
to agree on a range of fees for specific services. Even discussion of such matters could subject licensees to
civil and criminal penalties including fines and/or imprisonment.
■ Realty firms cannot agree to provide service only in a designated geographic area.
■ Realty firms cannot agree to boycott (direct business away from) certain companies or other realty firms.
■ Agents are not to form exclusive organizations (such as property listing services) that arbitrarily prevent
non-members from gaining access to sales and marketing information. Membership criteria must be
designed so as not to unfairly exclude otherwise qualified brokers from participation.
Advertising
At all times real estate licensees must make a diligent effort to make certain that all of their advertising creates an
accurate and truthful picture. There is no place in the real estate business for falsehoods and inaccuracies.
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When advertising credit terms, be sure to comply with the federal Truth-In-Lending Law and give complete
information including the Annual Percentage Rate (APR) whenever any trigger term is used. For a list of trig-
ger terms, please review “Financing/Credit Laws.”
Property Management
Property Management and Landlord/Tenant or Commercial/Income

Property
Tenancies and Leasehold Estates

A lease is a contract that transfers a possessory interest in real estate. The leasehold estate conveys to the tenant
a right to occupy the property for the term of the lease.
Leases may be oral or written, but the Statute of Frauds requires that leases of real estate, except for resi-
dential leases of one year or less, be in writing to be enforceable.
Leases must be signed by the landlord and the tenant but need not be recorded to be enforceable. An indi-
vidual who wishes to notify the public of a leasehold interest may record a memorandum of lease.
A lease must include a sufficient property description. A legal description as used in a deed is appropriate,
though in certain residential leases a street address and apartment number are sufficient.
There are several kinds of leases.
■ A gross lease specifies that the landlord pay all expenses: property taxes, insurance, maintenance. This
kind of lease is often used for apartments and other residential properties.
■ A net lease specifies that the tenant pay certain expenses. The most common arrangement requires the
tenant to pay property taxes, insurance, and maintenance. This is called a net, net, net or triple net lease.
■ An office-building lease is a hybrid of a gross and a net lease. The landlord pays the first portion of the
expenses, and each tenant pays a pro rata share of all expenses over that.
■ A percentage lease requires the tenant to pay a percentage of gross sales as rent in addition to a base
rental amount specified in the lease.
Several types of tenancies can be created by a lease.
■ An estate for years is given for a specified term. This common type of lease agreement includes all lease-
holds that continue for a specific period of time and have a definite termination date, such as a five-year
office lease or a 20-year retail lease.
■ A periodic estate is initially given for a specific term and then renews automatically until notice of ter-
mination is given. It does not have a definite termination date but runs from month to month or year to
year. A periodic estate is generally created when the landlord and tenant contract to rent month to
month, without specifying the number of months or years the lease will run.
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■ A tenancy at will extends indefinitely and may be terminated at any time by either the landlord or tenant
by giving a notice equal to one rental period’s notice.
■ Tenancy at sufferance is created when a tenant takes possession of a property lawfully and continues to
hold possession of the property after the right to remain has expired. However, if the holdover tenancy
exists with the consent of the landlord, then a periodic tenancy is created. When a lease is assigned to a
third party, the third party assumes all the obligations of the lessee (tenant). The right of the tenant to
assign the lease must be granted in writing by the landlord.
■ If a tenant subleases some or all of the leased space (commonly referred to as the demised premises) to
a third party, the original tenant’s relationship with the landlord does not change. All of the tenant’s obli-
gations remain binding even though the tenant no longer occupies the premises. The sublease is created
between the tenant (who now acts as the landlord) and the third party (who now becomes the tenant).
The original lease should specify whether a sublet is allowed.
Property Manager and Owner Relationships

The range of services that the property manager can perform for the landlord (property owner) includes mar-
keting, leasing, maintenance, and rent collection.
A major activity of the property manager will be the cost-effective marketing of vacant units, primarily by
ongoing advertising in selected publications. This usually will include classified ads in local newspapers, but may
also include specialty publications as well as Internet rental listing services. Use of rental listing agencies, partic-
ularly for residential property, will require compliance with specific state laws intended to safeguard the consumer.
On-site posting of unit availability will help attract the drive-by prospect.
The law of supply and demand applies in the leasing as well as the sale of real estate. Continuing surveys
of the number of units and vacancies available on the market and rents charged will help the property remain
competitive.
Advertising through newspapers, use of billboards, and posting on Internet and other listing services should
attract a steady flow of prospective tenants, provided the units have been competitively priced and offer ameni-
ties expected in the area. The applicant review process should be conducted in a personal interview on-site, for
the benefit of both property manager and prospective tenant.
Laws Affecting Property Management

All or part of the wording of the rental application, as well as the time frame in which the applicant must be noti-
fied of acceptance or non-acceptance, may be mandated by state law. Federal law regarding the use of a credit report
may also apply.
A property manager must comply with all federal and state fair housing laws to avoid charges of unlawful
discrimination.
State law governs many of the provisions in a residential lease (or rental agreement). The typical lease will
include:
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■ the identity of the lessor (landlord) and lessee (tenant)

■ a description of the premises to be leased
■ the terms of the lease, including beginning and ending times
■ the amount of rent to be paid and when payment is due—a grace period may be specified, as well as the
penalty for late payment due after that time
■ the obligations of the lessor, which will include compliance with an express or implied warranty of
habitability
■ the obligations of the lessee, which will include payment of the stated rent as well as maintenance of the
premises
■ a provision for arbitration or mediation clause to be enforced in the event of a dispute in the terms of the
agreement
■ the signature of the lessee and signature of the lessor (or agent)
In most states, the Statute of Frauds requires that a lease that will terminate one year or more from the date
of its signing must be in writing.
Federal law now requires compliance with the Lead-Based Paint Disclosure Law. This law is applicable for
a new or renewal lease on residential property constructed prior to 1978.
The state may require specific disclosures as part of the rental agreement, such as whether or not a smoke
alarm has been installed in the rental unit. The state may require dead-bolt locks on exterior doors of rental units.
A sprinkler system may be a requirement in a commercial building or a fire hazard area.
Common Interest Ownership Properties

Many properties are owned by multiple owners. Here are three types of these properties.
1. Cooperatives are apartments owned by a corporation that holds titles to the entire cooperative property
and is liable for the mortgage obligations and the ad valorem taxes for the entire property.
Each purchaser of an apartment unit is a stockholder in the corporation and obtains the right to
occupy through a proprietary lease. Each block of stock is tied to a specific right to occupy and carries a
lease payment financial obligation that represents a pro rata share of the total cost of the operations
expense and mortgage payments on the building.
2. Condominiums are created under state laws that permit a multi-tenant building to be divided into air
lots and that are declared as separate parcels of real estate by recording a vertical and horizontal plot. The
condominium declaration identifies each condominium and the percentage ownership that the individ-
ual owns in the land and the common elements of the structures. Some of the common elements will be
defined as limited common elements and will be designated as for the exclusive use of a specific unit.
An advantage of condominium ownership over cooperative ownership is that default in payment of
taxes, mortgage payment, or monthly assessment affects only the specific unit. Each unit is defined as a
separate parcel of real estate and is owned fee simple.
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3. Time-Shares are when multiple owners own a proportional interest in a single condominium unit with
the exclusive right to use and occupy the unit for a specified period of time each year. The individual
owners pay common expense and maintenance costs based on the ratio between the ownership period
and the total number of ownership periods available in the property. This type of ownership can be
either a fee simple or leasehold interest.
Subdivisions
When larger tracts of land are divided into smaller parcels that will be owned by multiple owners, the tract will
be converted into a subdivision. The subdivider divides the tract into smaller lots for sale. The developer will
improve the land by installing utilities, building roads, and preparing the sites for the activities of the builders
who will construct the buildings.
The subdivision of the tract may be regulated by local, state, and federal regulations. The subdivision will
be evidenced by the recording of a plat that shows lots, blocks, streets, and common amenities. The plat will also
identify easements on each lot, easements in gross, for the purpose of bringing necessary utilities to the lots.
When the lots are offered for sale across state lines, the Federal Interstate Land Sales Full Disclosure Act
enforced by HUD will require the filing of various reports. This law applies only to subdivisions with more than
25 lots and lots in excess of 20 acres.
Frequently subdividers and developers will place restrictive covenants on the lots that will control use of
the land and establish standards for the improvements to be constructed on the lots.
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C H A P T E R
5 Real Estate
Math Review
CHAPTER SUMMARY
In most states, math accounts for almost 10% of a real estate sales
exam, so you should take this topic seriously. But even if math is not
your favorite subject, this chapter will help you do your best. It not only
covers arithmetic, algebra, geometry, and word problems, but also has
practice problems for each of the real estate math topics.
H ■ Percents
ERE ARE SOME types of math questions you may encounter on your exam.
■ Areas
■ Property Tax
■ Loan-to-Value Ratios
■ Points
■ Equity
■ Qualifying Buyers
■ Prorations
■ Commissions
■ Sale Proceeds
101
– REAL ESTATE MATH REVIEW –
■ Transfer Tax/Conveyance Tax/Revenue Stamps

■ Competitive Market Analyses (CMA)
■ Income Properties
■ Depreciation
Keep in mind that although the math topics are varied, you will be using the same math skills to complete
each question. But before you review your math skills, take a look at some helpful strategies for doing your best.
Strategies for Math Questions
Answer Every Question

You should answer every single question, even if you don’t know the answer. There is usually no penalty for a
wrong answer, and, if there are four answer choices, you have a 25% chance of guessing correctly. If one or two
answers are obviously wrong, the odds may be even higher on selecting the correct one.
Bring a Calculator
Your state may allow you to bring calculator to your exam. You must check with your exam center to find out
exactly what type of calculator is permitted. In general, permissible calculators are battery-operated, do not print,
are not programmable, and do not have a keypad with letters. As a precaution, you should bring an extra battery
with you to your exam. Try not to rely entirely on the calculator. Although using one can prevent simple adding
and subtracting errors, it may take longer for you to use the calculator than to figure it out yourself.
Use Scratch Paper

Resist the temptation to “save time” by doing all your work on your calculator. The main pitfall with calculators
is the temptation to work the problem all the way through to the end on the calculator. At this point, if none of
the answers provided is correct, there is no way to know where the mistake lies. Use scratch paper to avoid this
problem.
Check Your Work

Checking your work is always good practice, and it’s usually quite simple. Even if you come up with an answer
that is one of the answer choices, you should check your work. Test writers often include answer choices that are
the results of common errors, which is what you may have.
102
Real Estate Math Review
Here’s a quick review of some basic arithmetic, algebra, geometry, and word problem skills you will need for your
exam.
Arithmetic Review
Symbols of Multiplication
When two or more numbers are being multiplied, they are called factors. The answer that results is called the
product.
Example:
5 × 6 = 30 5 and 6 are factors and 30 is the product.
There are several ways to represent multiplication in the above mathematical statement.
■ A dot between factors indicates multiplication:
5 · 6 = 30
■ Parentheses around any part of the one or more factors indicates multiplication:
(5)6 = 30, 5(6) = 30, and (5)(6) = 30
■ Multiplication is also indicated when a number is placed next to a variable:
5a = 30 In this equation, 5 is being multiplied by a.
Divisibility
Like multiplication, division can be represented in a few different ways:
8
8÷3 38
3
In each of the above, 3 is the divisor and 8 is the dividend.
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How to Round
If the number after the one you need to round to is 5 or more, make the preceding number one higher.
If it is less than 5, drop it and leave the preceding number the same. (Information about rounding is
usually provided in the exam instructions or in the exam bulletin.)
Example:
0.0135 = .014 or .01
Decimals
The most important thing to remember about decimals is that the first place value to the right begins with tenths.
The place values are as follows:
1 2 6 8 • 3 4 5 7
T H T O D T H T T
H U E N E E U H E
O N N E C N N O N
U D S S I T D U
S R M H R S T
A E A S E A H
N D L D N O
D S POINT T D U
S H T S
S H A
S N
D
T
H
S
In expanded form, this number can also be expressed as . . .
1268.3457 = (1 × 1,000) + (2 × 100) + (6 × 10) + (8 × 1) + (3 × .01) + (4 × .01) + (5 × .001) +

(7 × .0001)
Fractions
To do well when working with fractions, it is necessary to understand some basic concepts. Here are some math
rules for fractions using variables:
a a×c

b × dc =
b ×
d
a

b + bc =
a+c
b

a a×d

b ÷ dc = ab × dc =
b×c
a

b + dc =
ad + bc

bd
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Multiplication of Fractions
Multiplying fractions is one of the easiest operations to perform. To multiply fractions, simply multiply the numer-
ators and the denominators, writing each in the respective place over or under the fraction bar.
Example:
4 6 24
× =
5 7 35
Dividing of Fractions
Dividing fractions is the same thing as multiplying fractions by their reciprocals. To find the reciprocal of any
number, switch its numerator and denominator. For example, the reciprocals of the following numbers are:
1

3 31 = 3
x 1x
4
5 54
5 15
When dividing fractions, simply multiply the dividend (what is being divided) by the divisor’s (what is doing
the dividing) reciprocal to get the answer.
Example:
12 3 12 4 48 16
÷ = × = =
21 4 21 3 63 21
Adding and Subtracting Fractions

To add or subtract fractions with like denominators, just add or subtract the numerators and leave the denomi-
nator as it is. For example,
1

7 + 57 = 67 and 5

8 – 28 = 38
To add or subtract fractions with unlike denominators, you must find the Least Common Denominator,
or LCD.
For example, if given the denominators 8 and 12, 24 would be the LCD because 8 × 3 = 24, and 12 × 2 = 24.
In other words, the LCD is the smallest number divisible by each of the denominators.
Once you know the LCD, convert each fraction to its new form by multiplying both the numerator and
denominator by the necessary number to get the LCD, and then add or subtract the new numerators.
Example:
1 2 5(1) 3(2) 5 6 11
+ = + = 1
3 5 5(3) 3(5) 5 + 15 = 1
5
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Percent
A percent is a measure of a part to a whole, with the whole being equal to 100.
■ To change a decimal to a percentage, move the decimal point two units to the right and add a percentage
symbol.
Example:
.45 = 45% .07 = 7% .9 = 90%
■ To change a fraction to a percentage, first change the fraction to a decimal. To do this, divide the numera-
tor by the denominator. Then change the decimal to a percentage.
Example:
4
= .80 = 80%
5
2
= .4 = 40%
5
1
= .125 = 12.5%
8
■ To change a decimal to a percentage, move the decimal point two units to the right and add a percentage
symbol.
■ To change a percentage to a decimal, simply move the decimal point two places to the left and eliminate
the percentage symbol.
Example:
64% = .64 87% = .87 7% = .07
■ To change a percentage to a fraction, divide by 100 and reduce.
Example:
64 16
64% =
100 = 2
5
75 3
75% =
100 = 4
82 41
82% =
100 = 5
0
■ Keep in mind that any percentage that is 100 or greater will need to reflect a whole number or mixed
number when converted.
Example:
125% = 1.25 or 114
350% = 3.5 or 312
106
Here are some conversions you should be familiar with:
Fraction Decimal Percentage

1
2
.5 50%
1
4
.25 25%
1 ––
3
.333 . . . 33.3 %
2 ––
.666 . . . 66.6 %
3
1
.1 10%
10
1
8
.125 12.5%
1 ––
6
.1666 . . . 16.6 %
1
5
.2 20%
Algebra Review
Equations
An equation is solved by finding a number that is equal to an unknown variable.
Simple Rules for Working with Equations

1. The equal sign separates an equation into two sides.
2. Whenever an operation is performed on one side, the same operation must be performed on the other
side.
3. Your first goal is to get all of the variables on one side and all of the numbers on the other.
4. The final step often will be to divide each side by the coefficient, leaving the variable equal to a number.
Checking Equations
To check an equation, substitute the number equal to the variable in the original equation.
Example:
To check the equation below, substitute the number 10 for the variable x.
x x + 10
=
6 12
10 10 + 10 10 20
= = =
6 12 6 12
123 = 123 10

6 = 160
Because this statement is true, you know the answer x = 10 must be correct.
107
Special Tips for Checking Equations

1. If time permits, be sure to check all equations.
2. Be careful to answer the question that is being asked. Sometimes, this involves solving for a variable and
then performing an operation.
Example:
If the question asks the value of x – 2, and you find x = 2, the answer is not 2, but 2 – 2. Thus, the
answer is 0.
Algebraic Fractions
Algebraic fractions are very similar to fractions in arithmetic.
Example:
Write 5x − 1x0 as a single fraction.
Solution:
Just like in arithmetic, you need to find the LCD of 5 and 10, which is 10. Then change each fraction
into an equivalent fraction that has 10 as a denominator.
x

5 – 1x0 =
x(2)

x
5(2) – 10
= 120x – 1x0
= 1x0
Geometry Review
Area the space inside a 2 dimensional figure
Circumference the distance around a circle
Perimeter the distance around a figure
Radius the distance from the center point of a circle to any point on the circle
Area
Area is the space inside of the lines defining the shape.
= Area
108
This geometry review will focus on the area formula for three main shapes: circles, rectangles/squares, and
triangles.
Circle Rectangle Triangle
r w
h
l b
C = 2π r
A = π r2 A = lw A = bh
A = area
r = radius
l = length
w = width
b = base
h = height
C = circumference
π = 3.14
Perimeter
The perimeter of an object is simply the sum of all of its sides.
6 4 Perimeter = 6 + 7 + 4 + 10 = 27
10
The circumference is the perimeter of a circle.
C = 2πr
109
Word Problem Review

Since many of the math problems on your state’s real estate sales exam will be word problems, pay extra atten-
tion to the following review.
Translating Words into Numbers

The most important skill needed for word problems is being able to translate words into mathematical opera-
tions. The following will assist you by giving you some common examples of English phrases and their mathe-
matical equivalents.
■ “Increase” means add
Example:
A number increased by five = x + 5.
■ “Less than” means subtract.
Example:
10 less than a number = x – 10.
■ “Times” or “product” means multiply
Example:
Three times a number = 3x.
■ “Times the sum” means to multiply a number by a quantity.
Example:
Five times the sum of a number and three = 5 (x + 3).
■ Two variables are sometimes used together.
Example:
A number y exceeds 5 times a number x by 10.
y = 5x + 10
■ “Of ” means multiply.
Example:
10% of 100 is 10 = 10% × 100 = 10
110
■ “Is” means equals.
Example:
15 is 14 plus 1 becomes 15 = 14 + 1.
Assigning Variables in Word Problems

It may be necessary to create and assign variables in a word problem. To do this, first identify an unknown and
a known. You may not actually know the exact value of the “known,” but you will know at least something about
its value.
Examples:
Max is three years older than Ricky
Unknown = Ricky’s age = x
Known = Max’s age is three years older.
Therefore,
Ricky’s age = x and Max’s age = x + 3.
Heidi made twice as many cookies as Rebecca.

Unknown = number of cookies Rebecca made = x
Known = number of cookies Heidi made = 2x
Jessica has five more than three times the number of books that Becky has.
Unknown = the number of books Becky has = x
Known = the number of books Jessica has = 3x + 5
Percentage Problems
There is one formula that is useful for solving the three types of percentage problems:
part %
=
whole 100
When reading a percentage problem, substitute the necessary information into the above formula based on
the following:
■ 100 is always written in the denominator of the percentage sign column.

■ If given a percentage, write it in the numerator position of the number column. If you are not given a
percentage, then the variable should be placed there.
■ The denominator of the number column represents the number that is equal to the whole, or 100%. This
number always follows the word “of ” in a word problem.
111
■ The numerator of the number column represents the number that is the percent.
■ In the formula, the equal sign can be interchanged with the word “is.”
Example:
■ Finding a percentage of a given number.
What number is equal to 40% of 50?
# %
x
__ = 40
___
50 100
Cross multiply:
100(x) = (40)(50)
100x = 2,000
100x 2,000
=
100 100
x = 20 Therefore, 20 is 40% of 50.
■ Finding a number when a percentage is given:
40% of what number is 24?
# %
24
__ = 40
___
x 100
Cross multiply:
(24)(100) = (40)(x)
2,400 = 40x
2,400 40x
=
40 40
60 = x Therefore, 40% of 60 is 24.
■ Finding what percentage one number is of another:
What percentage of 75 is 15?
# %
15
__ = x
___
75 100
112
How Are Rate Problems Defined?
x units

Rate = y u
nits
A percentage problem simply means that y units is equal to 100. This is important to remember that
a percentage problem may be worded using the word rate.
Cross multiply:
15(100) = (75)(x)
1,500 = 75x
1,500 75x
=
75 75
20 = x Therefore, 20% of 75 is 15.
Rate Problems
You may encounter a couple of different types of rate problems on your state’s real estate sales exam: cost per unit,
interest rate, and tax rate. Rate is defined as a comparison of two quantities with different units of measure.
x units
Rate =
y units
dollars interest
Examples:
squarefoot ,
year
Cost Per Unit

Some problems on your exam may require that you calculate the cost per unit.
Example:
If 100 square feet cost $1,000, how much does 1 square foot cost?
Solution:
Total Cost 1,000

# of square feet =
100 = $10/square foot
Interest Rate
The formula for simple interest is Interest = Principal × Rate × Time or I = PRT. If you know certain values, but
not others, you can still find the answer using algebra. In simple interest problems, the value of T is usually 1, as
in 1 year. There are three basic kinds of interest problems, depending on which number is missing.
Practice
Now that you have reviewed some of the math skills you will need, it’s time to practice real estate math questions.
Below you will find practice problems and thorough answer explanations for the real estate math topics listed.
113
Here are some equivalencies you may need to use to complete some questions. Generally, any equivalencies you
will need to know for your exam are provided to you.
Equivalencies
12 inches (in. or ″) = 1 foot (ft. or ′)
3 feet or 36 inches = 1 yard (yd.)
1,760 yards = 1 mile (mi.)
5,280 feet = 1 mile
144 square inches (sq. in. or in2) = 1 square foot (sq. ft or ft.2)
9 square feet = 1 square yard
43,560 feet = 1 acre
640 acres = 1 square mile
Percents
You may be asked a basic percentage problem.
Example:
What is 86% of 1,750?
Solution:
Start by translating words into math terms.
x = (86%)(1,750)
Change the percent into a decimal by moving the decimal point 2 spaces to the LEFT.
86% = .86
Now you can solve.
x = (.86)(1,750)
x = 1,505
Other percentage problems you may find on your state’s real estate sales exam will come in the form of rate
problems. Keep reading for more examples of these problems.
Interest Problems
Let’s take a look at a problem in which you have calculate the interest rate (R). Remember, the rate is the same as
the percentage.
Example:
Mary Valencia borrowed $5,000, for which she is paying $600 interest per year. What is the rate of
interest being charged?
114
Solution:
Start with the values you know.
Principal = $5,000
Interest = $600
Rate = x
Time = 1 year
Using the formula I = PRT, insert the values you know, and solve for x.
600 = 5,000(x)(1)
600 = 5,000x
600 x

