Modern Real Estate Practice Nineteenth Edition
Sample Exam 1
Textbook Rationales
1.bA recorded mortgage constitutes a lien on a property.
2.aIt is voidable by the party who is currently the minor. It also would be enforceable by that party.
3.aThe broker has commingled the deposit with the broker’s personal funds.
4.cWhen the final payment on an amortized mortgage is larger than the previous payments, it is a balloon payment and the loan is a balloon loan.
5.cTwo steps: (1) Because the interest rate is based on annual interest, multiplying the one month’s interest by 12 gives an annual interest amount of $13,200 ($1,100 × 12 = $13,200). (2) To find the inertest rate, divide the annual interest by the balance on which it was paid ($13,200 ÷