5,0
00 =
5,0
00
.12 = x
To convert .12 to a percent, move the decimal point two places to the RIGHT.
.12 = 12%
Area
Some of the problems on your exam may ask you to figure the area of a piece of land, a building, or some other
figure. Here are some formulas and how to use them.
Rectangles
Remember the formula: Area = (length)(width)
Example:
A man purchased a lot that is 50 feet by 10 feet for a garden. How many square feet of land does he
have?
Solution:
Using the formula, Area = (length)(width), you have:
A = (50)(10) = 500 square feet
Example:
The Meyers family bought a piece of land for a summer home that was 2.75 acres. The lake frontage
was 150 feet. What was the length of the lot?
Solution:
When you take your salesperson exam, you may be provided with certain equivalencies. You will
need to refer to the “Equivalencies” list on the previous page to answer this question. First, find the
area of the land in square feet.
(2.75)(43,560) = 119,790 square feet
115
In the previous example, you were given the length and the width. In this example, you are given the area
and the width, so you are solving for the length. Since you know the area and the width of the lot, use the for-
mula to solve.
Area = (length)(width)
119,790 = (x)(150)
Divide both sides by 150.
119,790 (x)(150)
=
150 150
119,790
x=
150
x = 798.6 feet
Triangles
Although it may not be as common, you may be asked to find the area of a triangle. If you don’t remember the
formula, see page 109.
Example:
The Baron family is buying a triangular piece of land for a gas station. It is 200 feet at the base, and
the side perpendicular to the base is 200 feet. They are paying $2.00 per square foot for the prop-
erty. What will it cost?
Solution:
Start with the formula Area = 12(base)(height).
Now, write down the values you know.
Area = x
Base = 200
Height = 200
If it’s easier, you can change 12 to a decimal.
1
= .5
2
Now you can plug these values into the formula.
x = (.5)(200)(200)
x = (.5)(40,000)
x = 20,000 square feet
Don’t forget that the question is not asking for the number of square feet, but of the cost of the property
per square foot. This is a rate problem, so you need to complete one more step. (20,000 square feet)($2 per square
foot) = $40,000
116
Example:
Victor and Evelyn Robinson have an outlot that a neighbor wants to buy. The side of the outlot next
to their property is 86 feet. The rear line is perpendicular to their side lot, and the road frontage is
111 feet. Their plat shows they own 3,000 square feet in the outlot. What is the length of the rear
line of the outlot? Round your answer to the nearest whole number.
Solution:
Rear lot line
Outlot
Fr Robinson
on
ta 86′ Property
ge
It helps to draw the figure to conceive shapes. The rear lot line is perpendicular to the side lot line.
This makes the side lot line the base and the rear lot line the height (altitude).
Area = 12(base)(height)
Area = 3,000 square feet
Base = 86 feet
Height = x
If it’s easier, you can change 12 to a decimal.
1
= .5
2
Now you can plug these values into the formula.
3,000 = (.5)(86)(x)
3,000 = (43)(x)
Divide both sides by 43.
3,000 (43)(x)
=
43 43
x = 69.767 feet
Don’t forget the question says to round your answer to the nearest whole number. The answer is 70
feet.
Circles
Remember the formula Area = πr2.
Example:
Murray Brodman, a contractor, has been awarded the job to put up a circular bandstand in the
town square. The radius of the circular area for the bandstand is 15 feet. What is the area of the
bandstand? Use 3.14 for π.
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Solution:
Area = πr2
Area = x
π = 3.14
radius = 15
Now plug these values into the formula.
Area = (3.14)(15)(15) = 706.5 sq ft.
Property Tax
To solve property tax questions, you will be using percents and rates.
Example:
The tax rate in your county is $4.17 per hundred of assessed valuation, and Mr. Brown, a possible
client, has told you his taxes are $1,100. What is his property assessment? (Round your answer to
the nearest 10 cents.)
Solution:
Start off with the values you know.
Taxes = $1,100
Assessment = x
Tax rate = $4.17 per hundred (%)
If you remember the definition of percent as being an amount per hundred, then $4.17 per hun-
dred is actually 4.17%. To make this equation more manageable, convert this percent to a decimal
by moving the decimal point two spaces to the LEFT. Now the tax rate is .0417.
.0417 of the assessed value of the house is $1,100. Translate the words into math terms. This means:
(.0417)(x) = 1,100
To solve the equation, divide both sides by .0417.
.0417x 1,100
=
.0417 .0417
x = $26,378.896
Remember, the question asks you round to the nearest 10 cents. That means that .896 needs to be
rounded up to 90. So the answer is $26,378.90
Example:
Mr. Smith knew his own taxes were $975 and his property assessment was $17,000 for the house
and $6,000 for the land. He wanted to know the tax rate (%).
118
Tip
Note that you may be asked for monthly amounts certain problems. Most calculations are on an
annual basis—unless you divide by 12.
Solution:
Tax = $975
Assessment for house = $17,000 plus assessment for land = $6,000. Therefore, total = $23,000
Rate (%) = x
According to the question, $23,000 at a rate of x is $975. Convert this statement into an equation.
($23,000)(x) = 975.
Solve the equation by dividing both sides by 23,000.
23,000x 975
=
23,0
23,000 00
x = .0423913
To make this equation more simple, round the answer to .0424.
Remember that you are looking for the rate. Therefore, you need to convert this decimal to a per-
cent by moving the decimal point two places to the RIGHT. The rate is 4.24%. (This can also be
expressed as $4.24 per hundred.)
Loan-to-Value Ratios
These problems often deal with percentages.
Example:
A mortgage loan for 10% is at a 75% loan-to-value ratio. The interest on the original balance for
the first year is $6,590. What is the value of the property securing the loan? Round to the nearest
one cent.
Solution:
First, find out the loan amount.
$6,590 is 10% of the loan amount. Let x equal the loan amount. Now, translate these words into
math terms.
$6,590 = (10%)(x)
Change 10% into a decimal by moving the decimal point two places to the LEFT.
10% = .1
Now you have
$6,590 = (.1)(x)
Divide both sides by (.1)
x = $65,900
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Now that you know the loan amount ($65,900), use this information to find the value of the
property.
Write down the values you know.
Loan amount = $65,900
Loan-to-value ratio = 75%
Value = x
We know that 75% of the value is $65,900.
Translate this into math terms.
(75%)(x) = $65,900
Change the percent into a decimal (75% = .75) and solve.
(.75)(x) = 65,900
Divide both sides by .75.
(.75)(x) 65,900
=
(.75) (.75)
x = 87,866.66666
When rounded to the nearest one cent, the answer is $87,866.67
Points
Loan discounts are often called points, or loan placement fees, one point meaning one percent of the face amount
of the loan. The service fee of one percent paid by buyers of government backed loans is called a loan origination
fee.
Example:
A homebuyer may obtain a $50,000 FHA mortgage loan, provided the seller pays a discount of five
points. What is the amount of the discount?
Solution:
The definition of one point is one percent of the face amount of the loan.
Therefore, 5 points = 5% of face of loan. First, change the percent to a decimal.
5% = .05
Now you can use these values to solve.
Amount of discount = x
Points = .05
Amount of loan = $50,000
So, x = (.05)(50,000)
x = $2,500
Example:
A property is listed at $74,000. An offer is made for $72,000, provided the seller pays 3 points on a
loan for 80% of the purchase price. The brokerage commission rate is 7%. How much less will the
120
seller receive if he accepts the offer than he would have received if he sold at all cash at the original
terms?
Solution:
Here are the values you know:
Sold for original terms—price $74,000
Less 7% commission − 5,180 (.07)(74,000) = 5,180
Seller’s net $68,820
This question becomes more difficult, because in order to find the seller’s net on the offered price,
you must calculate the discount. The provision is that the seller pays 3 points (or .03) on a loan for
80% (or .8) of the price.
Start by finding 80% of the price.
(.8)(72,000) = $57,600
Now, the points are applied to this amount. This means .03 of $57,600 is the discount.
So, (.03)(57,600) = discount = 1,728.
You know these values:

Sold at offered terms—price $72,000
Less 7% Commission − 5,040 (.07)(72,000) = 5,040
Less discount 1,728
Seller’s net $65,232
$72,000 Sales price Net at original $68,820

× .80 Loan-to-value ratio Net at offered –65,232
$57,600 Loan amount Difference $ 3,588
× .03 Points
$ 1,728 Discount
Equity
Example:
If a homeowner has a first mortgage loan balance of $48,350, a second mortgage loan balance of
$18,200, and $26,300 equity, what is the value of her home?
Solution:
In this case, the value of the home is determined by the total loan balance plus the equity. Add the
three numbers to find the value of the home.
$48,350 loan balance + $18,200 loan balance + $26,300 = value of the home
$92,850 = value of the home.
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Qualifying Buyers
Example:
A buyer is obtaining a conventional loan that requires 29/33 ratios. He earns $66,000 a year, and has
a $1,350 car payment. What is his maximum PITI payment?
a. $1,612.50
b. $1,812.50
c. $21,750.00
d. $2,475.00
Solution:
$66,000 divided by 12 = $5,500 monthly income
($5,500)(.29) = $1,595 front end qualifier
($5,500)(.33) = $1,850 – $1,350 debt = $500 back end qualifier
Maximum PITI (Principal, Interest, Taxes, and Insurance) is the lower of these two qualifiers, $500.
Prorations
At the time of settlement, there must be a reconciliation or adjustment of any monies owed by either party as of
that date. The important fact to bear in mind is that the party who used the service pays for it. If you will keep this
firmly in mind you will not have any difficulty deciding who to credit and who to debit.
Example:
Mr. Seller’s taxes are $1,200 a year paid in advance on a calendar year. He is settling on the sale of
his house to Mr. Buyer on August 1. Which of them owes how much to the other?
Solution:
Ask yourself some questions:
How many months has the seller paid for? 12 ($1,200)
How many months has the seller used? 7 ($700)
How many months should the seller be reimbursed for? 5 ($500)
How many months will the buyer use? 5 ($500)
How many months has he paid for? 0 ($0)
How many months should he reimburse the seller for? 5 ($500)
Credit Mr. Seller $500
Debit Mr. Buyer $500
What would the answer be if the taxes were paid in arrears? In other words, the seller has used the service
for seven months but hasn’t paid anything. The buyer will have to pay it all at the end of the year. In that case,
the seller owes the buyer for seven months, or $700.
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Tip
In working proration problems, be sure you have the right dates when you subtract. Sometimes the
termination date for the policy is not given, and the tendency is to subtract the date the policy was
written from the date of settlement. This will not give you the unused portion. You must subtract the
date of settlement from the date of termination of the policy, which will be exactly the same date,
one, three, or five years after written, depending on the term of the policy. Most problems use either
a one- or three-year term.
Remember!
Use a 30-day month and a 360-day year in all calculations unless you are told otherwise. Assume
a calendar year, unless a fiscal or school year is specified.
Commissions
Let’s look at a commission problem. They are typically rate (percentage) problems.
Example:
Broker Jones sold the Smith house for $65,000. The total commission came to $4,000. What was
Jones’s commission rate? Round to the nearest whole percent.
Solution:
You see the word rate and decide this is solved using percentages.
Price of house = 65,000
Commission Rate = x
Commission = 4,000
Now, translate the word problem into an equation.

65,000x = 4,000
Divide both sides by 65,000

4,000
x=
65,000
x = 0.061
Convert the decimal to a percent by moving the decimal two places to the RIGHT. 0.061 becomes
6.1%.
Example:
An agent received a 3% commission on 14 of her total sales. On the remainder, she received a 6%
commission. What was her average commission for all of her sales?
123
Solution:
Start off by asking yourself: How many fourths (parts) were there? Four, naturally.
3% 6% 6% 6%
To find the average, you add up all the numbers, and divide by the number of items you add
together. In this case, there are 4 numbers.
So, 3 + 6 + 6 + 6 = 21
And 21% ÷ 4 = 5.25%
Sale Proceeds
Example:
Salesman Garcia was trying to list a house. The owner said he wanted to clear (net) $12,000 from
the sale of the house. The balance of the mortgage was $37,000. It would cost about $1,200 to fix the
house up to sell. How much would the owner have to sell the house for if the 7% commission was
included? (Round your answer to the nearest cent.)
Solution:
Use a chart to clarify the problem.
Expenses In Dollars In Percents

Seller’s net 12,000
Loan balance 37,000
Repairs 1,200
Commission 7%
50,200 7%
If the sales price is 100% and the commission is 7% of the sales price, all the remaining items added
together must make 93% of the sales price. The place where most people go wrong is in not includ-
ing the seller’s net when they add the expenses. The seller’s net has to come out of the sales price.
(Where else would it come from?) Therefore, it is part of the remaining 93%. You now have a per-
centage problem. As always, convert your percents to decimals.
Start with the values you know:
Expenses = $50,200
Sales price = x
Seller’s net, loan balance, repairs = .93 of sales price
.93 of the sales price is $50,200.
Convert this statement into an equation.
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(.93)(x) = $50,200
(.93)(x) $50,200
=
.93 .93
$50,200
x=
.93
x = $53,978.4945
Don’t forget to round to the nearest cent!
x = $53,978.49
Transfer Tax/Conveyance Tax/Revenue Stamps

Here is a transfer tax question.
Example:
A property is sold for $135,800 in cash. The transfer tax is $441.35. If transfer taxes are calculated
per $200 of value, what was the rate (per $200) of the transfer tax?
Solution:
Selling price = $135,800
Transfer tax rate = x per $200
Transfer tax = $441.35
It’s probably easiest to begin by dividing $200 since the rate is calculated per $200 of value.
$135,800
So,
$200 = $679
You know that $441.35 is some rate of $679. Translate this into math terms.
$441.35 = (x)($679)
Divide both sides by $679 to get
$441.35 (x)($679)
=
($679) ($679)
.65 = x
Therefore, the transfer tax rate is $.65 per $200.
Competitive Market Analyses (CMA)

To solve these problems you will use measurements and other hypothetical features of the comparable property
to arrive at a value. Remember, a CMA is not an appraisal.
Example:
If Building A measures 52’ by 106’ and Building B measures 75’ by 85’, how much will B cost if A
costs $140,000 and both cost the same per square foot to build?
125
Solution:
Area = (length)(width)
Area of Building A = (52)(106) = 5,512 square feet
Area of Building B = (75)(85) = 6,375 square feet
140,000
Cost of Building A per square foot =
5,512 = $25.40
Cost of Building B = (6,375)($25.40) = $161,925
Example:
Carson’s house (B), which is being appraised, is an exact twin of the houses on either side of it, built by
the same builder at the same time. House A was appraised for $45,000, but it has a 14 × 20 foot garage
which was added at a cost of about $18 per square foot. House C was recently sold for $43,000, with
central air valued at $3,000. What would be a fair estimate of the value of Carson’s house?
Solution:
Comparable C $43,000
– Air Conditioning –3,000
40,000
Comparable A $45,000 Garage: 14′ × 20′ = 280 sq. ft.

– Cost of Garage – 5,040 280 sq. ft. × $18 = $5,040
$39,960
Answer: $40,000
Income Properties
Example:
An investor is considering the purchase of an income property generating a gross income of
$350,000. Operating expenses constitute 70% of gross income. If the investor wants a return of
14%, what is the maximum he can pay?
Solution:
Gross income = $350,000
Expenses = 70% of gross income
Net income = Gross income – Expenses
Desired return = 14%
Maximum buyer can pay = x
This is a multi-step problem. Start by calculating the expenses, but remember you will need to stop
to calculate the net income. First, change the percent to a decimal.
70% = .70
126
Now, you know that expenses are 70% of the gross income of $350,000. Change the words to math-
ematical terms.
Expenses = (.7)(350,000) = $245,000
Gross income – Expenses = Net income
$350,000 – $245,000 = $105,000
The buyer wants the net income ($105,000) to be 14% of what he pays for the property.
Change the percent to a decimal (14% = .14) and then convert this statement to an equation.
$150,000 = (.14)(x)
$150,000 (.14)(x)
=
.14 .14
$150,000 ÷ .14 = x
$750,000 = x
Depreciation
There are several methods of depreciation, but the only one you are likely to meet on your exam is the straight-
line method. This method spreads the total depreciation over the useful life of the building in equal annual
amounts. It is calculated by dividing the replacement cost by the years of useful life left.
replacement cost
= annual depreciation
years of useful life
The depreciation rate may be given or may have to be calculated by the straight-line method. This means
dividing the total depreciation (100%) by the estimated useful life given for the building.
100%
= depreciated rate
years of useful life
If a building has 50 years of useful life left, the depreciation rate would be computed as follows:
100%
= 2%
50
In other words, it has a 2% depreciation rate annually.
Example:
The replacement cost of a building has been estimated at $80,000. The building is 12 years old and
has an estimated 40 years of useful life left. What can be charged to annual depreciation? What is
the total depreciation for 12 years? What is the present value of this building?
Solution:
Calculate the annual depreciation.
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replacement cost

years of useful life = annual depreciation
$80,000
= $2,000
40
Find the total depreciation over the 12 years.
Annual depreciation of $2,000 × 12 years = $24,000
Find the current value: replacement – depreciation = current value
$80,000 – $24,000 = $56,000
Summar y
Hopefully, with this review you have realized that real estate math is not as bad as it seems. If you feel you need
more practice, check out LearningExpress’s Practical Math Success in 20 Minutes a Day or 1,001 Math Problems.
Use the exams in the books to practice even more real estate math.
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C H A P T E R
6 Real Estate
Glossary
CHAPTER SUMMARY
One of the most basic components in preparing for your real estate
exam is making sure you know all the terminology. This glossary pro-
vides a list of the most commonly used real estate terms and their
definitions.
T HESE TERMS WILL help you not only as you study for your real estate exam, but also after you
pass your exam and are practicing in the field. The terms are listed in alphabetical order for
easy reference.
A
abandonment the voluntary surrender of a right, claim, or interest in a piece of property without
naming a successor as owner or tenant.
abstract of title a certified summary of the history of a title to a particular parcel of real estate
that includes the original grant and all subsequent transfers, encumbrances, and releases.
abutting sharing a common boundary; adjoining.
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– REAL ESTATE GLOSSARY –
acceleration clause a clause in a note, mortgage, or deed of trust that permits the lender to declare
the entire amount of principal and accrued interest due and payable immediately in the event of default.
acceptance the indication by a party receiving an offer that they agree to the terms of the offer. In most
states the offer and acceptance must be reduced to writing when real property is involved.
accretion the increase or addition of land resulting from the natural deposit of sand or soil by streams,
lakes, or rivers.
accrued depreciation (1) the amount of depreciation, or loss in value, that has accumulated since
initial construction; (2) the difference between the current appraised value and the cost to replace the build-
ing new.
accrued items a list of items of expenses that have been incurred but have not yet been paid, such as
interest on a mortgage loan, that are included on a closing statement.
acknowledgment a formal declaration before a public official, usually a notary public, by a person who
has signed a deed, contract, or other document that the execution was a voluntary act.
acre a measure of land equal to 43,560 square feet or 4,840 square yards.
actual eviction the result of legal action brought by a landlord against a defaulted tenant, whereby the
tenant is physically removed from rented or leased property by a court order.
actual notice the actual knowledge that a person has of a particular fact.
addendum any provision added to a contract, or an addition to a contract that expands, modifies, or enhances
the clarity of the agreement. To be a part of the contract and legally enforceable, an addendum must be ref-
erenced within the contract.
adjacent lying near to but not necessarily in actual contact with.
adjoining contiguous or attached; in actual contact with.
adjustable-rate mortgage (ARM) a mortgage in which the interest changes periodically, accord-
ing to corresponding fluctuations in an index. All ARMs are tied to indexes. For example, a seven-year,
adjustable-rate mortgage is a loan where the rate remains fixed for the first seven years, then fluctuates accord-
ing to the index to which it is tied.
adjusted basis the original cost of a property, plus acquisition costs, plus the value of added improve-
ments to the property, minus accrued depreciation.
adjustment date the date the interest rate changes on an adjustable-rate mortgage.
administrator a person appointed by a court to settle the estate of a person who has died without leav-
ing a will.
ad valorem tax tax in proportion to the value of a property.
adverse possession a method of acquiring title to another person’s property through court action
after taking actual, open, hostile, and continuous possession for a statutory period of time; may require pay-
ment of property taxes during the period of possession.
affidavit a written statement made under oath and signed before a licensed public official, usually a notary
public.
agency the legal relationship between principal and agent that arises out of a contract wherein an agent is
employed to do certain acts on behalf of the principal who has retained the agent to deal with a third party.
130
agent one who has been granted the authority to act on behalf of another.
agreement of sale a written agreement between a seller and a purchaser whereby the purchaser agrees
to buy a certain piece of property from the seller for a specified price.
air rights the right to use the open space above a particular property.
alienation the transfer of ownership of a property to another, either voluntarily or involuntarily.
alienation clause the clause in a mortgage or deed of trust that permits the lender to declare all unpaid
principal and accrued interest due and payable if the borrower transfers title to the property.
allodial system in the United States, a system of land ownership in which land is held free and clear of
any rent or services due to the government; commonly contrasted with the feudal system, in which own-
ership is held by a monarch.
amenities features or benefits of a particular property that enhance the property’s desirability and value,
such as a scenic view or a pool.
amortization the method of repaying a loan or debt by making periodic installment payments composed
of both principal and interest. When all principal has been repaid, it is considered fully amortized.
amortization schedule a table that shows how much of each loan payment will be applied toward
principal and how much toward interest over the lifespan of the loan. It also shows the gradual decrease of
the outstanding loan balance until it reaches zero.
amortize to repay a loan through regular payments that are comprised of principal and interest.
annual percentage rate (APR) the total or effective amount of interest charged on a loan,
expressed as a percentage, on a yearly basis. This value is created according to a government formula intended
to reflect the true annual cost of borrowing.
anti-deficiency law laws used in some states to limit the claim of a lender on default on payment of
a purchase money mortgage on owner-occupied residential property to the value of the collateral.
anti-trust laws laws designed to protect free enterprise and the open marketplace by prohibiting certain
business practices that restrict competition. In reference to real estate, these laws would prevent such prac-
tices as price-fixing or agreements by brokers to limit their areas of trade.
apportionments adjustment of income, expenses, or carrying charges related to real estate, usually com-
puted to the date of closing so that the seller pays all expenses to date, then the buyer pays all expenses begin-
ning on the closing date.
appraisal an estimate or opinion of the value of an adequately described property, as of a specific date.
appraised value an opinion of a property’s fair market value, based on an appraiser’s knowledge, expe-
rience, and analysis of the property, based on comparable sales.
appraiser an individual qualified by education, training, and experience to estimate the value of real prop-
erty. Appraisers may work directly for mortgage lenders, or they may be independent contractors.
appreciation an increase in the market value of a property.
appurtenance something that transfers with the title to land even if not an actual part of the property,
such as an easement.
arbitration the process of settling a dispute in which the parties submit their differences to an impartial
third party, on whose decision on the matter is binding.
131
ARELLO the Association of Real Estate License Law Officials.

assessed value the value of a property used to calculate real estate taxes.
assessor a public official who establishes the value of a property for taxation purposes.
assessment the process of assigning value on property for taxation purposes.
asset items of value owned by an individual. Assets that can be quickly converted into cash are considered
“liquid assets,” such as bank accounts and stock portfolios. Other assets include real estate, personal prop-
erty, and debts owed.
assignment the transfer of rights or interest from one person to another.
assumption of mortgage the act of acquiring the title to a property that has an existing mortgage
and agreeing to be liable for the payment of any debt still existing on that mortgage. However, the lender
must accept the transfer of liability for the original borrower to be relieved of the debt.
attachment the process whereby a court takes custody of a debtor’s property until the creditor’s debt is
satisfied.
attest to bear witness by providing a signature.
attorney-in-fact a person who is authorized under a power of attorney to act on behalf of another.
avulsion the removal of land from one owner to another when a stream or other body of water suddenly
changes its channel.
B
balloon mortgage a loan in which the periodic payments do not fully amortize the loan, so that a final
payment (a balloon payment) is substantially larger than the amount of the periodic payments that must
be made to satisfy the debt.
balloon payment the final, lump-sum payment that is due at the termination of a balloon mortgage.
bankruptcy an individual or individuals can restructure or relieve themselves of debts and liabilities by
filing in federal bankruptcy court. There are many types of bankruptcies, and the most common for an indi-
vidual is “Chapter 7 No Asset,” which relieves the borrower of most types of debts.
bargain and sale deed a deed which conveys title, but does not necessarily carry warranties against
liens or encumbrances.
base line one of the imaginary East-West lines used as a reference point when describing property with the
rectangular or government survey method of property description.
bench mark a permanently marked point with a known elevation, used as a reference by surveyors to meas-
ure elevations.
beneficiary (1) one who benefits from the acts of another; (2) the lender in a deed of trust.
bequest personal property given by provision of a will.
betterment an improvement to property that increases its value.
bilateral contract a contract in which each party promises to perform an act in exchange for the other
party’s promise also to perform an act.
132
bill of sale a written instrument that transfers ownership of personal property. A bill of sale cannot be used
to transfer ownership of real property, which is passed by deed.
binder an agreement, accompanied by an earnest money deposit, for the purchase of a piece of real estate to
show the purchaser’s good faith intent to complete a transaction.
biweekly mortgage a mortgage in which payments are made every two weeks instead of once a month.
Therefore, instead of making 12 monthly payments during the year, the borrower makes the equivalent of
13 monthly payments. The extra payment reduces the principal, thereby reducing the time it takes to pay
off a 30-year mortgage.
blanket mortgage a mortgage in which more than one parcel of real estate is pledged to cover a sin-
gle debt.
blockbusting the illegal and discriminatory practice of inducing homeowners to sell their properties by
suggesting or implying the introduction of members of a protected class into the neighborhood.
bona fide in good faith, honest.
bond evidence of personal debt secured by a mortgage or other lien on real estate.
boot money or property provided to make up a difference in value or equity between two properties in an
exchange.
branch office a place of business secondary to a principal office. The branch office is a satellite office gen-
erally run by a licensed broker, for the benefit of the broker running the principal office, as well as the asso-
ciate broker’s convenience.
breach of contract violation of any conditions or terms in a contract without legal excuse.
broker the term “broker” can mean many things, but in terms of real estate, it is the owner-manager of a busi-
ness that brings together the parties to a real estate transaction for a fee. The roles of brokers and brokers’
associates are defined by state law. In the mortgage industry, broker usually refers to a company or individual
that does not lend the money for the loans directly, but that brokers loans to larger lenders or investors.
brokerage the business of bringing together buyers and sellers or other participants in a real estate
transaction.
broker’s price opinion (BPO) a broker’s opinion of value based on a comparative market analy-
sis, rather than a certified appraisal.
building code local regulations that control construction, design, and materials used in construction that
are based on health and safety regulations.
building line the distance from the front, rear, or sides of a building lot beyond which no structures may
extend.
building restrictions limitations listed in zoning ordinances or deed restrictions on the size and type
of improvements allowed on a property.
bundle of rights the concept that ownership of a property includes certain rights regarding the prop-
erty, such as possession, enjoyment, control of use, and disposition.
buydown usually refers to a fixed-rate mortgage where the interest rate is “bought down” for a temporary
period, usually one to three years. After that time and for the remainder of the term, the borrower’s pay-
ment is calculated at the note rate. In order to buy down the initial rate for the temporary payment, a lump
133
sum is paid and held in an account used to supplement the borrower’s monthly payment. These funds usu-
ally come from the seller as a financial incentive to induce someone to buy their property.
buyer’s broker real estate broker retained by a prospective buyer; this buyer becomes the broker’s client
to whom fiduciary duties are owed.
bylaws rules and regulations adopted by an association—for example, a condominium.
C
cancellation clause a provision in a lease that confers on one or all parties to the lease the right to
terminate the parties’ obligations, should the occurrence of the condition or contingency set forth in the
clause happen.
canvassing the practice of searching for prospective clients by making unsolicited phone calls and/or vis-
iting homes door-to-door.
cap the limit on fluctuation rates regarding adjustable rate mortgages. Limitations, or caps, may apply to how
much the loan may adjust over a six-month period, an annual period, and over the life of the loan. There
is also a limit on how much that payment can change each year.
capital money used to create income, or the net worth of a business as represented by the amount by which
its assets exceed its liabilities.
capital expenditure the cost of a betterment to a property.
capital gains tax a tax charged on the profit gained from the sale of a capital asset.
capitalization the process of estimating the present value of an income-producing piece of property by
dividing anticipated future income by a capitalization rate.
capitalization rate the rate of return a property will generate on an owner’s investment.
cash flow the net income produced by an investment property, calculated by deducting operating and fixed
expenses from gross income.
caveat emptor a phrase meaning “let the buyer beware.”
CC&R covenants, conditions, and restrictions of a cooperative or condominium development.
certificate of discharge a document used when the security instrument is a mortgage.
certificate of eligibility a document issued by the Veterans Administration that certifies a veteran’s
eligibility for a VA loan.
certificate of reasonable value (CRV) once the appraisal has been performed on a prop-
erty being bought with a VA loan, the Veterans Administration issues a CRV.
certificate of sale the document given to a purchaser of real estate that is sold at a tax foreclosure sale.
certificate of title a report stating an opinion on the status of a title, based on the examination of pub-
lic records.
chain of title the recorded history of conveyances and encumbrances that affect the title to a parcel of land.
chattel personal property, as opposed to real property.
chattel mortgage a loan in which personal property is pledged to secure the debt.
134
city a large municipality governed under a charter and granted by the state.
clear title a title that is free of liens and legal questions as to ownership of a property that is a requirement
for the sale of real estate; sometimes referred to as just title, good title, or free and clear.
closing the point in a real estate transaction when the purchase price is paid to the seller and the deed to the
property is transferred from the seller to the buyer.
closing costs there are two kinds: (1) “non-recurring closing costs” and (2) “pre-paid items.” “Non-
recurring closing costs” are any items paid once as a result of buying the property or obtaining a loan.
“Pre-paid items” are items that recur over time, such as property taxes and homeowners insurance. A lender
makes an attempt to estimate the amount of non-recurring closing costs and pre-paid items on the good
faith estimate, which is issued to the borrower within three days of receiving a home loan application.
closing date the date on which the buyer takes over the property.
closing statement a written accounting of funds received and disbursed during a real estate transac-
tion. The buyer and seller receive separate closing statements.
cloud on the title an outstanding claim or encumbrance that can affect or impair the owner’s title.
clustering the grouping of home sites within a subdivision on smaller lots than normal, with the remain-
ing land slated for use as common areas.
codicil a supplement or addition to a will that modifies the original instrument.
coinsurance clause a clause in an insurance policy that requires the insured to pay a portion of any
loss experienced.
collateral something of value hypothecated (real property) or pledged (personal property) by a borrower
as security for a debt.
collection when a borrower falls behind, the lender contacts the borrower in an effort to bring the loan cur-
rent. The loan goes to “collection.”
color of title an instrument that gives evidence of title, but may not be legally adequate to actually con-
vey title.
commercial property property used to produce income, such as an office building or a restaurant.
commingling the illegal act of an agent mixing a client’s monies, which should be held in a separate escrow
account, with the agent’s personal monies; in some states, it means placing funds that are separate property
in an account containing funds that are community property.
commission the fee paid to a broker for services rendered in a real estate transaction.
commitment letter a pledge in writing affirming an agreement.
common law the body of law derived from local custom and judicial precedent.
common areas portions of a building, land, and amenities owned (or managed) by a planned unit devel-
opment or condominium project’s homeowners’ association or a cooperative project’s cooperative corpo-
ration. These areas are used by all of the unit owners, who share in the common expenses of their operation
and maintenance. Common areas may include swimming pools, tennis courts, and other recreational facil-
ities, as well as common corridors of buildings, parking areas, and lobbies.
community property a system of property ownership in which each spouse has equal interest in prop-
erty acquired during the marriage; recognized in nine states.
135
comparable sales recent sales of similar properties in nearby areas that are used to help estimate the
current market value of a property.
competent parties people who are legally qualified to enter a contract, usually meaning that they are
of legal age, of sound mind, and not under the influence of drugs or other mind-altering substances.
competitive market analysis (CMA) an analysis intended to assist a seller or buyer in deter-
mining a property’s range of value.
condemnation the judicial process by which the government exercises its power of eminent domain.
condominium a form of ownership in which an individual owns a specific unit in a multi-unit building
and shares ownership of common areas with other unit owners.
condominium conversion changing the ownership of an existing building (usually a multi-dwelling
rental unit) from single ownership to condominium ownership.
conformity an appraisal principle that asserts that property achieves its maximum value when a neigh-
borhood is homogeneous in its use of land; the basis for zoning ordinances.
consideration something of value that induces parties to enter into a contract, such as money or services.
construction mortgage a short-term loan used to finance the building of improvements to real estate.
constructive eviction action or inaction by a landlord that renders a property uninhabitable, forc-
ing a tenant to move out with no further liability for rent.
constructive notice notice of a fact given by making the fact part of the public record. All persons
are responsible for knowing the information, whether or not they have actually seen the record.
contingency a condition that must be met before a contract is legally binding. A satisfactory home inspec-
tion report from a qualified home inspector is an example of a common type of contingency.
contract an agreement between two or more legally competent parties to do or to refrain from doing some
legal act in exchange for a consideration.
contract for deed a contract for the sale of a parcel of real estate in which the buyer makes periodic
payments to the seller and receives title to the property only after all, or a substantial part, of the purchase
price has been paid, or regular payments have been made for one year or longer.
conventional loan a loan that is neither insured nor guaranteed by an agency of government.
conversion option an option in an adjustable-rate mortgage to convert it to a fixed-rate mortgage.
convertible ARM an adjustable-rate mortgage that allows the borrower to change the ARM to a fixed-
rate mortgage at a specific time.
conveyance the transfer of title from the grantor to the grantee.
cooperative a form of property ownership in which a corporation owns a multi-unit building and stock-
holders of the corporation may lease and occupy individual units of the building through a proprietary lease.
corporation a legal entity with potentially perpetual existence that is created and owned by shareholders
who appoint a board of directors to direct the business affairs of the corporation.
cost approach an appraisal method whereby the value of a property is calculated by estimating the cost
of constructing a comparable building, subtracting depreciation, and adding land value.
counteroffer an offer submitted in response to an offer. It has the effect of overriding the original offer.
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credit an agreement in which a borrower receives something of value in exchange for a promise to repay the
lender.
credit history a record of an individual’s repayment of debt.
cul-de-sac a dead-end street that widens at the end, creating a circular turnaround area.
curtesy the statutory or common law right of a husband to all or part of real estate owned by his deceased
wife, regardless of will provisions, recognized in some states.
curtilage area of land occupied by a building, its outbuildings, and yard, either actually enclosed or con-
sidered enclosed.
D
damages the amount of money recoverable by a person who has been injured by the actions of another.
datum a specific point used in surveying.
DBA the abbreviation for “doing business as.”
debt an amount owed to another.
decedent a person who dies.
dedication the donation of private property by its owner to a governmental body for public use.
deed a written document that, when properly signed and delivered, conveys title to real property from the
grantor to the grantee.
deed-in-lieu a foreclosure instrument used to convey title to the lender when the borrower is in default
and wants to avoid foreclosure.
deed of trust a deed in which the title to property is transferred to a third party trustee to secure repay-
ment of a loan; three-party mortgage arrangement.
deed restriction an imposed restriction for the purpose of limiting the use of land, such as the size or
type of improvements to be allowed. Also called a restrictive covenant.
default the failure to perform a contractual duty.
defeasance clause a clause in a mortgage that renders it void where all obligations have been fulfilled.
deficiency judgment a personal claim against a borrower when mortgaged property is foreclosed and
sale of the property does not produce sufficient funds to pay off the mortgage. Deficiency judgments may
be prohibited in some circumstances by anti-deficiency protection.
delinquency failure to make mortgage or loan payments when payments are due.
density zoning a zoning ordinance that restricts the number of houses or dwelling units that can be built
per acre in a particular area, such as a subdivision.
depreciation a loss in value due to physical deterioration, functional, or external obsolescence.
descent the transfer of property to an owner’s heirs when the owner dies intestate.
devise the transfer of title to real estate by will.
devisee one who receives a bequest of real estate by will.
devisor one who grants real estate by will.
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directional growth the direction toward which certain residential sections of a city are expected to grow.
discount point one percent of the loan amount charged by a lender at closing to increase a loan’s effec-
tive yield and lower the fare rate to the borrower.
discount rate the rate that lenders pay for mortgage funds—a higher rate is passed on to the borrower.
dispossess to remove a tenant from property by legal process.
dominant estate (tenement) property that includes the right to use an easement on adjoining
property.
dower the right of a widow in the property of her husband upon his death in non-community property states.
down payment the part of the purchase price that the buyer pays in cash and is not financed with a mort-
gage or loan.
dual agency an agent who represents both parties in a transaction.
due-on-sale clause a provision in a mortgage that allows the lender to demand repayment in full if
the borrower sells the property that serves as security for the mortgage.
duress the use of unlawful means to force a person to act or to refrain from an action against his or her will.
E
earnest money down payment made by a buyer of real estate as evidence of good faith.
easement the right of one party to use the land of another for a particular purpose, such as to lay utility
lines.
easement by necessity an easement, granted by law and requiring court action that is deemed nec-
essary for the full enjoyment of a parcel of land. An example would be an easement allowing access from
land-locked property to a road.
easement by prescription a means of acquiring an easement by continued, open, and hostile use
of someone else’s property for a statutorily defined period of time.
easement in gross a personal right granted by an owner with no requirement that the easement holder
own adjoining land.
economic life the period of time over which an improved property will generate sufficient income to jus-
tify its continued existence.
effective age an appraiser’s estimate of the physical condition of a building. The actual age of a build-
ing may be different than its effective age.
emblements cultivated crops; generally considered to be personal property.
eminent domain the right of a government to take private property for public use upon payment of its
fair market value. Eminent domain is the basis for condemnation proceedings.
encroachment a trespass caused when a structure, such as a wall or fence, invades another person’s land
or air space.
encumbrance anything that affects or limits the title to a property, such as easements, leases, mortgages,
or restrictions.
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equitable title the interest in a piece of real estate held by a buyer who has agreed to purchase the prop-
erty, but has not yet completed the transaction; the interest of a buyer under a contract for deed.
equity the difference between the current market value of a property and the outstanding indebtedness due
on it.
equity of redemption the right of a borrower to stop the foreclosure process.
erosion the gradual wearing away of land by wind, water, and other natural processes.
escalation clause a clause in a lease allowing the lessor to charge more rent based on an increase in
costs; sometimes called a pass-through clause.
escheat the claim to property by the state when the owner dies intestate and no heirs can be found.
escrow the deposit of funds and/or documents with a disinterested third party for safekeeping until the terms
of the escrow agreement have been met.
escrow account a trust account established to hold escrow funds for safekeeping until disbursement.
escrow analysis annual report to disclose escrow receipts, payments, and current balances.
escrow disbursements money paid from an escrow account.
estate an interest in real property. The sum total of all the real property and personal property owned by an
individual.
estate for years a leasehold estate granting possession for a definite period of time.
estate tax federal tax levied on property transferred upon death.
estoppel certificate a document that certifies the outstanding amount owed on a mortgage loan, as
well as the rate of interest.
et al. abbreviation for the Latin phrase et alius, meaning “and another.”
et ux. abbreviation for Latin term et uxor, meaning “and wife.”
et vir Latin term meaning “and husband.”
eviction the lawful expulsion of an occupant from real property.
evidence of title a document that identifies ownership of property.
examination of title a review of an abstract to determine current condition of title.
exchange a transaction in which property is traded for another property, rather than sold for money or
other consideration.
exclusive agency listing a contract between a property owner and one broker that only gives the
broker the right to sell the property for a fee within a specified period of time but does not obligate the owner
to pay the broker a fee if the owner produces his own buyer without the broker’s assistance. The owner is
barred only from appointing another broker within this time period.
exclusive right to sell a contract between a property owner and a broker that gives the broker the
right to collect a commission regardless of who sells the property during the specified period of time of the
agreement.
execution the signing of a contract.
executor/executrix a person named in a will to administer an estate. The court will appoint an admin-
istrator if no executor is named. “Executrix” is the feminine form.
executory contract a contract in which one or more of the obligations have yet to be performed.
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executed contract a contract in which all obligations have been fully performed.
express contract an oral or written contract in which the terms are expressed in words.
extension agreement an agreement between mortgagor and mortgagee to extend the maturity date
of the mortgage after it is due.
external obsolescence a loss in value of a property due to factors outside the property, such as a
change in surrounding land use.
F
fair housing law a term used to refer to federal and state laws prohibiting discrimination in the sale or
rental of residential property.
fair market value the highest price that a buyer, willing but not compelled to buy, would pay, and the
lowest a seller, willing but not compelled to sell, would accept.
Federal Housing Administration (FHA) an agency within the U.S. Department of Housing
and Urban Development (HUD) that insures mortgage loans by FHA-approved lenders to make loans avail-
able to buyers with limited cash.
Federal National Mortgage Association (Fannie Mae) a privately-owned corpora-
tion that buys existing government-backed and conventional mortgages.
Federal Reserve System the central banking system of the United States, which controls the mon-
etary policy and, therefore, the money supply, interest rates, and availability of credit.
fee simple the most complete form of ownership of real estate.
FHA-insured loan a loan insured by the Federal Housing Administration.
fiduciary relationship a legal relationship with an obligation of trust, as that of agent and principal.
finder’s fee a fee or commission paid to a mortgage broker for finding a mortgage loan for a prospective
borrower.
first mortgage a mortgage that has priority to be satisfied over all other mortgages.
fixed-rate loan a loan with an interest rate that does not change during the entire term of the loan.
fixture an article of personal property that has been permanently attached to the real estate so as to become
an integral part of the real estate.
foreclosure the legal process by which a borrower in default of a mortgage is deprived of interest in the
mortgaged property. Usually, this involves a forced sale of the property at public auction, where the pro-
ceeds of the sale are applied to the mortgage debt.
forfeiture the loss of money, property, rights, or privileges due to a breach of legal obligation.
franchise in real estate, an organization that lends a standardized trade name, operating procedures, refer-
ral services, and supplies to member brokerages.
fraud a deliberate misstatement of material fact or an act or omission made with deliberate intent to deceive
(active fraud) or gross disregard for the truth (constructive fraud).
freehold estate an estate of ownership in real property.
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front foot a measurement of property taken by measuring the frontage of the property along the street line.
functional obsolescence a loss in value of a property due to causes within the property, such as
faulty design, outdated structural style, or inadequacy to function properly.
future interest ownership interest in property that cannot be enjoyed until the occurrence of some event;
sometimes referred to as a household or equitable interest.
G
general agent an agent who is authorized to act for and obligate a principal in a specific range of mat-
ters, as specified by their mutual agreement.
general lien a claim on all property, real and personal, owned by a debtor.
general warranty deed an instrument in which the grantor guarantees the grantee that the title being
conveyed is good and free of other claims or encumbrances.
government backed mortgage a mortgage that is insured by the Federal Housing Administra-
tion (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS).
Mortgages that are not government loans are identified as conventional loans.
Government National Mortgage Association (Ginnie Mae) a government-owned
corporation within the U.S. Department of Housing and Urban Development (HUD). Ginnie Mae man-
ages and liquidates government-backed loans and assists HUD in special lending projects.
government survey system a method of land description in which meridians (lines of longitude)
and base lines (lines of latitude) are used to divide land into townships and sections.
graduated lease a lease that calls for periodic, stated changes in rent during the term of the lease.
grant the transfer of title to real property by deed.
grant deed a deed that includes three warranties: (1) that the owner has the right to convey title to the
property, (2) that there are no encumbrances other than those noted specifically in the deed, and (3) that
the owner will convey any future interest that he or she may acquire in the property.
grantee one who receives title to real property.
grantor one who conveys title to real property; the present owner.
gross income the total income received from a property before deducting expenses.
gross income multiplier a rough method of estimating the market value of an income property by
multiplying its gross annual rent by a multiplier discovered by dividing the sales price of comparable prop-
erties by their annual gross rent.
gross lease a lease in which a tenant pays only a fixed amount for rental and the landlord pays all oper-
ating expenses and taxes.
gross rent multiplier similar to gross income multiplier, except that it looks at the relationship between
sales price and monthly gross rent.
ground lease a lease of land only, on which a tenant already owns a building or will construct
improvements.
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guaranteed sale plan an agreement between a broker and a seller that the broker will buy the seller’s
property if it does not sell within a specified period of time.
guardian one who is legally responsible for the care of another person’s rights and/or property.
H
habendum clause the clause in a deed, beginning with the words “to have and to hold,” that defines or
limits the exact interest in the estate granted by the deed.
hamlet a small village.
heir one who is legally entitled to receive property when the owner dies intestate.
highest and best use the legally permitted use of a parcel of land that will yield the greatest return
to the owner in terms of money or amenities.
holdover tenancy a tenancy where a lessee retains possession of the property after the lease has expired,
and the landlord, by continuing to accept rent, agrees to the tenant’s continued occupancy.
holographic will a will that is entirely handwritten, dated, and signed by the testator.
home equity conversion mortgage (HECM) often called a reverse-annuity mortgage;
instead of making payments to a lender, the lender makes payments to you. It enables older homeowners
to convert the equity they have in their homes into cash, usually in the form of monthly payments. Unlike
traditional home equity loans, a borrower does not qualify on the basis of income but on the value of his
or her home. In addition, the loan does not have to be repaid until the borrower no longer occupies the
property.
home equity line of credit a mortgage loan that allows the borrower to obtain cash drawn against
the equity of his or her home, up to a predetermined amount.
home inspection a thorough inspection by a professional that evaluates the structural and mechanical
condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser.
homeowner’s insurance an insurance policy specifically designed to protect residential property
owners against financial loss from common risks such as fire, theft, and liability.
homeowner’s warranty an insurance policy that protects purchasers of newly-constructed or pre-
owned homes against certain structural and mechanical defects.
homestead the parcel of land and improvements legally qualifying as the owner’s principal residence.
HUD an acronym for the Department of Housing and Urban Development, a federal agency that enforces fed-
eral fair housing laws and oversees agencies such as FHA and GNMA.
I
implied contract a contract where the agreement of the parties is created by their conduct.
improvement human-made addition to real estate.
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income capitalization approach a method of estimating the value of income-producing prop-

erty by dividing its expected annual net operating income of the property by a capitalization rate.
income property real estate developed or improved to produce income.
incorporeal right intangible, non-possessory rights in real estate, such as an easement or right of way.
independent contractor one who is retained by another to perform a certain task and is not sub-
ject to the control and direction of the hiring person with regard to the end result of the task. Individual
contractors receive a fee for their services but pay their own expenses and taxes and receive no employee
benefits.
index a number used to compute the interest rate for an adjustable-rate mortgage (ARM). The index is a pub-
lished number or percentage, such as the average yield on Treasury bills. A margin is added to the index to
determine the interest rate to be charged on the ARM. This interest rate is subject to any caps that are asso-
ciated with the mortgage.
industrial property buildings and land used for the manufacture and distribution of goods, such as a
factory.
inflation an increase in the amount of money or credit available in relation to the amount of goods or serv-
ices available, which causes an increase in the general price level of goods and services.
initial interest rate the beginning interest rate of the mortgage at the time of closing. This rate changes
for an adjustable-rate mortgage (ARM).
installment the regular, periodic payment that a borrower agrees to make to a lender, usually related to a
loan.
installment contract see contract for deed.
installment loan borrowed money that is repaid in periodic payments, known as installments.
installment sale a transaction in which the sales price is paid to the seller in two or more installments
over more than one calendar year.
insurance a contract that provides indemnification from specific losses in exchange for a periodic payment.
The individual contract is known as an insurance policy, and the periodic payment is known as an insur-
ance premium.
insurance binder a document that states that temporary insurance is in effect until a permanent insur-
ance policy is issued.
insured mortgage a mortgage that is protected by the Federal Housing Administration (FHA) or by
private mortgage insurance (PMI). If the borrower defaults on the loan, the insurer must pay the lender the
insured amount.
interest a fee charged by a lender for the use of the money loaned; or a share of ownership in real estate.
interest accrual rate the percentage rate at which interest accrues on the mortgage.
interest rate the rent or rate charged to use funds belonging to another.
interest rate buydown plan an arrangement where the property seller (or any other party) deposits
money to an account so that it can be released each month to reduce the mortgagor’s monthly payments
during the early years of a mortgage. During the specified period, the mortgagor’s effective interest rate is
“bought down” below the actual interest rate.
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interest rate ceiling the maximum interest rate that may be charged for an adjustable-rate mortgage
(ARM), as specified in the mortgage note.
interest rate floor the minimum interest rate for an adjustable-rate mortgage (ARM), as specified in
the mortgage note.
interim financing a short-term loan made during the building phase of a project; also known as a con-
struction loan.
intestate to die without having authored a valid will.
invalid not legally binding or enforceable.
investment property a property not occupied by the owner.
J
joint tenancy co-ownership that gives each tenant equal interest and equal rights in the property, includ-
ing the right of survivorship.
joint venture an agreement between two or more parties to engage in a specific business enterprise.
judgment a decision rendered by court determining the rights and obligations of parties to an action or
lawsuit.
judgment lien a lien on the property of a debtor resulting from a court judgment.
judicial foreclosure a proceeding that is handled as a civil lawsuit and conducted through court; used
in some states.
jumbo loan a loan that exceeds Fannie Mae’s mortgage amount limits. Also called a nonconforming loan.
junior mortgage any mortgage that is inferior to a first lien and that will be satisfied only after the first
mortgage; also called a secondary mortgage.
L
laches a doctrine used by a court to bar the assertion of a legal claim or right, based on the failure to assert
the claim in a timely manner.
land the Earth from its surface to its center, and the air space above it.
landlocked property surrounded on all sides by property belonging to another.
lease a contract between a landlord and a tenant wherein the landlord grants the tenant possession and use
of the property for a specified period of time and for a consideration.
leased fee the landlord’s interest in a parcel of leased property.
lease option a financing option that allows homebuyers to lease a home with an option to buy. Each month’s
rent payment may consist of rent, plus an additional amount that can be applied toward the down payment
on an already specified price.
leasehold a tenant’s right to occupy a parcel of real estate for the term of a lease.
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legal description a description of a parcel of real estate specific and complete enough for an independent
surveyor to locate and identify it.
lessee the one who receives that right to use and occupy the property during the term of the leasehold estate.
lessor the owner of the property who grants the right of possession to the lessee.
leverage the use of borrowed funds to purchase an asset.
levy to assess or collect a tax.
license (1) a revocable authorization to perform a particular act on another’s property, (2) authorization
granted by a state to act as a real estate broker or salesperson.
lien a legal claim against a property to secure payment of a financial obligation.
life estate a freehold estate in real property limited in duration to the lifetime of the holder of the life estate
or another specified person.
life tenant one who holds a life estate.
liquidity the ability to convert an asset into cash.
lis pendens a latin phrase meaning “suit pending;” a public notice that a lawsuit has been filed that may
affect the title to a particular piece of property.
listing agreement a contract between the owner and a licensed real estate broker where the broker is
employed to sell real estate on the owner’s terms within a given time, for which service the owner agrees to
pay the broker an agreed-upon fee.
listing broker a broker who contracts with a property owner to sell or lease the described property; the
listing agreement typically may provide for the broker to make property available through a multiple list-
ing system.
littoral rights landowner’s claim to use water in large, navigable lakes and oceans adjacent to property;
ownership rights to land-bordering bodies of water up to the high-water mark.
loan a sum of borrowed money, or principal, that is generally repaid with interest.
loan officer or lender, serves several functions and has various responsibilities, such as soliciting loans; a
loan officer both represents the lending institution and represents the borrower to the lending institution.
lock-in an agreement in which the lender guarantees a specified interest rate for a certain amount of time.
lock-in period the time period during which the lender has guaranteed an interest rate to a borrower.
lot and block description a method of describing a particular property by referring to a lot and
block number within a subdivision recorded in the public record.
M
management agreement a contract between the owner of an income property and a firm or indi-
vidual who agrees to manage the property.
margin the difference between the interest rate and the index on an adjustable rate mortgage. The margin
remains stable over the life of the loan, while the index fluctuates.
145
market data approach a method of estimating the value of a property by comparing it to similar
properties recently sold and making monetary adjustments for the differences between the subject prop-
erty and the comparable property.
market value the amount that a seller may expect to obtain for merchandise, services, or securities in the
open market.
marketable title title to property that is free from encumbrances and reasonable doubts and that a court
would compel a buyer to accept.
mechanic’s lien a statutory lien created to secure payment for those who supply labor or materials for
the construction of an improvement to land.
metes and bounds a method of describing a parcel of land using direction and distance.
mil one-tenth of one cent; used by some states to express or calculate property tax rates.
minor a person who has not attained the legal age of majority.
misrepresentation a misstatement of fact, either deliberate or unintentional.
modification the act of changing any of the terms of the mortgage.
money judgment a court order to settle a claim with a monetary payment, rather than specific
performance.
month-to-month tenancy tenancy in which the tenant rents for only one month at a time.
monument a fixed, visible marker used to establish boundaries for a survey.
mortgage a written instrument that pledges property to secure payment of a debt obligation as evidenced
by a promissory note. When duly recorded in the public record, a mortgage creates a lien against the title
to a property.
mortgage banker an entity that originates, funds, and services loans to be sold into the secondary money
market.
mortgage broker an entity that, for a fee, brings borrowers together with lenders.
mortgage lien an encumbrance created by recording a mortgage.
mortgagee the lender who benefits from the mortgage.
mortgagor the borrower who pledges the property as collateral.
multi-dwelling units properties that provide separate housing units for more than one family that secure
only a single mortgage. Apartment buildings are also considered multi-dwelling units.
multiple listing system (MLS—also multiple listing service) the method of mar-
keting a property listing to all participants in the MLS.
mutual rescission an agreement by all parties to a contract to release one another from the obligations
of the contract.
N
negative amortization occurs when an adjustable rate mortgage is allowed to fluctuate independ-
ently of a required minimum payment. A gradual increase in mortgage debt happens when the monthly
146
payment is not large enough to cover the entire principal and interest due. The amount of the shortfall is
added to the remaining balance to create negative amortization.
net income the income produced by a property, calculated by deducting operating expenses from gross
income.
net lease a lease that requires the tenant to pay maintenance and operating expenses, as well as rent.
net listing a listing in which the broker’s fee is established as anything above a specified amount to be received
by the seller from the sale of the property.
net worth the value of all of a person’s assets.
no cash-out refinance a refinance transaction in which the new mortgage amount is limited to the
sum of the remaining balance of the existing first mortgage.
nonconforming use a use of land that is permitted to continue, or grandfathered, even after a zoning
ordinance is passed that prohibits the use.
non-liquid asset an asset that cannot easily be converted into cash.
notarize to attest or certify by a notary public.
notary public a person who is authorized to administer oaths and take acknowledgments.
note a written instrument acknowledging a debt, with a promise to repay, including an outline of the terms
of repayment.
note rate the interest rate on a promissory note.
notice of default a formal written notice to a borrower that a default has occurred on a loan and that
legal action may be taken.
novation the substitution of a new contract for an existing one; the new contract must reference the first
and indicate that the first is being replaced and no longer has any force and effect.
O
obligee person on whose favor an obligation is entered.

obligor person who is bound to another by an obligation.
obsolescence a loss in the value of a property due to functional or external factors.
offer to propose as payment; bid on property.
offer and acceptance two of the necessary elements for the creation of a contract.
open-end mortgage a loan containing a clause that allows the mortgagor to borrow additional funds
from the lender, up to a specified amount, without rewriting the mortgage.
open listing a listing contract given to one or more brokers in which a commission is paid only to the bro-
ker who procures a sale. If the owner sells the house without the assistance of one of the brokers, no com-
mission is due.
opinion of title an opinion, usually given by an attorney, regarding the status of a title to property.
option an agreement that gives a prospective buyer the right to purchase a seller’s property within a specified
period of time for a specified price.
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optionee one who receives or holds an option.

optionor one who grants an option; the property owner.
ordinance a municipal regulation.
original principal balance the total amount of principal owed on a loan before any payments are
made; the amount borrowed.
origination fee the amount charged by a lender to cover the cost of assembling the loan package and
originating the loan.
owner financing a real estate transaction in which the property seller provides all or part of the financing.
ownership the exclusive right to use, possess, control, and dispose of property.
P
package mortgage a mortgage that pledges both real and personal property as collateral to secure
repayment of a loan.
parcel a lot or specific portion of a large tract of real estate.
participation mortgage a type of mortgage in which the lender receives a certain percentage of the
income or resale proceeds from a property, as well as interest on the loan.
partition the division of property held by co-owners into individual shares.
partnership an agreement between two parties to conduct business for profit. In a partnership, property
is owned by the partnership, not the individual partners, so partners cannot sell their interest in the prop-
erty without the consent of the other partners.
party wall a common wall used to separate two adjoining properties.
payee one who receives payment from another.
payor one who makes payment to another.
percentage lease a lease in which the rental rate is based on a percentage of the tenant’s gross sales.
This type of lease is most often used for retail space.
periodic estate tenancy that automatically renews itself until either the landlord or tenant gives notice
to terminate it.
personal property (hereditaments) all items that are not permanently attached to real estate;
also known as chattels.
physical deterioration a loss in the value of a property due to impairment of its physical condition.
PITI principal, interest, taxes, and insurance—components of a regular mortgage payment.
planned unit development (PUD) a type of zoning that provides for residential and commer-
cial uses within a specified area.
plat a map of subdivided land showing the boundaries of individual parcels or lots.
plat book a group of maps located in the public record showing the division of land into subdivisions, blocks,
and individual parcels or lots.
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plat number a number that identifies a parcel of real estate for which a plat has been recorded in the pub-
lic record.
PMI private mortgage insurance.
point a point is one percent of the loan.
point of beginning the starting point for a survey using the “metes and bounds” method of description.
police power the right of the government to enact laws, ordinances, and regulations to protect the pub-
lic health, safety, welfare, and morals.
power of attorney a legal document that authorizes someone to act on another’s behalf. A power of
attorney can grant complete authority or can be limited to certain acts and/or certain periods of time.
pre-approval condition where a borrower has completed a loan application and provided debt, income,
and savings documentation that an underwriter has reviewed and approved. A pre-approval is usually done
at a certain loan amount, making assumptions about what the interest rate will actually be at the time the
loan is actually made, as well as estimates for the amount that will be paid for property taxes, insurance,
and so on.
prepayment amount paid to reduce the outstanding principal balance of a loan before the due date.
prepayment penalty a fee charged to a borrower by a lender for paying off a debt before the term of
the loan expires.
pre-qualification a lender’s opinion on the ability of a borrower to qualify for a loan, based on furnished
information regarding debt, income, and available capital for down payment, closing costs, and prepaids.
Pre-qualification is less formal than pre-approval.
prescription a method of acquiring an easement to property by prolonged, unauthorized use.
primary mortgage market the financial market in which loans are originated, funded, and serviced.
prime rate the short-term interest rate that banks charge to their preferred customers. Changes in prime
rate are used as the indexes in some adjustable rate mortgages, such as home equity lines of credit.
principal (1) one who authorizes another to act on his or her behalf, (2) one of the contracting parties to a
transaction, (3) the amount of money borrowed in a loan, separate from the interest charged on it.
principal meridian one of the 36 longitudinal lines used in the rectangular survey system method of
land description.
probate the judicial procedure of proving the validity of a will.
procuring cause the action that brings about the desired result. For example, if a broker takes actions
that result in a sale, the broker is the procuring cause of the sale.
promissory note details the terms of the loan and is the debt instrument.
property management the operating of an income property for another.
property tax a tax levied by the government on property, real or personal.
prorate to divide ongoing property costs such as taxes or maintenance fees proportionately between buyer
and seller at closing.
pur autre vie a phrase meaning “for the life of another.” In a life estate pur autre vie, the term of the estate
is measured by the life of a person other than the person who holds the life estate.
149
purchase agreement a written contract signed by the buyer and seller stating the terms and condi-
tions under which a property will be sold.
purchase money mortgage a mortgage given by a buyer to a seller to secure repayment of any
loan used to pay part or all of the purchase price.
Q
qualifying ratios calculations to determine whether a borrower can qualify for a mortgage. There are
two ratios. The “top” ratio is a calculation of the borrower’s monthly housing costs (principle, taxes, insur-
ance, mortgage insurance, homeowner’s association fees) as a percentage of monthly income. The “bottom”
ratio includes housing costs as well as all other monthly debt.
quitclaim deed a conveyance where the grantor transfers without warranty or obligations whatever inter-
est or title he/she may have.
R
range an area of land six miles wide, numbered East or West from a principal meridian in the rectangular
survey system.
ready, willing, and able one who is able to pay the asking price for a property and is prepared to
complete the transaction.
real estate land, the earth below it, the air above it, and anything permanently attached to it.
real estate agent a real estate broker who has been appointed to market a property for and represent
the property owner (listing agent), or a broker who has been appointed to represent the interest of the buyer
(buyer’s agent).
real estate board an organization whose members are primarily comprised of real estate sales agents,
brokers, and administrators.
real estate broker a licensed person, association, partnership, or corporation who negotiates real estate
transactions for others for a fee.
Real Estate Settlement Procedures Act (RESPA) a consumer protection law that
requires lenders to give borrowers advance notice of closing costs and prohibits certain abusive practices
against buyers using federally related loans to purchase their homes.
real property the rights of ownership to land and its improvements.
REALTOR® a registered trademark for use by members of the National Association of REALTORS® and affil-
iated state and local associations.
recording entering documents, such as deeds and mortgages, into the public record to give constructive
notice.
150
rectangular survey system a method of land description based on principal meridians (lines of
longitude) and base lines (lines of latitude). Also called the government survey system.
redemption period the statutory period of time during which an owner can reclaim foreclosed prop-
erty by paying the debt owed plus court costs and other charges established by statute.
redlining the illegal practice of lending institutions refusing to provide certain financial services, such as mort-
gage loans, to property owners in certain areas.
refinance transaction the process of paying off one loan with the proceeds from a new loan using
the same property as security or collateral.
Regulation Z a Federal Reserve regulation that implements the federal Truth-in-Lending Act.
release clause a clause in a mortgage that releases a portion of the property upon payment of a por-
tion of the loan.
remainder estate a future interest in an estate that takes effect upon the termination of a life estate.
remaining balance in a mortgage, the amount of principal that has not yet been repaid.
remaining term the original amortization term minus the number of payments that have been applied
to it.
rent a periodic payment paid by a lessee to a landlord for the use and possession of leased property.
replacement cost the estimated current cost to replace an asset similar or equivalent to the one being
appraised.
reproduction cost the cost of building an exact duplicate of a building at current prices.
rescission canceling or terminating a contract by mutual consent or by the action of one party on default
by the other party.
restriction (restrict covenant) a limitation on the way a property can be used.
reversion the return of interest or title to the grantor of a life estate.
reverse annuity mortgage when a homeowner receives monthly checks or a lump sum with no
repayment until property is sold, usually an agreement between mortgagor and elderly homeowners.
revision a revised or new version, as in a contract.
right of egress (or ingress) the right to enter or leave designated premises.
right of first refusal the right of a person to have the first opportunity to purchase property before
it is offered to anyone else.
right of redemption the statutory right to reclaim ownership of property after a foreclosure sale.
right of survivorship in joint tenancy, the right of survivors to acquire the interest of a deceased joint
tenant.
riparian rights the rights of a landowner whose property is adjacent to a flowing waterway, such as a river,
to access and use the water.
151
S
safety clause a contract provision that provides a time period following expiration of a listing agree-
ment, during which the agent will be compensated if there is a transaction with a buyer who was initially
introduced to the property by the agent.
sale-leaseback a transaction where the owner sells improved property and, as part of the same trans-
action, signs a long-term lease to remain in possession of its premises, thus becoming the tenant of the new
owner.
sales contract a contract between a buyer and a seller outlining the terms of the sale.
salesperson one who is licensed to sell real estate in a given territory.
salvage value the value of a property at the end of its economic life.
satisfaction an instrument acknowledging that a debt has been paid in full.
second mortgage a mortgage that is in less than first lien position; see junior mortgage.
section as used in the rectangular survey system, an area of land measuring one square mile, or 640 acres.
secured loan a loan that is backed by property or collateral.
security property that is offered as collateral for a loan.
selling broker the broker who secures a buyer for a listed property; the selling broker may be the listing
agent, a subagent, or a buyer’s agent.
separate property property owned individually by a spouse, as opposed to community property.
servient tenement a property on which an easement or right-of-way for an adjacent (dominant) prop-
erty passes.
setback the amount of space between the lot line and the building line, usually established by a local zon-
ing ordinance or restrictive covenants; see deed restrictions.
settlement statement (HUD-1) the form used to itemize all costs related to closing of a residential
transaction covered by RESPA regulations.
severalty the ownership of a property by only one legal entity.
special assessment a tax levied against only the specific properties that will benefit from a public
improvement, such as a street or sewer; an assessment by a homeowners’ association for a capital improve-
ment to the common areas for which no budgeted funds are available.
special warranty deed a deed in which the grantor guarantees the title only against the defects that
may have occurred during the grantor’s ownership and not against any defects that occurred prior to that
time.
specific lien a lien, such as a mortgage, that attaches to one defined parcel of real estate.
specific performance a legal action in which a court compels a defaulted party to a contract to per-
form according to the terms of the contract, rather than awarding damages.
standard payment calculation the method used to calculate the monthly payment required to
repay the remaining balance of a mortgage in equal installments over the remaining term of the mortgage
at the current interest rate.
statute of frauds the state law that requires certain contracts to be in writing to be enforceable.
152
statute of limitations the state law that requires that certain actions be brought to court within a spec-
ified period of time.
statutory lien a lien imposed on property by statute, such as a tax lien.
steering the illegal practice of directing prospective homebuyers to or away from particular areas.
straight-line depreciation a method of computing depreciation by decreasing value by an equal
amount each year during the useful life of the property.
subdivision a tract of land divided into lots as defined in a publicly recorded plat that complies with state
and local regulations.
sublet the act of a lessee transferring part or all of his or her lease to a third party while maintaining respon-
sibility for all duties and obligations of the lease contract.
subordinate to voluntarily accept a lower priority lien position than that to which one would normally
be entitled.
substitution the principle in appraising that a buyer will be willing to pay no more for the property being
appraised than the cost of purchasing an equally desirable property.
subrogation the substitution of one party into another’s legal role as the creditor for a particular debt.
suit for possession a lawsuit filed by a landlord to evict a tenant who has violated the terms of the
lease or retained possession of the property after the lease expired.
suit for specific performance a lawsuit filed for the purpose of compelling a party to perform
particular acts to settle a dispute, rather than pay monetary damages.
survey a map that shows the exact legal boundaries of a property, the location of easements, encroachments,
improvements, rights of way, and other physical features.
syndicate a group formed by a syndicator to combine funds for real estate investment.
T
tax deed in some states, an instrument given to the purchaser at the time of sale.
tax lien a charge against a property created by law or statue. Tax liens take priority over all other types of
liens.
tax rate the rate applied to the assessed value of a property to determine the property taxes.
tax sale the court-ordered sale of a property after the owner fails to pay ad valorem taxes owed on the property.
tenancy at sufferance the tenancy of a party who unlawfully retains possession of a landlord’s prop-
erty after the term of the lease has expired.
tenancy at will an indefinite tenancy that can be terminated by either the landlord or the tenant at any
time by giving notice to the other party one rental period in advance of the desired termination date.
tenancy by the entirety ownership by a married couple of property acquired during the marriage
with right of survivorship; not recognized by community property states.
tenancy in common a form of co-ownership in which two or more persons hold an undivided inter-
est in property without the right of survivorship.
153
tenant one who holds or possesses the right of occupancy title.

tenement the space that may be occupied by a tenant under the terms of a lease.
testate to die having created a valid will directing the testator’s desires with regard to the disposition of the
estate.
“time is of the essence” a phrase in a contract that requires strict adherence to the dates listed in
the contract as deadlines for the performance of specific acts.
timesharing undivided ownership of real estate for only an allotted portion of a year.
title a legal document that demonstrates a person’s right to, or ownership of, a property. Note: title is not an
instrument. The instrument, such as a deed, gives evidence of title or ownership.
title insurance an insurance policy that protects the holder from defects in a title, subject to the excep-
tions noted in the policy.
title search a check of public records to ensure that the seller is the legal owner of the property and that
there are no liens or other outstanding claims.
Torrens System a system of registering titles to land with a public authority, who is usually called a
registrar.
township a division of land, measuring 36 square miles, in the government survey system.
trade fixtures an item of personal property installed by a commercial tenant and removable upon expi-
ration of the lease.
transfer tax a state or municipal tax payable when the conveyancing instrument is recorded.
trust an arrangement in which title to property is transferred from a grantor to a trustee, who holds title but
not the right of possession for a third party, the beneficiary.
trustee a person who holds title to property for another person designated as the beneficiary.
Truth-in-Lending Law also known as Regulation Z; requires lenders to make full disclosure regarding
the terms of a loan.
U
underwriting the process of evaluating a loan application to determine the risk involved for the lender.
undivided interest the interest of co-owners to use of an entire property despite the fractional inter-
est owned.
unilateral contract a one-sided contract in which one party is obligated to perform a particular act
completely, before the other party has any obligation to perform.
unsecured loan a loan that is not backed by collateral or security.
useful life the period of time a property is expected to have economic utility.
usury the practice of charging interest at a rate higher than that allowed by law.
154
V
VA-guaranteed loan a mortgage loan made to a qualified veteran that is guaranteed by the Depart-
ment of Veterans Affairs.
valid contract an agreement that is legally enforceable and binding on all parties.
valuation estimated worth.
variance permission obtained from zoning authorities to build a structure that is not in complete compli-
ance with current zoning laws. A variance does not permit a non-conforming use of a property.
vendee a buyer.
vendor a seller; the property owner.
village an incorporated minor municipality usually larger than a hamlet and smaller than a town.
void contract a contract that is not legally enforceable; the absence of a valid contract.
voidable contract a contract that appears to be valid but is subject to cancellation by one or both of
the parties.
W
waiver the surrender of a known right or claim.

warranty deed a deed in which the grantor fully warrants a good clear title to the property.
waste the improper use of a property by a party with the right to possession, such as the holder of a life estate.
will a written document that directs the distribution of a deceased person’s property, real and personal.
wraparound mortgage a mortgage that includes the remaining balance on an existing first mort-
gage plus an additional amount. Full payments on both mortgages are made to the wraparound mortgagee
who then forwards the payments on the first mortgage to the first mortgagee.
writ of execution a court order to the sheriff or other officer to sell the property of a debtor to satisfy
a previously rendered judgment.
Z
zone an area reserved by authorities for specific use that is subject to certain restrictions.
zoning ordinance the exercise of regulating and controlling the use of a property in a municipality.
155
C H A P T E R
7 Real Estate Sales

Exam 2
CHAPTER SUMMARY
This is the second of four practice tests in this book. Since you have
taken one practice test already, you should feel more confident with
your test-taking skills. Use this test to see how knowing what to expect
can make you feel better prepared.
I F YO U A R Efollowing the advice in this book, you’ve done some studying between the first exam and
this one. This exam will give you a chance to see how much you have improved.
The answer sheet follows this page, and the test is followed by the answer key and explanations.
157
1. a b c d 35. a b c d 69. a b c d
2. a b c d 36. a b c d 70. a b c d
3. a b c d 37. a b c d 71. a b c d
4. a b c d 38. a b c d 72. a b c d
5. a b c d 39. a b c d 73. a b c d
6. a b c d 40. a b c d 74. a b c d
7. a b c d 41. a b c d 75. a b c d
8. a b c d 42. a b c d 76. a b c d
9. a b c d 43. a b c d 77. a b c d
10. a b c d 44. a b c d 78. a b c d
11. a b c d 45. a b c d 79. a b c d
12. a b c d 46. a b c d 80. a b c d
13. a b c d 47. a b c d 81. a b c d
14. a b c d 48. a b c d 82. a b c d
15. a b c d 49. a b c d 83. a b c d
16. a b c d 50. a b c d 84. a b c d
17. a b c d 51. a b c d 85. a b c d
18. a b c d 52. a b c d 86. a b c d
19. a b c d 53. a b c d 87. a b c d
20. a b c d 54. a b c d 88. a b c d
21. a b c d 55. a b c d 89. a b c d
22. a b c d 56. a b c d 90. a b c d
23. a b c d 57. a b c d 91. a b c d
24. a b c d 58. a b c d 92. a b c d
25. a b c d 59. a b c d 93. a b c d
26. a b c d 60. a b c d 94. a b c d
27. a b c d 61. a b c d 95. a b c d
28. a b c d 62. a b c d 96. a b c d
29. a b c d 63. a b c d 97. a b c d
30. a b c d 64. a b c d 98. a b c d
31. a b c d 65. a b c d 99. a b c d
32. a b c d 66. a b c d 100. a b c d
33. a b c d 67. a b c d
34. a b c d 68. a b c d
158
1. Which of the following actions is legally 5. For a real estate agency relationship to be
permitted? enforceable, which of the following is NOT
a. advertising property for sale only to a special required?
group a. The principal has the power to do what is
b. altering the terms of a loan for a member of being assigned.
a minority group b. The principal has the funds to pay the agent.
c. refusing to make a mortgage loan to a c. The agent must be authorized by a written
minority individual because of a poor credit agreement.
history d. The agent must be a real estate licensee.
d. telling a minority individual that an apart-
ment has been rented when in fact it has not 6. Elderly homeowners can sometimes tap the
been rented equity in their home without having to make
monthly payments by using a
2. The seller delivers the deed and the buyer pays a. wraparound mortgage.
the purchase price in the step referred to as b. reverse mortgage.
a. commitment. c. conversion option.
b. underwriting. d. blanket mortgage.
c. warehousing.
d. closing. 7. Which of the following statements is/are true
regarding FHA?
3. The approach to value that considers deprecia- I. FHA insures loans but does not guarantee
tion is the them.
a. cost approach. II. FHA has a program 203b that is for one- to
b. sales comparison approach. four-family dwellings.
c. income approach. III. FHA loans are funded by conventional
d. gross rent multiplier approach. lenders.
a. I only
4. A building permit may be issued without ques- b. I and II only
tion even if the proposed structure violates c. II and III only
existing d. I, II, and III
a. zoning laws.
b. deed restrictions.
c. building codes.
d. setback requirements.
159
8. George Brown owns 150 acres of farmland 12. Buyers who sign a document indicating the
and has posted “No Trespassing” signs on price and terms on which they are ready to
the fence surrounding the property. He can purchase described property have created
enforce this notice by virtue of his a. a purchase offer.
a. constitutional privilege. b. an option.
b. right to exclude. c. a contract of sale.
c. obligation of disposition. d. a listing contract.
d. surface rights.
13. There is an oral agreement to lease a prop-
9. An oral agreement between a lessor and les- erty for one year at $500 per month. This
see is legally agreement is
a. a valid tenancy for years. a. unenforceable because it is not in writing.
b. unenforceable due to the statute of frauds. b. enforceable.
c. a valid tenancy at will. c. unenforceable because there was no
d. unenforceable due to the statute of binder deposit.
limitations. d. none of the above
10. Although the term “purchase money mort- 14. A seller, anxious to sell, tells a cooperating
gage” applies to any loan that finances the agent during a showing that the agent will
purchase of real estate, it is commonly used be given a riding lawnmower if he brings an
to refer specifically to a acceptable offer by the end of the week. All
a. loan taken back as part of the sales price of the following are true in this situation
by the seller. EXCEPT that the
b. refinance loan. a. agent may accept the lawnmower because
c. loan on property already owned that is it is not cash.
used to finance the purchase of a second b. agent should report the incident to the
property. listing broker.
d. loan that is packaged for sale on the sec- c. agent would be in violation of the law if
ondary market. he took the lawnmower.
d. cooperating agent could legally receive the
11. Any federally related loan may require the lawnmower from his broker.
borrower to carry special insurance if the
property is located in 15. The right to occupy a property without
a. an earthquake area. interference for a specified period of time is
b. a flood zone. known as a
c. an ocean hazard district. a. trespass.
d. a desert. b. prescriptive easement.
c. leasehold.
d. suit for possession.
160
16. The landlord has the right to access the 20. The alienation clause found in most security
premises instruments states that the full amount will
a. for the purposes of making unannounced be immediately due and payable if the
“spot” checks. a. borrower is late with three monthly
b. in case of an emergency. payments.
c. when the tenant is away for an extended b. property is sold to a new owner.
time. c. hazard insurance policy is allowed to
d. all of the above lapse.
d. homeowner borrows more money on the
17. An assessment is a special type of appraisal property.
used for
a. property tax purposes. 21. A seller has $5,000 closing costs, a $93,000
b. income tax returns. loan balance, and pays 7% commission on a
c. estate tax returns. $125,000 sale. What are his net proceeds
d. divorce settlements. from the sale?
a. $81,490
18. A tenant is delinquent on his lease pay- b. $43,510
ments. The owner can c. $23,250
a. have his bill collector evict the tenant d. $18,250
from the premises.
b. turn off the electricity and water. 22. A broker may execute a contract on behalf
c. personally evict the tenant after giving 24- of his principal when he or she is a(n)
hour constructive notice. a. special agent.
d. bring court action. b. trustee.
c. attorney-at-law.
19. Which of the following is not associated d. attorney-in-fact.
with a mortgage/note?
a. a defeasible fee/indefeasible fee 23. Even though the broker hires a salesperson
b. an alienation/acceleration clause as an independent contractor, the broker is
c. a hypothecation/APR still responsible for
d. a pledge of property/evidence of debt a. payment of licensing and professional
fees.
b. providing a desk and telephone for the
salesperson.
c. the legal and ethical behavior of the
salesperson.
d. seeing that the salesperson attends office
meetings and training seminars.
161
24. While the doctrine of caveat emptor still 27. Chris Salvano is the broker hired to sell Erin
exists in most states, many are requiring that Miller’s house. Chris shows the house to the
the seller make written disclosure of latent Martins, who want to make an offer on it. At
defects within a property and to disclose this point, what duty does Chris legally owe
known problems. The best assurance for the to the Martins?
agent to avoid charges of misrepresentation a. confidentiality and fairness
about the property is to recommend b. fairness and honesty
a. an engineer’s report issued by a relative of c. exclusivity
the seller. d. those of a fiduciary
b. a property inspection by a qualified home
inspector. 28. Within the agency agreement is a statement
c. a walk-through by another agent. that binds the buyer to paying the broker’s
d. an inspection by the buyer. fee if, within a stated number of days, the
buyer purchases a property that was shown
25. When describing the particulars about a to the buyer during the agency period. This
property, the agent does not disclose that a clause is the called the
capital improvement project has been a. limited coverage clause.
approved that will result in a special assess- b. broker protection clause.
ment to the owner in the near future. The c. buyer liability clause.
broker has d. automatic extension clause.
a. acted in accordance with the duties of a
fiduciary. 29. In a real estate transaction, a broker does
b. refrained from disclosing anything which not affirmatively represent either the buyer
would weaken the principal’s bargaining or the seller as agent. He is acting as
position. a. a transaction broker.
c. committed a fraud. b. an undisclosed dual agent.
d. prevented future legal problems for the c. a non-representing dual agent.
seller client. d. an illegal real estate licensee.
26. The task of the appraiser is to 30. A life estate

a. establish market price. a. is a type of leasehold estate.
b. guess at the final contract price. b. is limited in duration to lifetime of its
c. estimate market value. owner.
d. evaluate the property for tax purposes. c. cannot pass to future owners.
d. is an estate in land.
162
31. Tenancy by the entirety differs from other b. Yes, this is an example of steering.
forms of co-ownership in that c. No, even though the buyer never stated it,
a. neither owner can force a sale. you felt he would be more comfortable in
b. each owner is free to devise his or her a Chinese community.
share to chosen heirs. d. Yes, this is an example of blockbusting.
c. shares may be acquired at different times.
d. the property must be a principal 36. The duties of the property manager include
residence. all of the following EXCEPT
a. maintaining the property while preserv-
32. To determine an encroachment, the pur- ing finances.
chaser should obtain b. marketing for a constant tenant base.
a. a title search. c. seeking interested buyers.
b. title insurance. d. preparing budgets.
c. a survey.
d. a current opinion from an attorney. 37. A lender has agreed to provide a loan on the
following terms: 90% LTV for the first
33. The seller of a house built before 1978 is $50,000 of appraised value; 95% LTV of the
required by law to furnish the buyer with a second $50,000 of appraised value and 97%
a. good-faith estimate of settlement costs. of the remaining amount. If the property
b. lead-paint information booklet. appraised for $140,000, how much will the
c. reduction certificate. lender’s loan be?
d. proof of flood insurance. a. $131,600
b. $131,300
34. A corporation holds title in the name of its c. $134,400
a. charter. d. $130,000
b. board of directors.
c. shareholders. 38. If a person dies leaving no will and no natu-
d. creditors. ral heirs, his or her property passes to
a. local charities.
35. As the buyer’s agent, your client is a person b. the state.
from China, who is moving to the United c. the Internal Revenue Service.
States to run a Chinese import business. You d. the Department of Housing and Urban
only show them properties where it is obvi- Development.
ous that the majority of residents are of Chi-
nese ancestry. Have you violated any Fair
Housing Laws?
a. No, as the buyer’s agent you’re responsible
to see that the buyer will be happy where
they buy.
163
39. Sue Addison owns an apartment building 42. Jerry Wright, the owner of a commercial
that was constructed in 1965. According to building, estimates the depreciation of the
federal law, which of the following must be physical plant at $15,000, the furniture and
attached to the leases Sue prepares for fixtures at $8,000, and the machinery at
prospective tenants? $7,500. If he is in the 40% bracket, his tax
a. a report of the building’s radon level savings would be
b. a lead-based paint disclosure statement a. $12,200.
c. an illustration of the building’s location b. $30,500.
relative to electromagnetic fields (EMFs) c. $18,300.
d. any known instances of groundwater con- d. $1,220.
tamination in the building’s water supply
43. A residential property was built 75 years
40. A property is sold for $75,600 in cash. If ago. Two of the five bedrooms have no clos-
transfer taxes are $.55 per $300 of value, ets, the basement floor is unpaved, and the
how much transfer tax is due? original slate roof needs repairs. To the
a. $138.60 appraiser, the most important consideration
b. $1,384.20 is
c. $1,525.00 a. the sale price of a nearby similar property.
d. $152.50 b. how much it would cost to finish the
basement floor.
41. If the buyer’s agent splits his commission c. how the bedrooms could be reconfigured
50/50 with his broker, and the seller’s agent to provide some storage.
receives 60% of his broker’s 50% share, how d. the life expectancy of the roof.
much does the buyer’s broker receive if the
listing broker’s fee is 6% of the $125,000 44. Which of the following statements is true of
sales price of the house? a tenancy in common?
a. $3,450 a. When one of the tenants dies, his interest
b. $3,750 is spread among the survivors.
c. $1,875 b. Unless another form of ownership is
d. $7,500 described in the deed, co-owners who are
not spouses of each other are presumed to
be tenants in common.
c. Sale of one of the interests will end the
tenancy in common.
d. Destruction of the property terminates
the co-ownership.
164
45. Which of the following instruments would 50. Gratuities for referring prospects to a broker
contain the loan amount, interest rate, term are legal if paid to a
of the loan, and monthly payments? a. salesperson affiliated with another firm.
a. note b. relative of the buyer.
b. mortgage c. licensed broker.
c. deed d. federal employee.
d. lease
51. Which of the following is not a participant
46. A tax bill computed by a cost-per-front foot in the secondary mortgage market?
is a a. Fannie Mae
a. personal property tax. b. RESPA
b. special assessment. c. Ginnie Mae
c. license. d. FHLMC
d. use permit.
52. Significant provisions of the Real Estate Set-
47. Using real property as collateral to secure a tlement Procedures Act include all of the
loan while retaining the property is called following EXCEPT
a. mortgage. a. the lender’s estimate of settlement costs.
b. encumbrance. b. a uniform settlement statement.
c. hypothecation. c. a settlement location.
d. promissory intent. d. the disclosure of controlled business.
48. Dave Gates, a widower, died without leaving 53. Express covenants that protect the grantee
a will or other instruction. His surviving are found in a
children received ownership of his real a. quitclaim deed.
estate holdings by b. bargain and sale deed.
a. adverse possession. c. sheriff ’s deed.
b. eminent domain. d. general warranty deed.
c. escheat.
d. law of intestate succession.
49. In the event of default and foreclosure,

which clause would require the lender to
look only to the property for satisfaction of
the debt?
a. defeasance clause
b. exculpatory clause
c. cognivit clause
d. subordination clause
165
54. An elderly property owner dies testate. In 58. Property managers often make management
the will, care of the family pet is assured by decisions about tenant selection and bud-
conveying ownership in the property to a gets for their clients. In these relationships,
grandson who may occupy and enjoy the the property manager is acting as a(n)
property so long as the pet lives. Upon the a. special agent.
death of the pet, ownership passes to a des- b. power of attorney.
ignated charity. Which of the following is c. independent contractor.
true in this situation? d. general agent.
a. The charity acquired legal title on the eld-
erly property owner’s death. 59. A house was purchased 5 years ago for
b. The son may replace the pet with another $90,000. The area has generally appreciated
of the same breed. at an annual rate of 2%. How much should
c. The estate is one of a life tenancy pur the house sell for now?
autre vie. a. $81,000
d. The son has a fee interest. b. $99,000
c. $95,000
55. What is the indicated value of a home if the d. $100,000
others in the neighborhood sold recently for
between $160,000 and $167,000, and the 60. The Sherman Anti-Trust Act prohibits real
subject house has a pool (valued at $8,000 estate brokers from
by the appraiser) that the others do not a. selling each other’s listings.
have? b. agreeing to set standard commission rates.
a. $168,000 c. advertising the amount of down payment
b. $175,000 needed on a property.
c. between $168,000 and $175,000 d. discriminating on the basis of race or
d. between $160,000 and $175,000 religion.
56. A representative with full authority to bind 61. A type of lease that is common in retail
the principal to all agreements is properties requires the tenant to pay a por-
a. a general agent. tion of gross sales to the landlord. This is
b. a literary agent. commonly referred to as a
c. a special agent. a. net lease.
d. an accidental agent. b. sales lease.
c. percentage lease.
57. A cap rate is used in what type of appraisal? d. gross lease.
a. reproduction
b. income approach
c. tax assessment
d. competitive market analysis
166
62. Which of the following listings is risky and 66. An abstract of title contains
open to fraudulent dealings? a. the summary of a title search.
a. an open listing b. an attorney’s opinion of title.
b. an exclusive right to sell c. a registrar’s certificate of title.
c. an exclusive agency d. a quiet title lawsuit.
d. a net listing
67. Which of the following is NOT necessary in
63. In which appraisal approach is it necessary order for a property to have value?
for the appraiser to estimate the value of the a. The property has a useful purpose.
land separately? b. Somebody wants to own the property.
a. sales comparison approach c. The property is unique.
b. cost depreciation approach d. The owner of the property is unknown.
c. income capitalization approach
d. gross income multiplier 68. An acre contains approximately
a. 5,270 square yards.
64. Mortgage insurance protects the b. 40,000 square feet.
a. borrower’s family by paying off the loan c. one-quarter square mile.
in case of death. d. 43,560 square feet.
b. lending institution against loss if the loan
goes into default. 69. When offering property for cooperation
c. borrower in case of job loss or accident. through the Multiple Listing Service, the
d. veteran by allowing no-down-payment listing broker is assuring all of the following
mortgage loans. EXCEPT that
a. cooperating brokers will be compensated
65. An appraiser is appraising a house that had upon completion of the sale.
an estimated economic life of 15 years when b. the information in the data base is
the property was purchased 10 years ago. If deemed to be accurate.
the appraiser currently estimates that the c. the seller has the authority to sell.
house is 13 depreciated, what is the remain- d. any offer will be accepted as written.
ing economic life?
a. 5 years 70. If a lender agrees to make a loan based on
b. 10 years an 80% LTV, what is the amount of a loan
c. 15 years for a property appraised for $135,000 and a
d. none of the above sale price of $137,800?
a. $110,240
b. $105,920
c. $108,000
d. $112,000
167
71. The buyer has been held to be in default on 74. A property sold for $57,300 and is subject to
a contract of sale. If buyer and seller had not revenue stamp fees of .50 for each $500 (or
agreed on liquidated damage, the seller portion thereof) of the sales price. What is
could do which of the following? the cost of the stamps?
a. Obtain a court order preventing the buyer a. $571.50
from purchasing another property. b. $57.50
b. Sue the buyer for compensatory damages. c. $95.50
c. Have the buyer incarcerated. d. $955.00
d. Require the buyer to find a substitute
purchaser. 75. The investor criterion for a home mortgage
is an uninsured loan-to-value ratio of 90%
72. The house being appraised has no fireplace, of the appraisal. The sales agreement and
but it does have a garage, and the appraiser appraisal is in the amount of $180,000. Fol-
estimates that a fireplace contributes $3,000 lowing underwriting guidelines, the buyer
to the value of a home in that neighbor- qualifies for a loan of $145,000. How much
hood. A nearby house that recently sold for of the purchase will be financed by this
$198,000 is similar except that it has a fire- investor?
place but no garage. The appraiser estimates a. $180,000
that a garage contributes $12,000 to value. b. $145,000
The adjusted sale price of the subject house c. $108,750
is d. $135,000
a. $213,000.
b. $183,000. 76. A valid deed must contain
c. $207,000. a. a survey of the property.
d. $189,000. b. a legal description.
c. a title report.
73. Ownership of a property by only one person d. the signature of the grantee.
is known as
a. entirety. 77. Adjacent properties are combined into one
b. remainder interest. large tract in order to enhance the utiliza-
c. reversionary interest. tion and the value of the larger tract. The
d. severalty. term used to describe this is
a. severalty.
b. appurtenance.
c. assemblage.
d. plottage.
168
78. The broker’s responsibility at the closing 80. House A sold for $132,000. It had three bed-
is to rooms, two bathrooms, and a two-car
a. interpret the terms and conditions con- garage. In the same neighborhood one
tained in the loan documents. month later, house B sold for $140,000.
b. explain the clauses found in the deed. It had a three-car garage, but was otherwise
c. review the title report for clouds or other very similar to House A. House C (the sub-
problems. ject property) has a two-car garage. What
d. verify and receive the brokerage fee. would the appraiser adjust for the extra
garage space on house B?
79. A buyer makes an offer to purchase a prop- a. $8,000 addition to the value of House A
erty and specifies that the owner accept or b. $8,000 deduction from the value of
reject the offer within 48 hours. Before hear- House A
ing back from the owner, the buyer locates a c. $8,000 addition to the value of House B
more attractive property and withdraws the d. $8,000 deduction from the value of
offer. Is the buyer legally entitled to with- House B
draw the offer?
a. Yes; either party may withdraw an offer or 81. The Housing and Community Development
counteroffer at any time prior to its Act of 1974 prohibits discrimination based
acceptance. on
b. No; the offer is binding until the 48-hour a. race.
time period expires. b. gender.
c. Yes; an offer with a condition to respond c. familiar status.
in 48 hours is not valid. d. handicap.
d. No; the owner must be allowed an oppor-
tunity to respond to the offer. 82. The IRS requires that an independent con-
tractor be
a. paid on the basis of successful transac-
tions rather than hours worked.
b. covered by unemployment insurance.
c. strictly regulated in the matter of atten-
dance at sales meetings.
d. allowed at least two weeks of paid vaca-
tion annually.
169
83. After the sale of the collateral property, it is 87. Which is NOT an example of a buyer’s debit
determined that the net proceeds did not on a closing statement?
clear the debt. In this situation, the borrower a. a loan origination fee
is likely to receive a b. a credit report
a. notice of a deficiency judgment. c. the tenants’ security deposit
b. letter of defeasance. d. an appraisal fee
c. certificate of liability.
d. notice of foreclosure. 88. All of the following are physical characteris-
tics of real estate EXCEPT
84. Which statement is true with respect to the a. immobility.
assignment of a lease? b. scarcity.
a. The original lessee is not responsible for c. indestructibility.
the payment of the rent. d. non-homogeneity.
b. It is the same as a sublease.
c. The original lessee would still retain a 89. Which of the following would not be per-
right to use the property for a limited mitted under the Federal Fair Housing Act?
time. a. The USO in Chicago renting rooms only
d. The entire leasehold is transferred. to service personnel.
b. An Arabian owner refusing to rent his
85. All of the following are elements affecting home to a Jewish man.
the value of real estate EXCEPT c. The owner of a 20-unit residential apart-
a. scarcity. ment building renting only to black men.
b. demand. d. An owner who lives on one side of a
c. comparability. duplex refusing to rent to a family with
d. utility. children on the other side of the duplex.
86. The Fair Housing Act of 1988, which 90. The words of conveyance in a deed appear
addresses accessibility in new multi-family in the
buildings for people with physical disabili- a. heading.
ties, mandates all of the following EXCEPT b. granting clause.
a. elevators or power lifts. c. alienation clause.
b. doors, kitchens, and bathrooms that are d. purchase clause.
wheelchair friendly.
c. thermostats and lighting switches within
easy reach.
d. bathroom walls strong enough to support
grab bars.
170
91. A purchaser contracts for a new home for 94. Which is not an exemption to the Federal
$250,000 and, after making a 20% down Housing Act?
payment, applies for a 30-year fixed-rate a. An owner who occupies a one- to four-
loan at the rate of 7.5%. At the settlement family dwelling may limit the rental of
on April 10, the lender collects interest up to rooms or units.
May 1. What is the interest charge to the b. Housing may be limited for use by senior
buyer shown on the settlement statement? citizens if occupied by one person at least
a. $1,250 55 years of age or older.
b. $416.60 c. a woman with three children
c. $833.33 d. Religious organizations may limit the
d. $875 occupancy of real estate that it owns to its
own members if the units are not owned
92. Which of the following properties would for business purposes.
likely merit the highest capitalization rate?
a. a single-family residence 95. A broker has a principal that he turns over
b. a convenience store in an urban to a salesperson. Which of the following
neighborhood statements is/are true regarding the fiduci-
c. a modern firehouse ary relationship?
d. a strip mall with limited access to traffic a. The broker still has full fiduciary respon-
sibility to the principal.
93. A tenant applicant confined to a wheelchair b. The salesperson has a fiduciary relation-
is interested in renting a townhome. A ship to the principal because the broker
request is made to the landlord to allow the relinquished the fiduciary responsibilities
tenant to have an access ramp constructed. when he turned the principal over to the
Which of the following is true in this salesperson.
situation? c. The salesperson has the same fiduciary
a. The tenant application must be rejected. duties to the principal as the broker.
b. The landlord must allow the tenant to d. Both a and c.
make the modification at the tenant’s
expense. 96. What is the difference between MIP and
c. The landlord is required to fund modifi- PMI?
cations to the property to accommodate a. PMI insures conventional mortgages, and
the access problem. MIP insures FHA loans.
d. The landlord may collect an additional b. PMI is the older form of mortgage
deposit to assure compliance. insurance.
c. MIP is required only on VA mortgages.
d. There is no difference; the two terms
mean the same thing.
171
97. The term “walk-through” refers to 99. An apartment has total operating expenses
a. an appraiser’s inspection of the interior of of $75,000 a year and income of $750 a
the subject property. month for each of its 15 units. If an investor
b. empty office buildings where the vacancy wants a 12% return on his money, what is
rate in the community is high. the value of this property to him?
c. a seller’s check of the premises before an a. $500,000
open house is held. b. $550,000
d. the buyer’s final inspection of the prop- c. $750,000
erty to check its condition. d. $135,000
98. An article of personal property that is per- 100. Which of the following changes in zoning
manently attached and becomes part of the should result in compensation to the owner?
real estate is known as a. spot zoning
a. an emblement. b. down-zoning
b. an accretion. c. buffer zoning
c. a chattel. d. “taking”
d. a fixture.
172
Answers 12. a. Until it is accepted by a seller, the docu-

ment remains simply a purchase offer.
1. c. The Fair Housing Law does not require a 13. b. A lease that is not for more than one year
lender to make a loan to an individual does not come under the Statute of
who does not meet credit standards. Frauds.
2. d. The process of transfer of title and settle- 14. a. Salespersons may only receive compensa-
ment of accounts takes place at the tion from their principal broker. Gifts of
closing. merchandise, use of luxury cars, trips, and
3. a. In the cost approach, the property’s outings are also compensation and may
depreciated value is estimated. only be given to a broker who disposes of
4. b. Deed restrictions are private and non- them in accord with the company policy.
governmental, set by previous owners of 15. c. A lease defines the period of time during
the property. They are enforced through which the tenant has the right to occupy
neighbors’ lawsuits, not by local building and enjoy a property. At the end of that
authorities. period, the right reverts to the owner.
5. b. The principal cannot empower the agent 16. b. The tenant has the right of “quiet enjoy-
to do anything the principal cannot do. ment” and the landlord must give proper
There is no guarantee that the principal notice prior to accessing the premises.
has the necessary funds. 17. a. Assessors set the value at which real estate
6. b. With a reverse mortgage, the homeowner will be taxed.
receives a lump sum or monthly checks, 18. d. The Landlord Tenant Act in most states
and no repayment is made until the prop- clearly establishes specific court proce-
erty is sold or the owner dies. dures with strict time lines.
7. d. FHA insures loans but does not make the 19. a. A defeasible/indefeasible fee is associated
loans. with a deed.
8. b. The right to exclude is one of the rights 20. b. The term “alienation” means transfer of
contained in the bundle of legal rights of title. The lender reserves the right to call
ownership. in the loan if the property is sold.
9. c. An oral lease for one year or less is 21. d. $5,000 + $93,000 = $98,000 total dollar
enforceable and creates a tenancy at will. expenses of closing. Convert 7% to a deci-
10. a. Seller financing is often referred to as a mal and multiply. $125,000 × .07 = $8,750
purchase money mortgage. commission; $125,000 – $98,000 – $8,750
11. b. The government issues flood hazard = $18,250 net proceeds to seller.
maps, and for mortgage loans within 22. d. The power of attorney authorizes the
those areas, borrowers must carry flood agent to perform certain acts in place of
insurance, which is available from the fed- the principal.
eral government.
173
23. c. The broker is responsible under the law 34. a. A corporation is an artificial person and
and licensing regulations for the activities holds title in the name of its charter.
of any licensees affiliated with that firm. 35. b. The agent’s job is to show his client homes
24. b. A home inspection by a certified inspec- within their housing needs and ability to
tor, supported by a home warranty, is the pay. Unless the client asks for a specific
best assurance that the agent will not be area, the agent should show representative
accused of concealing mechanical or homes in all areas that meets the client’s
physical problems in the property. needs and price range. The client should
25. c. Regardless of an agency relationship, the then decide on the area they want to live,
agent must disclose all pertinent facts not the agent.
about a property or be charged with com- 36. c. The property manager typically is not
mitting a fraud. The seller has the same involved in selling the property.
obligation. 37. b. To determine the amount of the loan,
26. c. An appraisal is an estimate of market multiply the level amount times its per-
value through an analysis of data. cent. Get the loan amount for that level
27. b. As customers, the Martins are entitled and then add the level loan amounts
merely to fair and honest treatment. Chris together to get the total loan amount.
is not acting in a fiduciary capacity. $50,000 × .90 = $45,000
28. b. Unless the buyer subsequently hires $50,000 × .95 = $47,500
another buyer agent and purchases this $40,000 × .97 = $38,800
property, the broker protection clause Total: $131,300
obligates the buyer to pay the broker’s fee. 38. b. The state becomes owner of a deceased
29. a. If a broker is handling both sides of a person’s property in the absence of a will
transaction, he may do so only as a trans- or natural heirs, through the power of
action broker or by disclosing a “No Bro- escheat.
kerage” relationship. 39. b. Federal law requires that a lead-paint dis-
30. b. A life estate is an interest in real or per- closure form be given to all tenants and
sonal property that is limited in duration buyers if the building was constructed
to the lifetime of its owner or some other before 1978.
designated person or persons. 40. a. $75,600 ÷ $300 = $252; $252 × $.55 =
31. a. When a married couple buys any real $138.60.
estate as tenants by the entirety, neither 41. b. Convert 6% to a decimal and multiply;
can obtain a court order for partition. $125,000 × .06 = $7,500 total commission
32. c. Only a survey will show an encroachment. on sales price. Convert 50% to a decimal
33. b. Tenants must receive lead-paint informa- and multiply; $7,500 × .50 = $3,750 total
tion before a lease is signed if the house buyer’s broker share.
was built before 1978.
174
42. a. The owner would save 40% of the total 52. c. The Real Estate Settlement Procedures Act
depreciation. ($15,000 + $8,000 + $7,500) does not require a specific settlement
× 0.40 = $12,200. location.
43. a. In appraising residential real estate, the 53. d. A general warranty deed contains
subject property is compared with similar covenants that warrant the new owner’s
properties that have sold recently. undisturbed and clear title.
44. b. There is a presumption that co-owners 54. d. An interest that exists “so long as” a con-
are tenants in common unless they are dition is met is a fee simple with a special
married to each other, in which case the limitation.
presumption is that the property is held as 55. c. If the value of the pool is $8,000, the
community property. adjustment is a direct addition to the
45. a. The note contains the loan amount, inter- range of the current sales in the neighbor-
est rate, term of the loan, and monthly hood which did not have pools.
payments. 56. a. A general agent has the power to act for
46. b. Special assessments are generally for most purposes on behalf of the principal.
repayment to the government for the cost 57. b. The capitalization rate is an analysis of
of installing utilities, or curbs and gutters. how much investors are willing to spend
Each owner is billed for their share of the in a certain neighborhood in return for a
expense calculated by their proportion of certain amount of income.
the benefit to their property. 58. d. The general agent is empowered to make
47. c. When a borrower uses property to secure binding decisions on behalf of the princi-
a loan while retaining the property’s use pal. Approving leases and property expen-
and benefit, it is known as hypothecation. ditures are among those activities.
48. d. Each state has a set of laws that define the 59. b. 5 years × 2% per year = 10% appreciation
distribution of real estate owned by some- (straight line); 100% + 10% = 110%
one who dies without leaving written property is now worth relative to original
instruction. If no heirs are located, the purchase price; $90,000 × 110% = $99,000
property reverts to the state. current value.
49. b. An exculpatory clause acts as a non- 60. b. In the past, brokers have suffered large
recourse loan. The buyer is not personally fines for conspiring to set commission
responsible for the note. rates beyond their own offices.
50. c. Referral fees may only be paid to licensed 61. c. A percentage lease has a base rent plus a
brokers. percentage (overage) of the gross sales
51. b. RESPA, the Real Estate Settlement Proce- after the retailer goes over a predeter-
dures Act, requires certain information be mined threshold in sales.
disclosed and documented for residential
loans.
175
62. d. Net listings, in which the agent keeps any 73. d. The word severalty comes from sever, and
part of the sale price above a given implies that all other persons are severed,
amount may subject a broker or associate or cut off, from any share of ownership.
licensee to license revocation or 74. b. $57,300 ÷ $500 = $114.60 so use $115
suspension. (because the problem states “any portion
63. b. The cost approach requires the building thereof ”); $115 × .50 = $57.50.
and land to be valued separately. 75. b. $180,000 × 0.9 = $162,000 maximum
64. b. Mortgage insurance, which protects the uninsured loan, so the buyer’s entire loan
lender from loss, should not be confused of $145,000 can be figured by the
with mortgage life insurance, which pays described investor.
off the loan in case of the borrower’s 76. b. Conveyance, description, appurtenances,
death. premises, and habendum clauses are
65. b. 13 of 15 is 5 years depreciation, leaving 10 required in deed along with the execution
years remaining life; 23 × 15 = 10. and acknowledgement of the grantor.
66. a. An abstract reports the results of a title 77. c. Assemblage is bringing together two or
search of the public records. more properties to form an aggregate
67. d. Property has value only if title can be whole.
passed. 78. d. The settlement officer is responsible for
68. d. Students should memorize the size of an all of the details of the closing. The broker
acre, which some estimate at “somewhat is merely a witness and provides moral
more than 200 feet by 200 feet.” support.
69. d. Until the seller approves an offer, it is 79. a. The general rule is that any offer or coun-
open for consideration. teroffer may be withdrawn at any time
70. c. 80% LTV is based on the lesser of the before notice of its acceptance has been
appraised value or the sale price; $135,000 communicated to the other party.
× .80 = $108,000. 80. d. With the information given, a garage is
71. b. After disposing of the property, the seller valued at $8,000. The subject property is
may calculate losses and seek to recover never adjusted. House B would receive the
compensatory damages from the default- deduction from value in order to make it
ing buyer. as much like the subject property as
72. c. The appraiser subtracts the value of the possible.
fireplace from the sales price of the com- 81. b. Civil Rights Act of 1866 prohibits dis-
parable house and adds the value of the crimination based on race, handicap, and
garage that is found in the subject prop- familiar status. The Housing and Com-
erty. $198,000 – $3,000 + $12,000 = munity Development Act of 1974 pro-
$207,000. hibits discrimination based on gender.
176
82. b. The IRS’s safe harbor guidelines for inde- 93. b. So long as the tenant pays, there is no vio-
pendent contractor status also require lation of building codes, and the tenant
that the associate hold a real estate license agrees to restore the property to its origi-
and that a written contract exist. nal condition, the landlord must approve
83. a. If the foreclosure sale does not clear the the ramp.
debt, the borrower remains responsible 94. c. The Fair Housing Amendments Act of
for any monies due, including costs and 1988 prohibits discrimination based on
interest. familial status.
84. d. An assignment is the transfer of the entire 95. d. All salespersons have the same relation-
term of the lease. A sublet is the creation ship with the principal as the broker has.
of a new lease. 96. a. MIP (mortgage insurance premium) is
85. c. Value is determined by demand, utility, charged on FHA loans; PMI (private
scarcity, and transferability (DUST). mortgage insurance) applies to some con-
86. a. The law does not require elevators or ventional mortgages.
power lifts in residential real estate. 97. d. The sales contract should contain a provi-
87. c. Security deposits are an example of the sion allowing the buyer a walk-through
seller’s debit. within 24 hours before closing.
88. b. Scarcity is an economic characteristic of 98. d. Emblements are annual crops, accretion
real estate. refers to land built up by soil deposits, and
89. c. The owner of more than four units can- chattel is another word for personal
not deny access to any member of a pro- property.
tected class as defined in the federal Fair 99. a. $750 × 15 = $11,250 income per month;
Housing Laws. $11,250 × 12 = $135,000 income per year;
90. b. The granting clause of a deed contains the $135,000 income – $75,000 expenses =
words of conveyance, such as “[grantor] $60,000 annual net operating income.
hereby grants . . . ” Convert 12% to a decimal and divide;
91. d. At closing, interest on new loans is col- $60,000 ÷ .12 = $500,000 value to
lected in advance from the day of closing investor.
until the first of the next month. No pay- 100. d. When property is rezoned so that it
ment is due until the month following severely limits land use, it may be consid-
and that payment includes the 30 days ered the same as being condemned or
just earned; (($250,000 × 0.8 × 0.075) ÷ “taken.” This is a legal issue.
360) × 21 days = $875.00.
92. d. The strip mall would have the highest risk
and thus bear the highest capitalization
rate. The single-family residence could be
appraised using the sales comparison
approach.
177
Scoring important than your overall score. Use the table

below to see where your strengths and weaknesses
Remember that this practice exam is not correlated lie so that you can concentrate your efforts as you
exactly to your state’s real estate sales exam. In gen- continue to prepare.
eral, to evaluate how you did on this second prac- After working more on your problem areas,
tice exam, find the number of questions you got take the third practice exam in Chapter 8 to see how
right, and divide by 100 (the number of questions much you’ve improved. This will help you revise
on this exam). This will give you your score as a per- your study plan if need be. After your study plan is
centage. Try to aim for a 70% on this practice exam, revised, turn again to the Real Estate Refresher
or at least a higher score than you got on the previ- Course and the Real Estate Math Review in Chap-
ous practice exam. ters 4 and 5, and to the Real Estate Glossary in
Keep in mind that at this point, how you did Chapter 6 to target areas that still need work.
on each of the basic areas tested by the exam is more
EXAM 2 FOR REVIEW

Financing 6, 7, 10, 19, 20, 37, 45, 47, 49, 51, 64, 83, 96
Business Practices 1, 14, 23, 24, 25, 35, 50, 69, 81, 82, 89, 94,
Mathematics 21, 40, 41, 55, 59, 70, 74, 75, 80, 99
178
C H A P T E R
8 Real Estate Sales

Exam 3
CHAPTER SUMMARY
This is the third of four practice exams in this book. Use this exam to
identify which types of questions are still giving you problems.
Y O U A R E N OW more familiar with these practice exams and most likely you feel more confi-
dent than you did at first. However, your practice test-taking experience will help you most
if you have created a situation as close as possible to the real one.
For this exam, try to simulate real testing conditions. Find a quiet place where you will not be disturbed.
Make sure you have two sharpened pencils and a good eraser. Be sure to leave enough time to complete the
exam in one sitting. You should have plenty of time to answer all of the questions when you take the real
exam, but you’ll want to practice working quickly without rushing. Use a timer or a stopwatch and see if
you can work through all the exam questions within two hours.
As before, the answer sheet you should use is on the next page. After the exam is an answer key and
explanations. These explanations, along with the table at the end of this chapter, will help you see where
you need further study.
179
1. a b c d 35. a b c d 69. a b c d
2. a b c d 36. a b c d 70. a b c d
3. a b c d 37. a b c d 71. a b c d
4. a b c d 38. a b c d 72. a b c d
5. a b c d 39. a b c d 73. a b c d
6. a b c d 40. a b c d 74. a b c d
7. a b c d 41. a b c d 75. a b c d
8. a b c d 42. a b c d 76. a b c d
9. a b c d 43. a b c d 77. a b c d
10. a b c d 44. a b c d 78. a b c d
11. a b c d 45. a b c d 79. a b c d
12. a b c d 46. a b c d 80. a b c d
13. a b c d 47. a b c d 81. a b c d
14. a b c d 48. a b c d 82. a b c d
15. a b c d 49. a b c d 83. a b c d
16. a b c d 50. a b c d 84. a b c d
17. a b c d 51. a b c d 85. a b c d
18. a b c d 52. a b c d 86. a b c d
19. a b c d 53. a b c d 87. a b c d
20. a b c d 54. a b c d 88. a b c d
21. a b c d 55. a b c d 89. a b c d
22. a b c d 56. a b c d 90. a b c d
23. a b c d 57. a b c d 91. a b c d
24. a b c d 58. a b c d 92. a b c d
25. a b c d 59. a b c d 93. a b c d
26. a b c d 60. a b c d 94. a b c d
27. a b c d 61. a b c d 95. a b c d
28. a b c d 62. a b c d 96. a b c d
29. a b c d 63. a b c d 97. a b c d
30. a b c d 64. a b c d 98. a b c d
31. a b c d 65. a b c d 99. a b c d
32. a b c d 66. a b c d 100. a b c d
33. a b c d 67. a b c d
34. a b c d 68. a b c d
180
1. Jeff and Alexandra Clancey have paid a total of 5. For appraising a 20-year-old single-family resi-
$10,500 in mortgage interest and $1,500 in dence, the best data is the
property taxes in this tax year. If they are in the a. probable rental figure.
28% tax bracket, their tax savings is b. recent sale prices of nearby houses.
a. $12,000. c. replacement cost.
b. $1,000. d. owner’s original cost plus money spent on
c. $294. improvements.
d. $3,360.
6. The provisions of the Real Estate Settlement
2. An example of a seller’s credit on a closing Procedures Act (RESPA) apply to
statement is a. one- to four-family residential mortgage
a. a broker’s commission. loans.
b. the contract sales price. b. all residential mortgage loans.
c. the pay-off of a first mortgage. c. all mortgages except home equity loans.
d. a transfer tax. d. installment contracts.
3. All the salespersons in Al’s brokerage firm work 7. The Bakers have a gross income of $60,000.The
as independent contractors. Their office most lender wants them to spend no more than 28%
likely provides them with which of the of their income on their housing expenses. A
following? house they can buy for $240,000 has $2,400 in
a. access to the MLS annual property taxes. Homeowners insurance
b. health insurance would cost about $400 a year. At today’s inter-
c. income tax withholding est rates, monthly payments would be $6.65
d. paid vacations per $1,000 borrowed on a 30-year mortgage.
What is the smallest amount they can expect to
4. The management agreement does all of the fol- spend for a cash down payment?
lowing EXCEPT a. $10,334
a. identify the parties. b. $48,000
b. authorize the manager to make personal c. $52,000
deals resulting in outside compensation by d. $64,510
suppliers.
c. describe the manager’s responsibilities and
authorities.
d. state the owner’s overall goals for the
property.
181
8. All are true about an appraisal EXCEPT 13. While Dana Nelson spends six months in
a. it is the impartial third party who pre- Europe, she continues to pay rent to her
pares the appraisal. landlord, but actually collects rent from her
b. the appraiser’s service is performed for a friend Tim Baylor, who is living there while
fee. she is gone. The situation is known as
c. the appraiser does not have an agency a. an assignment.
relationship with the party for whom the b. a sublet.
appraisal is performed. c. a lease option.
d. an appraiser determines value. d. a right of reverter.
9. Land consisting of a quarter section is sold 14. If a principal terminates the listing agree-
for $1,850 per acre. The total sale price is ment during the listing period, the broker
a. $296,000. may be able to do any of the following
b. $592,000. EXCEPT
c. $296,000. a. collect a commission for a transaction in
d. $1,850,000. process.
b. recover marketing expenses.
10. The economic characteristics of land are c. encourage termination of any contract in
a. scarcity, fixity, modification, and situs. process.
b. scarcity, non-homogeneity, immobility, d. continue to cooperate with any subse-
and modification. quent listing broker.
c. indestructibility, situs, fixity, and scarcity.
d. situs, fixity, scarcity, and immobility. 15. All the following statements are true
EXCEPT
11. All are examples of involuntary conveyance a. the Veterans Administration has the
of title EXCEPT authority to make direct loans to veterans.
a. adverse possession. b. the government sets the maximum loan
b. condemnation through eminent domain. amount on all VA guaranteed loans.
c. tax sale. c. lenders are usually willing to make a “no
d. dedication. down payment” loan for up to four times
the maximum entitlement of the veteran
12. An option to purchase is applicant.
a. a unilateral contract. d. the veteran has liability for any claims
b. a bilateral contract. paid by the Veterans Administration on a
c. an installment contract. VA loan.
d. enforceable by the optioner.
182
16. The most profitable way in which a particu- 19. No federal fair housing laws are violated if a
lar property can be utilized is known as its landlord refuses to rent to
a. plottage value. a. people with children.
b. highest and best use. b. Vietnamese.
c. increasing return. c. deaf persons.
d. principle of progression. d. students.
17. Which of the following would not be 20. A homeowner has a balance of $149,570.75
allowed under the Federal Fair Housing Act? remaining on the mortgage. The interest
a. The owner of a 10-unit apartment build- rate is 9.5% and the monthly payment is
ing renting to men only. $1,303.55. After the next two payments, the
b. A landlord refuses to rent his double balance will be
home in which he lives to a woman with a. $149,451.30.
three children. b. $148,267.20.
c. An American Legion will rent rooms only c. $149,330.91.
to members who belong to the American d. $149,570.75.
Legion.
d. Housing limited to persons age 62 or 21. Assuming the net operating income remains
older. constant, what will happen to the present
value of the property if the capitalization
18. The buyer gives the seller’s agent a check for rate increases? The present value will
$5,000 to serve as earnest money accompa- a. increase.
nying a purchase offer. He asks that the b. stay the same.
agent not deposit the check for two weeks c. decrease.
and also asks him not to tell the seller about d. increase at first and then decrease.
this. When the agent presents the offer he
should 22. Which of the following would terminate a
a. say nothing to the seller but inform his listing agreement?
supervising broker of the situation. a. the death of the broker
b. say nothing to the buyer but tell the seller b. the retirement of the salesperson
the exact status of the check. c. the receipt of an offer to purchase
c. mention nothing about the check to any- d. the expiration of the salesperson’s license
one and wait to deposit it as requested.
d. explain to the buyer that he has a fiduci-
ary duty to inform the seller about the
check.
183
23. A doctor calls and states he is prequalified to 27. All of the following are examples of a gen-
buy a $300,000 home. He is not familiar eral lien EXCEPT
with your area and asks where he should a. a mortgage lien.
live. You reply, “The Heights Estates, that’s b. federal income tax.
where several professionals like yourself c. state income tax.
live.” This is an example of d. judgment.
a. blockbusting.
b. steering. 28. Paul and John Mitchell are brothers who
c. redlining. own a chain of auto shops. Paul Mitchell is
d. doing your job. also a real estate broker, and he’s been
authorized to find a buyer for their business.
24. A mini-ranch is being established on a Paul has
newly acquired 25-acre parcel of land. The a. an ostensible agency.
new owner plans to enclose the property b. a designated agency.
with a split-rail fence. The rectangular lot c. an agency by ratification.
has 1,000 feet of frontage on the state road. d. an agency coupled with an interest.
How many feet of fencing will be needed?
a. 2,090 feet 29. Depreciation is
b. 4,178 feet I. a loss of value due to any cause.
c. 4,270 feet II. subtracted from the reproduction cost
d. 4,595 feet of the building.
III. not a deduction to land.
25. Property taxes are paid annually in Novem- a. II only
ber for the calendar year. The closing is held b. I and II only
on August 15, and the property taxes of c. II and III only
$3,250 are prorated to date of closing. What d. I, II, and III
entries are made on the settlement
statement? 30. A land contract or installment contract is
a. Charge seller and credit buyer $677.08. best described as
b. Charge buyer and credit seller $1,218.75. a. a contract to mortgage land.
c. Charge seller and credit buyer $2,031.00. b. when the deed to the property is passed
d. Charge buyer and credit seller $677.08. and then the buyer makes regular install-
ment payments.
26. When negative amortization occurs, the c. when the buyer makes regular installment
a. monthly payment increases. payments while the seller retains title.
b. term of the loan increases d. a type of contract to buy land only.
c. loan balance increases.
d. term of the loan decreases.
184
31. Removal of encumbrances in order to pro- 36. When a leased property is sold, the lease
vide free and clear title is the responsibility a. has to be renewed.
of b. is binding on the new owner.
a. the title company. c. creates a tenancy for month to month.
b. the broker. d. is considered void.
c. the seller.
d. the buyer. 37. Transfer of title requires
a. the delivery and presence of grantee.
32. Joanna Bruno bought a house for $120,000, b. the acceptance and presence of grantee.
putting 20% down and borrowing the rest c. the delivery from the grantor.
with a conventional loan. At the end of the d. both delivery and acceptance of the deed.
first year, her principal had been paid down
by $480 and property values in the area had 38. The obligation of protecting any deposits
risen by 6%. Her equity at the end of that entrusted to an agent is an example of the
first year was fiduciary duty of
a. $7,200. a. competence.
b. $24,480. b. disclosure.
c. $31,680. c. accounting.
d. $95,520. d. obedience.
33. A valid lease, in writing and witnessed by 39. Failure to comply with Fair Housing Laws is
two people, is a. a civil violation.
a. a contract. b. a criminal violation.
b. an interest in real property. c. grounds for disciplinary action against the
c. both a and b. licensee.
d. neither a nor b. d. all of the above
34. Soil that builds up gradually along a river 40. A contingency in a purchase contract is
bank is called a. something that must happen before the
a. peat. buyer can be required to complete the
b. avulsion. purchase.
c. alluvion. b. a listing of personal property that is to be
d. sod. left by the seller.
c. a statement making time of the essence in
35. The person who receives real property the performance of the contract.
through a will is known as a d. the seller’s promise to prove clear title to
a. devisee. the buyer’s satisfaction.
b. testator.
c. vendee.
d. legatee.
185
41. A property manager’s compensation may be 45. John offers $100,000 for a home listed at
based on any of the following EXCEPT $120,000. The seller counteroffers at
a. finder’s fees from suppliers of goods and $110,000. At this point
services. a. the original offer can still be valid.
b. a flat fee. b. the owner must take the original offer if
c. a percentage of gross income. he wants to sell.
d. a fee per unit. c. the original offer is void.
d. if the seller now chooses to take John’s
42. Jerry Wright, the owner of a commercial original offer of $110,000, John must go
building, estimates the depreciation of the forward with the purchase.
physical plant at $15,000, the furniture and
fixtures at $8,000, and the machinery at 46. All are protected classes EXCEPT
$7,500. If he is in the 40% bracket, his tax a. 35-year-old men.
savings would be b. national origin.
a. $12,200. c. race.
b. $30,500. d. handicap.
c. $18,300.
d. $1,220. 47. What is the square footage of a room meas-
uring 20 feet by 40 feet?
43. When an appraiser deducts depreciation a. 400 sq. ft.
using the reproduction cost of a building, b. 800 sq. ft.
the depreciation represents c. 200 sq. ft.
a. costs to modernize property. d. 840 sq. ft.
b. loss of value due to any cause.
c. lack of site improvements. 48. Michael Brown refuses to sell his farm to the
d. amount of accrued depreciation. state, which needs it to complete the route
for a new highway. The state may go to court
44. The Millers put their house on the market, and ask that his farm be condemned, allow-
the Blacks made a written purchase offer, ing the state to purchase the land using its
and the Millers accepted the offer in writing. right of
When is the contract valid? a. laches.
a. immediately b. adverse possession.
b. as soon as the signatures are notarized c. easement by necessity.
c. when the Blacks are notified of the d. eminent domain.
acceptance
d. when it is placed in the public records
186
49. In constructing her financial report, Noel c. The owner of the new building may
Carpenter estimates that her real estate acquire authority to maintain the building
holdings have appreciated by 18% since through their right to an easement by
purchase. If the original value was $585,000, necessity.
what would her balance sheet show now? d. Title may be considered unmarketable
a. $690,300 unless the encroachment is removed or
b. $585,000 otherwise dealt with.
c. $479,700
d. $526,500 53. A salesperson is about to change firms.
Should he contact all of his buyer clients
50. The type of deed that provides the least pro- and advise them that he will still represent
tection is them at his new firm?
a. a special warranty. a. Yes, because a listing is a personal service
b. a quitclaim. agreement and stays with the salesperson.
c. a bargain and sale. b. No, because the listing is with the broker.
d. a deed in trust. c. Yes, because the salesperson is the one the
client looks to for representation.
51. When the Franks bought their first home, d. No, because a listing cannot be termi-
some of their costs included payment of nated by a buyer.
points, establishment of an escrow account,
premium for title insurance, and commis- 54. Lenders across the country are likely to offer
sion to their own buyers’ agent. On that a certain type of mortgage plan after an
year’s income tax return they may deduct announcement that such mortgages with
the certain specifications will be purchased by
a. points. a. the Office of Thrift Supervision.
b. title insurance. b. the Federal Deposit Insurance
c. commission. Corporation.
d. escrowed amount. c. Fannie Mae.
d. HUD.
52. By mistake of the general contractor, a new
building was constructed so that it extends 55. All of the following are true about a settle-
over the property line onto an adjacent lot ment statement EXCEPT
owned by another individual. Which of the a. the statement is to determine the net
following is NOT true in this situation? amount due to the seller.
a. The owner of the new building has cre- b. the statement determines the cash
ated an encroachment. required of the buyer.
b. The adjacent owner may bring legal c. the statement is signed by both parties to
action to require that the new building be evidence approval.
reconstructed to remove the offending d. the statement is signed by the lender only.
portion.
187
56. Which approach to value is best when 60. Which is NOT an example of a buyer’s
appraising a six-unit apartment building? agency agreement?
a. the sales approach to value a. an exclusive buyer agency
b. the replacement cost b. an open buyers’ agency
c. the reproduction cost c. an exclusive-agency buyer agency
d. the income approach to value d. a net buyer agency
57. A buyer contracts for a property and negoti- 61. All of the following are economic principals
ates a purchase price of $250,000. With a that can affect the value of real estate
20% down payment, he has no problem EXCEPT
obtaining a 30-year conventional loan for a. competition.
the balance. At 8%, full amortization b. contribution.
requires for a monthly payment $7.34 per c. change.
thousand. If the lender adds another $250 d. cost.
per month for escrow, what will the buyer
pay each month? 62. Linda has a three-year lease on her apart-
a. $1,835.00 ment. At the end of the three years
b. $1,468.00 a. the landlord must notify her if he wants
c. $2,085.00 her to vacate.
d. $1,718.00 b. she must give the landlord one month’s
notice of termination or departure.
58. The appraised value of a property is c. she may remain because an estate for
$325,000, assessed at 90% of its appraisal. If years automatically renews.
the tax rate is $2.90 per thousand of assess- d. neither party need give the other any
ment, how much are the taxes for the first notice of termination.
half of the year?
a. $471.25 63. One of the newer developments in mortgage
b. $424.13 lending is the use of
c. $942.50 a. computerized loan origination.
d. $848.25 b. adjustable rate mortgages.
c. wraparound mortgages.
59. The best way to define market price is d. regional reserve banks.
a. the actual selling price of a property.
b. the most probable price a property should 64. A subdivider must place in the public
bring in a fair sale. records a map of the property known as a
c. the price represents normal consideration a. plan.
for the property. b. zone.
d. the price is not affected by unusual c. plot.
circumstances. d. plat.
188
65. Mary owned fee simple title to a lot next 68. The broker agrees to accept as her fee any
door to a church. She gave the lot to the monies received above a stipulated amount.
church as a gift. However, she wanted to This is improper because this arrangement
make sure it would always be used for constitutes
church purposes. Her attorney prepared her a. a conflict of interest.
deed to convey ownership of the lot to the b. an option contract.
church “so long as it is used for church pur- c. a risky action for the broker.
poses.” The church owns a d. a net listing.
a. fee simple estate.
b. fee simple determinable. 69. Riparian and littoral rights belong to owners
c. fee simple absolute. of
d. fee simple defeasible. a. a homestead.
b. subsurface minerals.
66. A buyer offers, in writing, to pay $295,000 c. land bordering bodies of water.
for a property. The buyer makes a down d. remainder and reversionary interests.
payment of 30% and finances the balance by
obtaining a 30-year conventional loan. The 70. A buyer obtained a loan of $135,000 with a
factor for the PI payment is $7.34 per thou- 9.25% interest rate for the purchase of a
sand. The lender opens an escrow account home. After paying the first monthly pay-
for payment of the annual property taxes of ment of $1,111.05, the remaining balance
$3,000 and the property insurance premium will be
of $600, collecting 112 of those amounts with a. $134,929.57.
the monthly payment. What is the monthly b. $133,888.95.
PITI payment for this borrower? c. $135,070.43.
a. $1,515.71 d. $135,000.00.
b. $1,815.71
c. $2,798.00 71. A broker takes a sales agreement to his seller
d. $2,498.00 for full price. The seller states he will not
accept this agreement because the buyers are
67. A tenant paid rent of $500 due the first of Puerto Rican. The broker should do which
the month and $500 security deposit. The of the following?
property closes on September 15. How a. abide by the principal’s directions and
much money will the sellers owe the buyer return the offer to the selling broker.
at closing? b. explain to the owner that his refusal to
a. $750 sign because of the buyer’s race violates
b. $500 federal laws.
c. $1,000 c. bring sales agreement to the seller from
d. $1,500 non-Puerto Rican buyers only.
d. have the buyers purchase a different
property.
189
72. James Kingsley has just settled on his new 76. A shoe store in the Town Mall pays a base
home. He obtained a new loan of $151,000 rent each month plus additional rent based
at 8% that requires a monthly payment of on the amount of business it does. It is oper-
$7.34 per thousand. He also has an esti- ating under a
mated annual property tax of $2,900 and an a. ground lease.
insurance premium of $560 per year, which b. percentage lease.
he will pay in monthly deposits into escrow. c. net lease.
What is the monthly payment for James? d. holdover lease.
a. $1,108.34
b. $1,396.67 77. Commercial building site value is com-
c. $1,350.00 monly quoted to a buyer by price per
d. $1,156.00 a. square foot.
b. front foot.
73. Both buyer and seller must consent to the c. acre.
agent’s role in the transaction so that they d. parcel or tract.
know
a. who is responsible for the commission. 78. Prices are likely to rise when there is a
b. whether they need a lawyer. a. buyer’s market.
c. whom to ask about hidden defects. b. seller’s market.
d. whether their disclosures will be held in c. thin market.
confidence. d. broad market.
74. Riparian rights refers to all EXCEPT 79. Regarding real property, which of the fol-
a. rivers. lowing statements is TRUE?
b. streams. a. Emblements are considered as fixtures
c. waterways. since they are attached to the land.
d. oceans. b. Trade fixtures attached to the building are
always the landlord’s property.
75. The Simons have defaulted on their loan c. Air rights can be granted separately by
payments and are behind in paying the rest deed.
of their bills, so their home is being sold in a d. Mineral rights always run with the land.
foreclosure auction. Of the many liens
against it, which will have first claim on the 80. Which of the following statements is TRUE
proceeds of the sale? of a land contract?
a. the first mortgage recorded a. The buyer is given the right to possess.
b. unpaid real estate taxes b. The seller has a lien on the title.
c. mechanics lien c. The buyer has legal title to the property.
d. home equity loan d. The seller cannot provide any of the
financing.
190
81. The Sinclairs needed two different loans to 85. Which clause, if included in a mortgage,
buy their first home. The loan that will have allows a lien recorded subsequent in time to
first claim on the value of the house in case have a superior position to the mortgage
of foreclosure is the one that was first that was recorded prior in time?
a. negotiated. a. a release clause
b. signed. b. a subordination clause
c. recorded. c. a cognovit clause
d. satisfied. d. a superior clause
82. Easements, encroachments, and licenses are 86. Which of the following approaches would
examples of an appraiser most likely use to appraise a
a. water rights. church?
b. types of estates. a. market data approach
c. encumbrances. b. cost approach
d. government powers. c. income approach
d. gross rent multiplier approach
83. When tenant Heather Grayson opened her
ice cream shop in the mall, she installed 87. A seller has $5,000 closing costs, a $93,000
counters and special freezers. When Heather loan balance, and pays 7% commission on a
closes the shop, can she remove them? $125,000 sale. What are his net proceeds
a. It depends on whether her lease specifi- from the sale?
cally states that she can. a. $81,490
b. No, because as a tenant she gives up the b. $43,510
right of possession. c. $23,250
c. Yes, she can if she repairs any damage d. $18,250
caused by their removal.
d. No, because as fixtures they have become 88. Under the Equal Credit Opportunity Act
part of the real estate. (ECOA), a lender does not have to offer a
loan to a
84. Dennis Sorensen is buying land on which he a. recipient of public assistance with poor
plans to build a cabin. He wants 200 feet in credit history.
road frontage and a lot 500 feet deep. If the b. recipient of social security.
asking price is $9,000 an acre for the land, c. recipient of food stamps.
how much will Dennis pay for his lot? d. a 90-year-old man looking for a 30-year
a. $10,000.49 mortgage.
b. $20,661.15
c. $22,956.37
d. $24,104.03
191
89. Taxes on a given property are $3,726.50 per 93. Nell Woodhouse wants to buy a certain
year. Taxes for the first half 2003 have been condo in Florida. In order to pay for the
paid. If the property closes on January 16, unit, the furniture, and all the appliances,
2004, which of the following would be she needs a
reflected on the closing statement? a. package mortgage.
a. Credit buyer $2,041.92, debit seller b. blanket mortgage.
$1,684.50. c. wraparound mortgage.
b. Credit buyer $1,684.50, debit seller d. buydown mortgage.
$1,684.50.
c. Debit buyer $1,684.50, credit seller 94. A property manager may legally attract
$1,684.50. prospective tenants to a building by doing
d. Credit buyer $2,041.92, debit seller all of the following EXCEPT
$2,041.92. a. offering generous concessions.
b. removing troublesome tenants.
90. According to the Federal Fair Housing Laws, c. undertaking an extensive remodeling
all these practices are illegal EXCEPT effort.
a. blockbusting. d. paying referral fees to salespersons.
b. steering.
c. redlining. 95. The lender’s right to call in the loan in case
d. appraising. of default and put the secured property up
for sale is based on the mortgage
91. With an amortized loan, each month document’s
a. the amount of principal and interest in a. alienation clause.
each payment remains the same. b. acceleration clause.
b. the interest and principal payments each c. defeasance clause.
increase. d. equity of redemption.
c. the interest portion decreases and the
principal portion increases. 96. In order to appraise property valued over
d. the interest portion increases and the $1,000,000 in a federally related transaction,
principal portion decreases. the person performing the appraisal would
need to be
92. The purpose of RESPA is to a. state-certified.
a. help a buyer know how much money is b. federally licensed.
required. c. certified by the bank.
b. see that a buyer and seller know all settle- d. approved by the government.
ment costs.
c. see that the borrower only knows his set-
tlement costs.
d. make sure that buyers do not borrow
more than they can afford.
192
97. Nancy Tomsic’s tenants all had several 99. “Drug dealers are choosing your neighbor-
months remaining on their leases when she hood to live.” This statement is a form of
sold her six-unit apartment building to a. blockbusting.
Chuck Dwight. Tenants in this situation b. steering.
typically c. redlining.
a. must renegotiate their leases with the new d. determining neighborhood value.
landlord.
b. can be required to leave with one month’s 100. The statute of frauds requires that
notice. a. real estate brokers answer buyers’ and sell-
c. lose their leases when the new owner takes ers’ questions honestly.
possession. b. the seller of real estate provide a written
d. need do nothing and may remain until disclosure about the condition of the
the end of their leases. property.
c. certain contracts, including those for the
98. Henry Benton hires Brittany Crandall, a sale of real estate, must be in writing to be
property manager, to lease a house that he enforceable.
owns. Henry is Brittany’s d. a mortgage borrower has three days in
a. customer. which to cancel the loan.
b. client.
c. fiduciary.
d. subagent.
193
Answers 8. d. An appraiser does not determine value

but rather provides an estimate of value.
1. d. The taxpayer is permitted to deduct 9. a. A quarter section contains 160 acres. (160
$12,000 from earned income. At the 28% × $1,850 = $296,000).
tax rate, the savings would be $3,360; 10. a. The economic characteristics of land are
($10,500 + $1,500) × 0.28 = $3,360. scarcity, fixity, modification, and situs.
2. b. A credit represents an amount of money 11. d. Dedication is the giving of land to a
that is to be received by a party at municipality for public use.
settlement. 12. a. An option to purchase is enforced by one
3. a. An independent contractor can receive party (unilateral contract)—the optionee,
nothing that resembles an employee the buyer.
benefit. 13. b. With a sublet, Dana remains responsible
4. b. The manager must avoid conflicts of for the rent.
interest by refusing to accept gratuities 14. c. The agent is prohibited from interfering
from suppliers. with any transactions that originated dur-
5. b. How much buyers have paid for similar ing the relationship.
nearby properties is the best guide to 15. b. The government sets the maximum guar-
market value. antee not the loan amount.
6. a. RESPA covers federally related one- to 16. b. Analyzing a parcel’s highest and best use
four-family mortgage loans, including (in terms of money) is a standard part of
equity loans. the appraisal process.
7. d. The Bakers’ monthly gross income is 17. a. The Federal Fair Housing Act prohibits
$5,000 ($60,000 ÷ 12). The lender allows discrimination based on gender.
them a monthly mortgage payment no 18. d. The seller has a right to full information
higher than 28% of $5,000 = $1,400. before making a decision about the offer.
From that $1,400, a month’s property The buyer has a right to honest and
taxes must be subtracted ($2,400 ÷ 12 = straightforward treatment, which includes
$200.00) and a month’s homeowner notice that his instructions will not be
insurance premium ($400 ÷ 12 = $33.33). obeyed.
That leaves $1,167 to pay for the mortgage 19. d. Occupation and source of income are not
itself, principal, and interest. At $6.65 per protected classes under federal laws.
thousand dollars, $1,167 will pay for 20. c. $149,570.75 × 0.095 ÷ 12 = $1,184.10
$175.49, or $175,490 borrowed on a month interest; $1,303.55 – $1,184.10 =
mortgage ($1,167 ÷ $6.65 = $175.49). If $119.45 principal; $149,570.75 – $119.45
they buy for $240,000 and borrow = $149,451.30; $149,451.30 × 0.095 ÷ 12
$175,490, the Bakers will need $64,510 as = $1,183.16 month interest; $1,303.55 –
a cash down payment ($240,000 – $1,183.16 = $120.39 principal;
$175,490). $149,451.30 – $120.39 = $149,330.91.
194
21. c. The greater the cap rate, the lower the debt is $95,520 ($120,000 × 80%, reduced
value. by $480). Thus, her present equity is
22. a. The death of either party will cancel the $31,680 ($127,200 – $95,520).
listing. 33. c. A valid lease is both a contract and an
23. b. Steering is the channeling of home interest in real property.
seekers to or away from particular 34. c. Alluvion (or alluvium) is the soil that is
neighborhoods. deposited by the action of a flowing
24. b. (25 acres × 43,560 square feet per acre) ÷ stream.
1,000 front feet = 1,089 feet deep; (1,000 35. a. The transfer of real property through a
feet × 2 sides) + (1,089 feet × 2 sides) = will is known as a devise.
4,178 feet. 36. b. A lease is valid for the entire term and is
25. c. The seller owes 712 months’ of property binding on future owners.
taxes: $3,250 ÷ 12 = $270.80; $270.80 × 37. d. Ownership is not considered “transferred”
7.5 = $2,031.00. until the deed is actually delivered and
26. c. In a negative amortized loan, the pay- accepted by the grantee.
ments do not cover the principle amount 38. c. The agent must be able to account for and
of the loan, thereby increasing the balance produce anything of value entrusted to
of the loan after each payment. their care. This includes advances of mar-
27. a. A mortgage lien is an example of a spe- keting fees, earnest money deposits, and
cific lien. escrows.
28. d. Paul is not only an agent, but also has an 39. d. If you fail to comply with fair-housing
interest (part ownership) in the property, laws, it is considered both a criminal and
and should disclose this to potential a civil violation and is grounds for disci-
buyers. plinary action against the licensee.
29. d. Depreciation is a loss of value for any rea- 40. a. The most common contingencies are for
son and is applicable only to the the buyer’s securing the necessary financ-
improvements. ing, the sale of the buyer’s present home,
30. c. Under a typical installment contract or and the buyer’s approval of a home
land contract, the seller retains legal title. inspector’s report.
31. c. It is the seller’s responsibility to deliver 41. a. A property manager may not solicit or
title to buyer free and clear of any accept gratuities from suppliers of goods
encumbrances. or services.
32. c. Her equity is the present market value of 42. a. The owner would save 40% of the total
her home, minus the amount of debt depreciation; ($15,000 + $8,000 + $7,500)
remaining on it. Present market value is × 0.40 = $12,200.
$127,200 ($120,000 × 106%). Remaining 43. b. In an appraisal, depreciation is a loss of
value in property due to any cause.
195
44. c. Acceptance of an offer must be communi- 56. d. The income approach to value is used for
cated to the offeror. valuation of income-producing
45. c. Once there is a counteroffer the original properties.
offer is void. 57. d. ($250,000 × 0.8) ÷ 1,000 = $200; multiply
46. a. Protected classes include national origin, by 7.34 to get $1,468. Add $250 escrow to
race, and handicap. get $1,718 monthly payment.
47. b. Length × width totals square footage; (20 58. b. $325,000 × 9% × 0.5 (half-year) = $424.13
× 40 = 800). 59. a. Market price is what a property actually
48. d. The government’s right of eminent sells for—its sales price.
domain is enforced through 60. d. There are three basic types of buyer
condemnation. agency agreements: exclusive buyer
49. a. The property today is valued at 118% of agency, open buyers’ agency, and
purchase price: $585,000 × 1.18 = exclusive-agency buyer agency.
$690,300. 61. d. Competition, contribution, and change
50. b. A quitclaim deed is the weakest type of are all economic principals that affect real
deed for a grantee to receive because no estate.
warranty of good title is given by the 62. d. An estate for years automatically termi-
grantor. nates and requires no notice from either
51. a. Points paid for a purchase money mort- party.
gage on one’s own home are immediately 63. a. The use of CLO, computerized loan origi-
deductible as prepaid interest. nation systems, shortens approval time
52. c. An easement by necessity requires that and is growing in popularity.
crossing adjacent property is the only way 64. d. The subdivision map, which shows lots,
to access another property. blocks, streets, and the like, is known as a
53. b. Listings are with the broker, not the sales- plat. It is filed in a plat book, open to the
person. Unless a contractual agreement public.
exists to the contrary, the salesperson may 65. b. Feasible title with a special limitation is
not interfere with any legal relationship called fee simple determinable.
the broker may have with a client. 66. b. $295,000 × 0.7 = $206,500 loan; 206.5 ×
54. c. Fannie Mae buys large packages of mort- 7.34 = $1,515.71 principal and interest;
gages that meet its particular specifica- ($3,000 + $600) ÷ 12 = $300 taxes and
tions and has great influence on the insurance; $1,515.71 + $300 = $1,815.71
primary mortgage market. PITI.
55. d. Although the lender may witness the sig- 67. a. The security deposit transfers to the new
natures, both buyer and seller must sign owner. $500 plus 12 month’s rent ($250)
the closing statement. = $750.
196
68. d. This scenario is known as a net listing and 79. c. Even though air rights are considered part
is prohibited in most states. This practice of the real property, they can be conveyed
exposes unsophisticated owners to the separately by deed.
potential for outrageous selling fees. 80. a. The buyer may take possession of the
69. c. Riparian rights apply to owners of land property, but legal title remains with the
bordering rivers and streams and littoral owner until the terms of the purchase are
rights apply to those owning land on lakes met.
and oceans. 81. c. Liens generally take priority from the
70. a. ($135,000 × 0.0925) ÷ 12 = $1,040.63 order in which they were entered in the
interest; $1,111.05 – $1,040.62 = $70.43 public records.
principal; $135,000 – $70.43 = 82. c. Anything such as a mortgage, tax or judg-
$134,929.57. ment lien, an easement, or a restriction on
71. b. The Federal Housing Act prohibits dis- the use of the land is considered an
crimination based on race. encumbrance.
72. b. 151 × 7.34 = $1,108.34 (principal and 83. c. Trade fixtures, installed for use in a trade
interest); ($2,900 + $560) ÷ 12 = $288.33 or business, may be removed by the ten-
(taxes and insurance); $1,108.34 + ant prior to the expiration of the lease if
$288.33 = $1,396.67 (payment). the premises are returned to their original
73. d. The question of confidential information condition.
is the main reason for all the new state 84. b. The lot will measure 200′ by 500′, or
laws on agency disclosure. 100,000 square feet in all (200′ × 500′). An
74. d. Littoral rights include oceans. acre contains 43,560 square feet, so the lot
75. b. Whether entered in the public records or contains 2.2957 acres (100,000 ÷ 43,560).
not, real estate property taxes automati- At $9,000 per acre, the total cost is
cally take priority over all other liens. $20,661.15 (2.2957 × $9,000).
76. b. The store will pay as additional rent a per- 85. b. A subordination clause allows a subse-
centage of its receipts each month. quent mortgage to be placed ahead of the
77. a. In putting the high cost of commercial existing mortgage and would generally
land in perspective, sellers and brokers also have an escalation clause that would
commonly quote the price per square foot increase the interest rate caused by the
to compare property costs for buyers. increased risk.
78. b. In a seller’s market, buyers are competing 86. b. Unique property that does not produce
for the few homes on the market and are income is appraised by estimating repro-
likely to offer more for them. duction or replacement cost.
197
87. d. $5,000 + $93,000 = $98,000 total dollar 93. a. A package mortgage covers both real and
expenses of closing. Convert 7% to a deci- personal property.
mal and multiply; $125,000 × .07 = $8,750 94. d. It is illegal to pay referral fees to anyone
commission. $125,000 − $98,000 − $8,750 except a principal broker.
= $18,250 net proceeds to seller. 206,500 × 95. b. The acceleration clause allows the lender
(7.34 ÷ 1,000) = $1,515.71 principal and to declare the whole debt immediately
interest; ($3,000 + $600) ÷ 12 = $300 due and payable in case of default.
taxes and insurance; $1,515.71 + $300 = 96. a. Under FIRREA, appraisers need to be cer-
$1,815.71 PITI. tified by the state to perform an appraisal
88. a. The ECOA prevents lenders from pro- as part of a federally related transaction
hibiting loans based on age. when the property value exceeds
89. d. 184 days in the second half of 2002 plus $1,000,000.
16 days in January 2003 = 200 days. 97. d. A lease survives the sale, and the new
$3,726.50 divided by 365 multiplied by landlord is in exactly the same position
200 = $2,041.92 credit to buyer and debit with tenants as the old one was.
to seller. 98. b. The person who retains an agent is usually
90. d. Appraising a property is not an illegal act known as the client.
so long as you are not discriminating 99. a. The illegal practice of attempting, for
under Fair Housing Laws. profit, to induce homeowners to sell their
91. c. As the debt is paid down, the amount of properties by making representations
interest due each month becomes smaller, about the entry or prospective entry of
and more of the payment is available to be persons in the protect classes into the
applied to the principal. neighborhood is called blockbusting.
92. b. RESPA requires lenders to inform buyers 100. c. Every state has adopted the statute of
and sellers about settlement costs prior to frauds, which requires offers, acceptances,
settlement. land contracts, and other real estate docu-
ments to be in writing to be enforceable.
198
Scoring If your score was close to your personal goal,

you need to work as hard as you can to improve your
Again, evaluate how you did on this practice exam skills. Go back to your real estate license course text-
by finding the number of questions you got right, books to review the knowledge you need to do well
disregarding, for the moment, the ones you got on the exam. If math is your problem area, check out
wrong or skipped. the LearningExpress book, Practical Math Success in
If you didn’t score as high as you would like, 20 Minutes a Day. Also, reread and pay close atten-
ask yourself the following: Did I run out of time tion to the information in Chapter 4, Real Estate
before I could answer all the questions? Did I go back Refresher Course; Chapter 5, Real Estate Math
and change my answers from right to wrong? Did I Review; and Chapter 6, Real Estate Glossary. It might
get flustered and sit staring at a difficult question for be helpful, as well, to ask friends and family to make
what seemed like hours? If you had any of these up mock test questions and quiz you on them.
problems, be sure to go over the LearningExpress If you scored well above your personal goal,
Test Preparation System in Chapter 2 to review how that’s great! You may have an excellent chance of
best to avoid them. passing your license exam. Don’t lose your edge,
You probably have seen improvement between though; keep studying right up to the day before the
your first two practice exam scores and this one; but exam.
if you didn’t improve as much as you’d like, follow- Now, revise your study schedule according to
ing are some options: the time you have left, emphasizing those parts that
If you scored below your personal goal, you gave you the most trouble this time. Use the table
should seriously consider whether you’re ready for below to see where you need more work, so that you
the exam at this time. A good idea would be to take can concentrate your preparation efforts. After
some brush-up courses in the areas you feel less sure working more on the subject areas that give you
about. If you don’t have time for a course, you might problems, take the fourth practice exam in Chapter
try private tutoring. 9 to see how much you’ve improved.
EXAM 3 FOR REVIEW

Financing 7, 15, 20, 26, 54, 63, 66, 72, 81, 85, 91, 93, 95
Business Practices 3, 17, 18, 23, 38, 39, 46, 53, 71, 88, 90, 99
Mathematics 1, 25, 32, 42, 49, 57, 58, 70, 84, 87
199
C H A P T E R
9 Real Estate Sales

Exam 4
CHAPTER SUMMARY
This is the last of the practice exams in this book, but it is not designed
to be any harder than the other three. It is simply another representa-
tion of what you might expect for your state’s exam. Just as when you
take the real exam, there shouldn’t be anything here to surprise you.
In fact, you probably already know what’s in a lot of it! That will be the
case with the real exam, too.
F OR THIS EXAM, pull together all the tips you’ve been practicing since the first practice exam.
Give yourself the time and the space to work. Since you won’t be taking the real exam in your
living room, you might take this one in an unfamiliar location such as a library. Make sure you
have plenty of time to complete the exam in one sitting. In addition, use what you’ve learned from reading
the answer explanations on previous practice exams. Remember the types of questions that caused prob-
lems for you in the past, and when you are unsure, try to consider how those answers were explained.
After you’ve taken this written exam, you should try the computer-based practice questions using the
CD-ROM at the back of this book. That way you’ll get familiar with taking exams on a computer.
Once again, use the answer explanations at the end of the exam to understand questions you may have
missed.
201
1. a b c d 35. a b c d 69. a b c d
2. a b c d 36. a b c d 70. a b c d
3. a b c d 37. a b c d 71. a b c d
4. a b c d 38. a b c d 72. a b c d
5. a b c d 39. a b c d 73. a b c d
6. a b c d 40. a b c d 74. a b c d
7. a b c d 41. a b c d 75. a b c d
8. a b c d 42. a b c d 76. a b c d
9. a b c d 43. a b c d 77. a b c d
10. a b c d 44. a b c d 78. a b c d
11. a b c d 45. a b c d 79. a b c d
12. a b c d 46. a b c d 80. a b c d
13. a b c d 47. a b c d 81. a b c d
14. a b c d 48. a b c d 82. a b c d
15. a b c d 49. a b c d 83. a b c d
16. a b c d 50. a b c d 84. a b c d
17. a b c d 51. a b c d 85. a b c d
18. a b c d 52. a b c d 86. a b c d
19. a b c d 53. a b c d 87. a b c d
20. a b c d 54. a b c d 88. a b c d
21. a b c d 55. a b c d 89. a b c d
22. a b c d 56. a b c d 90. a b c d
23. a b c d 57. a b c d 91. a b c d
24. a b c d 58. a b c d 92. a b c d
25. a b c d 59. a b c d 93. a b c d
26. a b c d 60. a b c d 94. a b c d
27. a b c d 61. a b c d 95. a b c d
28. a b c d 62. a b c d 96. a b c d
29. a b c d 63. a b c d 97. a b c d
30. a b c d 64. a b c d 98. a b c d
31. a b c d 65. a b c d 99. a b c d
32. a b c d 66. a b c d 100. a b c d
33. a b c d 67. a b c d
34. a b c d 68. a b c d
202
1. The purchase contract is the most important 4. Salesperson Pelke has just returned from a
document in the sales process because closing. The property sold for $150,000 and the
a. the agent is not guaranteed payment without commission was 6% of selling price. The com-
it. pany offers a 50/50 split between the listing
b. it provides the road map for the closing. and selling side. Salesperson Pelke is on a 70/30
c. preparing sales agreements is good for the with his company. As the selling agent, how
legal business. much commission will Pelke receive?
d. unless a real estate transaction is in writing, a. $6,300
state law dictates how the money is spent b. $2,250
and distributed. c. $3,150
d. $4,500
2. The area of a lot that measures 850′ × 850′ is
how many square yards? 5. Sue Addison owns an apartment building that
a. 80,278 was constructed in 1965. According to federal
b. 240,833 law, which of the following must be attached to
c. 26,759 the leases Sue prepares for prospective tenants?
d. 722,500 a. a report of the building’s radon level
b. a lead-based paint disclosure statement
3. The Franks receive two offers on their condo, c. an illustration of the building’s location rela-
which is listed for $140,000. Anne Hill offers to tive to electromagnetic fields (EMFs)
pay $138,000 cash for the unit. Bob Stone d. any known instances of groundwater con-
offers $141,000, putting 20% down, if the tamination in the building’s water supply
Franks will pay three points to Stone’s lender
for the mortgage loan the buyers need. What is 6. A borrower can expect to pay a mortgage
the difference between the two offers? insurance premium (MIP) for
a. $384 a. an 80% LTV conventional loan.
b. $3,000 b. a VA loan.
c. $2,000 c. a graduated payment loan.
d. $1,128 d. an FHA 203(b) loan.
7. A property is valued at $850,000 by an

appraiser and generates an annual net income
of $144,500. What capitalization rate percent-
age did the appraiser use in determining value?
a. 11.5
b. 13
c. 14.45
d. 17
203
8. If a property generates a negative cash flow, 12. To qualify for innocent landowner status, a
in order to be an attractive investment to a purchaser under federal law must have the
prospective purchaser property environmentally inspected
a. there must be a substantial down a. prior to taking title.
payment. b. within 30 days of ownership.
b. there must be a large depreciable base. c. in the first year of ownership.
c. there must be a substantial increase in d. when economically feasible.
property value.
d. there must be little deferred maintenance. 13. Which of the following investment opportu-
nities would involve the greatest risk even
9. A deed restriction is also known as a land though it would likely produce the highest
use covenant. Which of the following is an rate of return?
example of a land use covenant? a. before construction is started
a. minimum square footage of homes within b. during construction
a subdivision c. after construction
b. fire safety devices within a structure d. upon occupancy by anchor tenants
c. type of fencing constructed by owner
d. both a and c 14. Economic or external obsolescence refers to
loss of value due to
10. Who will fund a primary loan? a. wear and tear.
a. a mortgage broker b. outdated design.
b. a mortgage banker c. factors outside the property lines.
c. both d. incurable defects in the subject property.
d. neither
15. An appraiser may take which factor into
11. A comprehensive buyer representation consideration when appraising a property?
agreement would address the a. familiar status
a. buyer’s desired property description. b. race of neighborhood
b. duties of the agent, termination date, and c. religions of area churches
compensation agreement. d. square footage
c. agent’s contact information.
d. family contact names and numbers. 16. Which is true of owner’s title insurance?
a. It guarantees ownership in perpetuity.
b. It is transferable to the next property
owner.
c. It will reimburse for title losses up to the
face amount of the policy.
d. It protects the lender against loss of lien
rights.
204
17. The owner of Highland Apartments has 21. How may FHA insured and VA guaranteed
determined that his vacancy rate is less than loans be assumed?
5%. What, if any, action should he take? a. on payment of an assumption fee to the
a. He should spend less money on seller
advertising. b. with guaranteed agreement of the selling
b. He should renovate the lobby. broker
c. He should survey his market to determine c. under no circumstances
if the rents should be increased. d. either freely or on qualification of the
d. He should do nothing. buyer, depending on the date of the loan
18. The closed sales price of an income property 22. A broker would not be violating a law for
divided by its gross monthly rent equals the making the statement “This is the most
a. estimated market value. beautiful view in the state,” because it is con-
b. capitalization rate. sidered harmless
c. gross income multiplier. a. showmanship.
d. gross rent multiplier. b. puffing.
c. advertising.
19. An abstract of title provides which of the d. fibbing.
following?
a. insures ownership in perpetuity 23. Of the following, the most important factor
b. pays owner for full or partial title loss that a lender will consider would be
c. insures against unrecorded documents, a. the borrowers investments.
such as unpaid previous property taxes b. the borrower’s marital status.
d. a history of documents in public records c. payment history of previous car loans.
that affect title to the property d. payment history of previous home loans.
20. In order to appraise property valued over 24. The house on Summit Street is up for sale
$1,000,000 in a federally-related transaction, because last year a suicide took place in an
the person performing the appraisal would upstairs bedroom. In real estate circles the
need to be house is now considered
a. state certified. a. latently defective.
b. federally licensed. b. environmentally unsound.
c. certified by the bank. c. functionally obsolescent.
d. approved by the government. d. stigmatized.
205
25. All of the following provisions will be found c. follow the state law even though it is
in recently enacted residential landlord/ unethical.
tenant laws EXCEPT d. contact the National Association of Real-
a. statutory procedures for collecting back tors and inform them that they must
rent. change the code of ethics because part of
b. statutory procedures for evicting a tenant. it is illegal in your state.
c. defining a leasehold as a recordable real
property belonging to the tenant. 29. Regarding the landlord’s duties under a resi-
d. that the landlord must supply a fit and dential lease agreement, current legal think-
habitable premise. ing holds that
a. only written agreements may be pursued
26. How many square feet are in a half-acre in court.
parcel? b. the tenant is obligated to keep the prem-
a. 43,560 ises in good repair.
b. 2,780 c. the owner is obligated to keep the prem-
c. 20,001 ises in good repair.
d. 21,780 d. the owner is obligated to repair only those
items required by law.
27. A property manager should not consider
which of the following when selecting a 30. Depreciation is classified as curable if it can
tenant? be
a. the tenant’s ability to pay a. lived with.
b. space requirements of the tenant b. recovered.
c. compatibility of the tenant’s business with c. deducted on an income tax return.
other tenants’ businesses d. fixed economically.
d. the gender of the tenant
31. The right that a power company acquires in
28. You are a licensed real estate agent and a order to lay a service line across a customer’s
realtor, meaning that you are bound to a property is called
higher standard of ethics than a non-realtor. a. an easement in gross.
You find a conflict between the National b. a license.
Association of Realtors code of ethics and c. a condemnation.
state law. You should d. a restrictive covenant.
a. follow the code of ethics so as not to be
charged with an ethics violation.
b. ignore the state law because it is unethical.
206
32. Reconciliation is 36. A zoning commission may grant a variance

a. used to determine reproduction cost of a to property use when which of the following
building. exists?
b. loss of value. a. over-budget development costs to a
c. an element of value. subdivider
d. analyzing the three estimates of value in b. environmental concerns as to use
the appraisal process to arrive at an esti- c. alternative building sites that increase
mate of market value for the property. owner’s costs
d. limitation of feasible building sites due to
33. Which of the following sources provides the land contours
most money to the borrower for residential
property purchases? 37. For there to be a valid right to purchase or
a. credit unions terminate, an option contract must contain
b. mortgage companies a. notice to terminate.
c. Government National Mortgage Associa- b. at least seven days to back out of the
tion (GNMA) agreement.
d. Federal Housing Authority (FHA) c. dollar consideration.
d. a right of recission.
34. A metes and bounds survey begins at the
point of beginning and ends at the 38. Which form or action of discrimination was
a. point of beginning. NOT in violation of the Federal Fair Hous-
b. end point. ing Act when established in 1968?
c. monument. a. gender
d. last benchmark. b. religion
c. color
35. An odorless substance created by decaying d. national origin
radioactive materials in the soil is known as
a. urea formaldehyde. 39. If a seller’s agent shares his commission with
b. radon gas. a buyer’s agent
c. carbon monoxide. a. this is not necessarily an indication of
d. polychlorinated biphenyl. agency representation.
b. the seller’s agent may advise the seller of
this cooperation.
c. the buyer’s agent does not have to disclose
this to the buyer.
d. the seller agent may deduct that amount
from the total he pays his agent.
207
40. The form of ownership that would give an 45. Jill Adams, a property owner, just received a
investor the greatest flexibility when selling bill from her local taxing authority in the
his or her interest would be amount of $2,040. Property taxes in this
a. a general partnership. jurisdiction are based on 80% of assessed
b. ownership in severalty. value and the rate is $1.50 per hundred.
c. joint tenancy. What value has the assessor placed on Jill’s
d. a limited partnership. property?
a. $136,000
41. The most accurate way to uniquely locate b. $170,000
and bound a parcel of real property is to use c. $163,200
a. a topographical map. d. $190,000
b. latitude and longitude bearings.
c. the assessor parcel number. 46. Commercial banks prefer to make short-
d. a metes and bounds survey. term loans like construction loans and 90-
day business loans. The reason for their
42. Which of the following deeds provides the preference is
purchaser with the least protection in a. the source of their funds is primarily from
regards to covenants and/or warranties CDs (Certificates of Deposit).
given by the seller? b. the source of their funds is primarily from
a. trustee’s savings accounts.
b. special warranty c. the source of their funds is primarily from
c. general warranty checking accounts.
d. quitclaim d. the source of their funds is primarily from
issuing bonds.
43. When money is escrowed each month to
cover annual payments of insurance and 47. Upon the buyer signing the sales agreement
taxes, the mortgage is called a licensee is obligated to give a copy to the
a. a blanket mortgage. a. buyer upon request.
b. a budget mortgage. b. buyer by law.
c. a graduated payment mortgage. c. buyer after the seller signs.
d. a growing equity mortgage. d. the lender.
44. The term that describes the percentage of 48. It is said that a deed transfers title when the
the appraised value of a property that a deed is
lender will finance is called a. signed by the grantor at closing.
a. loan-to-value ratio. b. prepared by an attorney and reviewed by
b. owner’s equity. the purchaser.
c. certificate of reasonable value. c. handed to the purchaser or his or her
d. capital investment. representative.
d. delivered to and accepted by the grantee.
208
49. A buyer wants to purchase a home. How- 53. A homebuyer may obtain a $35,000 mort-
ever, he has his present home to sell. The gage loan provided that the seller pays a dis-
best way to write the contract of sale would count of 3 points. What is the amount of the
be to discount?
a. wait until his present home sells. a. $1,150
b. include a sale-of-existing-home b. $1,050
contingency. c. $10,500
c. use an option agreement. d. $1,510
d. include an addendum.
54. An accrued charge on a closing statement is
50. If a contract for real estate is vague in its paid
basic terms, a court would hold that it is a. in advance.
a. binding on the offeror. b. in arrears.
b. unenforceable. c. always by buyer.
c. valid against all parties. d. always by seller.
d. invalid until rewritten by an attorney.
55. What is the square footage of a living room
51. Market data approach appraising may measuring 30 feet by 23 feet?
require adjustments of sold comparables by a. 960
an appraiser for all of the following b. 690
EXCEPT c. 609
a. sale date of comparable. d. 906
b. replacement cost of structure.
c. financing made available by seller. 56. What did the 1972 amendment add to the
d. lot size and location. Federal Fair Housing Act of 1968?
a. qualifications as to the age of children in
52. Samantha Mulder goes to a bank and bor- certain housing facilities
rows money for the purchase of her first b. landlords making reasonable property
home, thereby becoming a alterations for handicapped tenants
a. mortgagor. c. operation of an adults only apartment
b. mortgagee. complex
c. lienor. d. display of equal housing poster in broker’s
d. lienee. place of business
209
57. A property manager must have which type 61. One advantage of condominium ownership
of contract with the owner? over cooperative ownership is that
a. a listing agreement a. condominium owners pay no mainte-
b. a management agreement nance fees.
c. a lease agreement b. condominium owners can mortgage their
d. a multi-peril agreement units individually.
c. cooperative owners have no choice in
58. The vendee has which unit they occupy.
a. equitable title in the property. d. there is basically no difference in the two
b. an obligation to sell the property. forms of ownership.
c. temporary title to the property.
d. no obligation to the seller. 62. Earnest money is entered on a closing state-
ment as a
59. Under the Truth-in-Lending Act, lenders are a. credit to the seller.
required to provide borrowers with a state- b. charge to the buyer.
ment disclosing the essential costs involved c. debit to the seller.
with borrowing. If your clients are buying a d. credit to the buyer.
new-build, which item will not be disclosed
to them? 63. Failure to act timely to have a court enforce
a. the interest rate deed restrictions may result in the violations
b. the term being allowed because of the legal concept
c. the monthly payment called
d. the developer’s buy-down a. non-conforming use.
b. laches.
60. An appraiser estimates annual rental collec- c. constructive notice.
tions on an investment property of $99,000. d. injunction.
The vacancy factor is 5% and operating
expenses run 30% of gross income. A simi- 64. A landlord not offering as many properties
lar investment should generate a return on to a family with children that were offered to
investment of 15%. Using the income a single prospect is an example of
approach to value, what is the market value a. channeling prospects.
of this property? b. redlining of marital status.
a. $462,000 c. malice before the fact.
b. $627,000 d. less favorable treatment.
c. $429,000
d. $660,000
210
65. Which of the following phrases is NOT dis- 69. Which phrase in a lender advertisement to
criminatory in an advertisement to lease a secure borrowers would be in violation of
non-exempt one hundred unit apartment the Equal Credit Opportunity Act?
complex under the current Federal Fair a. low interest rates and fast loan approvals
Housing Act? b. assumable note for future ease of selling
a. no handicapped alterations will be made c. must be under 60 years of age for 30 year
b. adults only, no children term loans
c. no smoking on premises d. rates will be adjusted according to num-
d. females only ber of minor children
66. In which real estate closing must a HUD 70. Ad valorem real estate tax is which type of
Uniform Settlement Statement be used? lien?
a. cash transaction on the sale of a single a. specific/voluntary
family dwelling b. general/voluntary
b. commercial sale funded by a federally c. specific/involuntary
chartered bank d. general/involuntary
c. one- to-four family home with federal
related loan 71. Which of the following would NOT affect
d. agricultural vacant land purchased with a realty value?
federally backed loan a. permitted uses by city zoning ordinances
b. number of real estate brokers in the area
67. Which of the following statements concern- c. marketable and/or indefeasible title of a
ing an easement is true? property
a. An easement is always appurtenant. d. demand for property by qualified buyers
b. An easement is an estate at sufferance.
c. An easement can only be created by a 72. If real estate property taxes are paid in
deed. arrears, what would the seller be debited on
d. An easement appurtenant runs with the a September 14 closing with annual taxes of
land. $2,700.00? (Use statutory method, taxes
accrue from January 1 through closing date,
68. When a buyer makes an offer and a seller seller responsible for day of closing.)
changes a few of the terms before he signs a. $1,880
and returns it, that is a b. $1,902
a. rejection. c. $1,905
b. conditional acceptance. d. $1,913
c. conditional rejection.
d. counteroffer.
211
73. John Fitzpatrick holds $800 in security 77. The four unities required for the creation of
deposits from the six tenants in his apart- a joint tenancy are
ment building when he sells the building to a. time, title, consideration, and interest.
Helen Baker. The tenants can expect a b. competent parties, title, possession, and
return of their security deposits from interest.
a. John at closing. c. time, title, legal purpose, and possession.
b. Helen upon termination of the lease. d. time, title, possession, and interest.
c. the person who conducted the closing.
d. John upon completion of the tenancy. 78. After a purchase contract is accepted, the
parties may later make additional agree-
74. An income approach appraisal would ments without changing the original docu-
include which of the following information? ment by use of
a. annual net operating income generated a. a codicil.
b. sold comparables within the same market b. an addendum.
area c. a revision.
c. replacement cost of structure and site d. a contingency.
improvements
d. building value based on cost per square 79. A property manager should do all of the fol-
foot lowing EXCEPT
a. screen prospective tenants for the
75. Which method of foreclosure is used in a HIV/AIDS virus for the protection of the
deed of trust mortgage lien? other tenants.
a. non-judicial power of sale b. show available rental units to prospective
b. judicial court ordered sale tenants.
c. sheriff ’s sale at the courthouse c. produce the highest possible profit for the
d. deed in lieu of accepted by lender owner.
d. execute leases.
76. The entity that loses ownership through a
deed of trust mortgage foreclosure is the 80. When a property owner leases his property,
a. lender. at the end of the lease he has
b. beneficiary. a. a reversionary interest in the property.
c. mortgagee. b. a remainderman interest in the property.
d. mortgagor. c. 30 days to terminate the lease.
d. a possessory right to the property.
212
81. Office space rents for $700 per month. The 85. The legal remedy in many sales contracts
tenant has a three-year lease. Your commis- which allows the non-defaulting party to
sion is 7% of the gross lease, what is your force the sale is
fee? a. bilateral promises.
a. $1,764. b. earnest money.
b. $1,674. c. specific performance.
c. $490. d. punitive damages.
d. $1,470.
86. Under Regulation Z, the right of rescission
82. Which fee does NOT have to be disclosed in does not apply to
a lender’s advertisement when the actual a. home-equity loans.
note interest rate is mentioned? b. owner-occupied residential first
a. required down payment mortgages.
b. appraisal fee c. refinancing a home.
c. number of payments over loan term d. both a and c.
d. monthly payment amount
87. In comparing a competitive market analysis
83. A owner who transfers real property to a comparative market analysis, what is the
through a will is known as the differing factor?
a. testator. a. sold comparables used
b. legatee. b. amenity differences between the
c. devisee. comparables
d. beneficiary. c. adjustments for time of sale, such as loca-
tion and property condition
84. An apartment unit rents for $500 per month d. properties currently for sale in the same
the first year and $550 per month the sec- market area
ond year. How much total rent will this ten-
ant pay during his two-year lease? 88. Fines for non-compliance under Regulation
a. $16,200. Z are imposed by which jurisdiction?
b. $6,600. a. municipal court
c. $12,600. b. county court
d. $6,000. c. state attorney general’s office
d. Federal Reserve
213
89. Simon Hersch, a salesperson associated with 92. Richard Morgan wants to buy Daniel John-
broker Bob King, lists a house for sale for son’s house, but Daniel doesn’t want to turn
$620,000, with 5% commission due at clos- over title until he receives the purchase
ing. Three weeks later the owner accepts an price. They could use either a lease option or
offer for $595,000, brought in by Simon. a land contract. Richard would prefer a lease
Bob’s practice is that 45% of commissions option because
go to the brokerage and the rest to the sales- a. it will allow him to move in immediately.
person. How much will Simon make on the b. he won’t know the eventual sale price.
sale? c. Daniel will be obligated to sell to him.
a. $17,050.00 d. he will be free to change his mind about
b. $32,725.00 buying.
c. $16,362.50
d. $13,387.50 93. Laura Murphy is buying a new home for
$193,000. She makes a $40,000 down pay-
90. Which of the following is NOT a physical ment and finances the balance with a 7.5%
characteristic of land? 30-year conventional loan. The factor for
a. immobility repayment is $7.00 per thousand. After
b. situs making the first payment, what is the
c. non-homogeneity remaining balance on Laura’s loan?
d. indestructibility a. $153,135.25
b. $152,808.75
91. A salesperson has earned $120,000 in gross c. $152,635.25
commissions this year. If the average com- d. $152,885.25
mission is 2.6% per transaction, and the
salesperson receives 60% of the commission 94. Which of the following would be classified
from each transaction, how much sales vol- as “limited” common elements in a condo-
ume has that salesperson settled this year? minium development?
a. $7,200,007.69 a. elevators
b. $4,615,380.05 b. hallways
c. $7,692,307.69 c. assigned parking places
d. $8,000,000.00 d. limited access gates
95. An encumbrance that states a monetary

interest in someone’s property is called
a. an encroachment.
b. a deed restriction.
c. an estate at sufferance.
d. a lien.
214
96. A borrower must pay $5,600 for points on a 99. In the reconciliation of an appraisal on a
$140,000 loan. How many points is the home in a large subdivision, the appraiser’s
lender charging for this loan? decision of value would rely most on which
a. 2.5 appraisal approach?
b. 4 a. cost
c. 4.5 b. market data
d. 5 c. income
d. reproduction
97. What would you pay for a building produc-
ing $20,000 net income annually and show- 100. A residential broker usually relies on which
ing a minimum rate of 8%? form of valuation to assist a seller in setting
a. $50,000. the listing price?
b. $200,000. a. ad valorem tax assessment
c. $500. b. fee appraisal prepared by a licensed
d. $250,000. appraiser
c. cost approach analysis
98. If a bilateral contract is signed d. competitive market analysis
a. either party may back out prior to closing.
b. both parties are legally obligated to
perform.
c. the seller can be forced to perform on the
agreement.
d. the buyer can be forced to perform on the
agreement.
215
Answers house could be a good investment if it is

sold at a substantial gain over the original
1. b. The contract outlines the rights, duties, purchase price.
and responsibilities of the parties and 9. d. Deed restrictions for land use covenants
gives guidance to the closing officer about control private property use by a current
allocation of fees. owner. These covenants are used to con-
2. a. 850′ times 850′ divided by 9 is just less trol property use if zoning ordinances do
than 80,278 square yards. not exist. Deed covenants can set con-
3. a. Bob will get a mortgage for $112,800 struction standards to maintain subdivi-
($141,000 × 80%). Three points will cost sion property values.
$3,384 ($112,800 × 0.03). The Franks will 10. b. The mortgage banker is an intermediary
end up with $141,000 less $3,384, or between the primary and secondary mar-
$137,616. This is $384 less than Anne kets and may make direct loans. A mort-
Hill’s all cash offer ($138,000 – $137,616). gage broker operates only in the primary
4. c. Agent Pelke gets 70% of the company’s market and brokers the loan.
dollar and the company receives 3% of the 11. b. A buyer’s representation agreement
sale price for their commission; $150,000 should be a specific outline of what is
× .03 = $4,500 × .70 = $3,150. expected of the broker and of the buyer.
5. b. Federal law requires that a lead-paint dis- 12. a. Under federal law, to qualify as an inno-
closure form be given to all tenants and cent land owner, a purchaser must have
buyers if the building was constructed the property professionally inspected for
before 1978. environmental hazards prior to taking
6. d. The premium paid to purchase mortgage ownership. If the property is not
insurance provided by FHA is referred to inspected prior to ownership, the owner is
as MIP or mortgage insurance premium. responsible for all previous environmental
7. d. Capitalization rate for annual rate of hazards.
return on investment is computed by 13. a. There is very little security in an invest-
dividing a property’s annual net income ment before construction is started, there-
by the property value. This math problem fore, to attract an investor, the developer
is solved by dividing $144,500 (net oper- must offer the greatest return.
ating income) by $850,000 (property 14. c. External obsolescence refers to outside
value) which equals a capitalization rate factors (a nearby landfill, unemployment
of 17%. in the community) that affect the value of
8. c. A negative cash flow can be offset by a the subject property.
substantial increase in property value. 15. d. People who prepare appraisals or any
Even in ownership of a personal residence statements of valuation, whether they are
where there is a negative cash flow, the formal or informal, oral or written may
consider any factors that affect value.
216
16. c. Buyer’s title insurance covers monetary 24. d. State laws and court decisions vary on
losses due to a covered loss of title up to whether potential buyers are entitled to
the face amount of the policy. It does not notification of past murders, suicides, and
guarantee ownership, nor is it other “stigmas.”
transferable. 25. c. Common law and contract tenancy rights
17. c. A five percent vacancy rate is considered typically do not define a leasehold as a
normal; anything lower means rents are recordable real property belonging to the
too low. tenant.
18. d. The gross rent multiplier is a number 26. d. An acre (43,560 sq. ft.) ÷ 2 = 21,780 sq. ft.
derived from a sale comparable to deter- 27. d. Under the Fair Housing Act the federal
mine the value of an income property law prohibits discrimination in housing
being appraised. The gross rent multiplier based on gender.
is multiplied by object property monthly 28. c. In the event of a conflict, and there are
rent to determine its current market some, always follow the state law.
value. 29. d. Current legal thinking with regard to
19. d. An abstract of title is a history of a prop- owner’s obligations under a residential
erty’s legal records prepared by an rental contract holds that the owner is
abstracter. There is no insurance for loss obligated to repair only those items
of money or possession if title problems required by law.
occur in the future. 30. d. Curable depreciation can be remedied at
20. a. Under FIRREA, appraisers need to be cer- reasonable cost.
tified by the state to perform an appraisal 31. a. If a power company wants to lay a service
as part of a federally-related transaction line across customer properties and has to
when the property value exceeds acquire an irrevocable right to do so, that
$1,000,000. right would be called an easement in
21. d. Older FHA and VA loans are freely assum- gross.
able; newer ones require the next bor- 32. d. Reconciliation is the art of analyzing and
rower to prove financial qualification. effectively weighing the findings from the
22. b. As opposed to potentially fraudulent mis- three approaches to value.
representation, obvious exaggeration is 33. b. The great majority of funds for residential
considered acceptable puffing. loans are provided by mortgage compa-
23. d. The real estate lender will be greatly con- nies. Since they sell the loans they origi-
cerned with how a prospective borrower nate, they have virtually unlimited funds.
has performed on previous real estate 34. a. A metes and bounds survey begins at the
loans. point of beginning and ends at the point
of beginning in order to describe the
entire tract.
217
35. b. Radon gas is a naturally occurring gas that appraised at $100,000 and the lender will
may cause deadly health hazards in high lend $90,000, this would be a 90% loan to
concentrations inside a structure. value.
36. d. A variance is a change in zoning require- 45. b. $2,040 ÷ 1.5 × 100 ÷ 0.8 = $170,000
ments to lessen restrictions when building 46. c. Since a bank’s funds are by definition
site hardships occur, such as limited short-term, that is, from checking
building sites. accounts also known as “demand
37. c. The lack of dollar consideration may deposits,” the banks prefer to make short-
invalidate an option. The courts want term loans.
“something at risk” for the right to pur- 47. b. Immediately upon the buyer making the
chase/terminate at a later time. offer by signing the agreement of sale, a
38. a. Discrimination based on a person’s gen- licensed real estate agent is obligated by
der was added to Fair Housing Laws law to voluntarily give a copy of that
through the Housing and Community agreement of sale to that buyer.
Development Act of 1974. 48. d. A deed passes title when the seller delivers
39. a. The mere payment of a fee does not indi- an acceptable deed to the buyer or his or
cate an agency relationship. her representative. This transfer of title
40. b. Ownership in severalty, that is, severed usually occurs at the real estate closing.
from anyone else’s interest, would give the 49. b. A contingency creates an additional con-
individual owner complete freedom to dition that must be satisfied before an
dispose of the property. agreement is fully enforceable.
41. d. A metes and bounds survey is the most 50. b. Contracts must be in writing and contain
accurate way to uniquely locate and all of the basic elements to be legally
bound a parcel of real property. enforceable.
42. d. A quitclaim deed grants no covenants or 51. b. Sales date, seller financing, lot size, and
warranties from the seller to the buyer. If location of a property are adjustments to
the seller has no ownership rights, then sold comparables an appraiser must con-
the buyer will not acquire any title, also sider in determining market value of an
the buyer will not have any claim against object property. Replacement cost of a
the seller. structure is used to determine value in a
43. b. A budget mortgage is a mortgage wherein cost approach appraisal.
the lender will escrow money from the 52. a. The borrower mortgages the property,
borrower’s monthly payment to pay giving the lender a claim against the real
annual taxes and insurance. estate. As the one who does the mortgag-
44. a. The lender will divide the loan amount by ing, she is the mortgagor.
the appraised value (or purchase price,
whichever is lower). This is called the
loan-to-value ratio. If a property is
218
53. b. 3 points = 3%, or .03. The amount of the 61. b. Condominium owners can borrow money
discount = x. The points = .03, and the by pledging their individual unit giving
amount of the loan is $35,000. So, x = them the opportunity to structure the
(.03)(35,000); x = $1,050. financing to suit their individual needs.
54. b. Accrued means owed but not paid, there- Likewise, they can purchase their unit
fore an account is paid after charges were without any debt.
made, such as real estate property taxes or 62. d. Earnest money is used to partially satisfy
credit cards. the transaction sales price on behalf of the
55. b. Square footage is calculated as length buyer; therefore, it would be a credit to
times width. (30 × 23 = 690) the buyer on the closing statement.
56. d. In making the public more aware of fed- 63. b. Laches is a legal tenet to set a statute of
eral Fair Housing Laws, Congress requires limitations on court-ordered removal of a
all brokers to display the HUD Equal deed restriction violation. A property
Housing Poster in their place of business. owner’s failure to act timely may result in
57. b. A management agreement is between the a loss of court-ordered action to correct a
owner of income property and a manage- deed restriction violation.
ment firm or individual property man- 64. d. Not offering as many choices to a
ager that outlines the scope of the prospect with children would be less
manager’s authority. favorable treatment based on familial
58. a. Equitable title is an interest in acquiring status.
legal title. Legal title will not be obtained 65. c. Smoking rights are not protected under
until the buyer has actually purchased the Fair Housing Laws. Landlords may
property. enforce no smoking as a lease provision.
59. d. Buy-down is a financial arrangement 66. c. The Real Estate Settlement and Proce-
whereby money is paid up-front to a dures Act requires the use of the HUD
lender in order to reduce the rate of inter- closing statement on all federal related
est for the borrower. A developer’s buy- one- to-four family home loans.
down is an agreement between the 67. d. An easement appurtenant runs with the
developer and the lender, not the bor- land, which means that if the property is
rower and the lender. transferred the easement goes with it to
60. c. The formula for the income approach is the new owner.
NOI divided by cap rate = value. $99,000 68. d. If an offer is changed at all, it becomes a
× 0.95 = $94,050 net income; $99,000 × rejection combined with a new offer. The
0.3 = $29,700 operating expense; $94,050 offeree is not obligated to accept this new
– $29,700 = $64,350 NOI; $64,350 ÷ 0.15 offer.
= $429,000.
219
69. c. Age discrimination is protected under the 76. d. The mortgagor (borrower) who deeds the
Equal Credit Opportunity Act. A lender property into trust for the mortgagee
must offer all loan programs in its portfo- (lender) will lose ownership through
lio to any prospective borrower of legal foreclosure.
age who applies for a loan. 77. d. The four unities required for the creation
70. c. An ad valorem tax lien is created by statu- of a joint tenancy are time, title, posses-
tory property tax laws and is levied sion, and interest.
against a specific legal address. Property 78. b. Any provision later added to a contract is
tax liens are involuntary, since non- known as an addendum. It identifies the
payment by a property owner will result original contract and must be signed by
in a tax foreclosure sale. all parties.
71. b. The number of realty brokers in a market 79. a. People with HIV/AIDS are members of a
area has no effect on property market protected class (disability) and cannot be
value, since the market is sensitive to the discriminated against.
economic theory of supply and demand. 80. a. A lease is a temporary condition. Owner-
However, agency contracts that brokers ship remains with the owner. Revert
have with their clients demand that the means to “bounce back” to the owner.
brokers obtain the best price for their 81. a. $700 per month × 12 (1 year) = $8,400 ×
clients. 3 (3-year lease) = $25,200 × 7% = $1,764.
72. c. $2,700.00 divided by 360 days equals 82. b. A lender-required appraisal fee is not dis-
$7.50 per day, times 254 days equals closed in advertising under Regulation Z,
$1,905 debit to the seller. January 1 since it is not a component in computing
through September 14 equals 254 days loan annual percentage rate.
(statutory method). 83. a. A person who wills his property upon
73. b. The new landlord is responsible for the death to an heir is called the testator or
return of the security deposits, which will maker. The legatee, devisee, and bene-
should have been credited to her when the ficiary are parties that receive property,
sale was settled. both real and personal, through a will.
74. a. Annual net operating income results after 84. c. $6,000 for first year (500 × 12); $6,600 for
operating expenses are deducted from second year (550 × 12); That totals
gross income. Annual net operating $12,600 for two years.
income divided by appraiser capitaliza- 85. c. Forcing someone to perform on an agree-
tion rate equals property value. ment is a legal injunction making it
75. a. A deed of trust mortgage permits the mandatory that the defaulting party do
trustee/fiduciary to sell the property at what he promised to do. If he does not, he
public auction to protect the lender’s/ben- is in contempt of a court order.
eficiary’s lien position without a judicial
court hearing.
220
86. b. The right of rescission does not apply to 93. d. 153 × 7.00 = $1,071.00 PI; $153,000 ×
owner-occupied residential first mortgage 0.075 ÷ 12 is $956.25 interest; $1,071.00 –
loans, but it does apply to refinancing a $956.25 = $114.75 principal; $153,000 –
home mortgage and to a home equity $114.75 = $152,885.25 remaining balance.
loan. 94. c. Assigned parking spaces are limited to
87. d. A competitive market analysis includes specific unit owners, whereas the other
both sold comparables and the sales price items are unlimited in their use and are
of current properties on the market to available to all unit owners.
determine value. A comparative market 95. d. A lien states that there is a monetary obli-
analysis evaluates only sold comparables gation implied by the encumbrance.
in property valuation, which results in a 96. b. Divide the dollar amount of the discount
competitive market analysis being more points by the loan amount; $5,600 ÷
informative as to value of the object $140,000 = 4.
property. 97. d. $20,000 net income ÷ 8% = $250,000.
88. d. Regulation Z, which is part of the Truth- 98. b. A bilateral contract is one in which both
in-Lending Act is under the supervision of parties make promises and are charged
the Federal Reserve, which would impose with performance of the agreement.
fines for non-compliance. 99. b. Market data approach appraisal reveals
89. c. Total commission is $29,750.00 (5% of the current trend in market sales, which
sale price $595,000). Simon receives reflects parties attitudes toward real estate
$16,362.50 (55% of $29,750.00). value.
90. b. Situs is an economic characteristic of land, 100. d. A competitive market analysis is the least
not a physical characteristic. expensive method of determining value
91. c. $120,000 ÷ 0.60 ÷ 0.026 is approximately for a seller with much greater accuracy
$7,692,307.69. than tax assessor value. This value infor-
92. d. With a lease option, the potential buyer is mation is commonly available through
free either to complete the purchase or to broker networking systems, such as a mul-
move out at the expiration of the lease. tiple listing service.
221
Scoring exams in this book, you have made yourself better

prepared than other people who may be taking the
Once again, in order to evaluate how you did on this exam with you. You have diagnosed where your
last practice exam, find the number of questions you strengths and weaknesses lie and learned how to deal
got right. Take a look at the following table to see with the various kinds of questions that will appear
what problem areas remain. on the test. So go into the exam with confidence,
The key to success in almost any pursuit is to knowing that you are ready and equipped to do your
prepare for all you’re worth. By taking the practice best.
EXAM 4 FOR REVIEW

Financing 3, 6, 10, 21, 23, 33, 43, 44, 46, 52, 59, 86, 93
Business Practices 5, 15, 22, 24, 28, 38, 56, 64, 65, 69, 82, 88,
Mathematics 2, 4, 26, 45, 53, 55, 60, 89, 91, 96
222

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What is the purpose of this book?

What is the purpose of this book?

What are some of the topics covered in the practice exams?

What are some of the topics covered in the practice exams?

REAL ESTATE

All rights reserved under International and Pan-American Copyright Conventions.

Library of Congress Cataloging-in-Publication Data:

Printed in the United States of America

For more information or to place an order, contact LearningExpress at:

1 The Real Estate Sales Exam 1

1 The Real Estate

Your Upcoming Real Estate Exam

independent testing companies are listed below, AMP

Promissor Regardless of whether you take a state-admin-

Note: Approximately 10% of the questions on this Financing 13

About Licensing Requirements and Exams

State Licensing Agencies

MISSOURI NEW YORK

MONTANA NORTH CAROLINA

NEBRASKA NORTH DAKOTA

NEW HAMPSHIRE OKLAHOMA

RHODE ISLAND VERMONT

The Right Questions

✓ Which exam is given in my state?

How This Book Can Help You

■ being unfamiliar with the format of the exam

Step 1. Get Information 50 minutes

Step 1: Get Information

Time to complete: 50 minutes

Part A: Straight Talk About the Real Estate Sales Exam

Part B: What’s on the Test

Step 2: Conquer Test Anxiety

Time to complete: 20 minutes

Combating Test Anxiety

0 = Never 1 = Once or twice 2 = Sometimes 3 = Often

Your Test Stress Score

Stress Management Before the Test

Stress Management on Test Day

Step 3: Make a Plan

Time to complete: 30 minutes

Schedule A: The 30-Day Plan

Schedule B: The 10-Day Plan

Step 4: Learn to Manage Your Time

Time to complete: 10 minutes to read, many hours of practice!

Step 5: Learn to Use the Process of Elimination

Time to complete: 20 minutes

Using the Process of Elimination

Use the process of elimination to answer the following questions.

3. Smoking tobacco has been linked to

4. Which of the following words is spelled correctly?

Step 6: Know When to Guess

Time to complete: 20 minutes

■ Are you a risk-taker?

Your Guessing Ability

9. The winner of the Masters golf tournament in Answers

How Did You Do?

Step 7: Reach Your Peak Performance Zone

Time to complete: 10 minutes to read; weeks to complete!

Step 8: Get Your Act Together

Time to complete: 10 minutes to read; time to complete will vary

Do I know how to get to the exam site? Yes _ No _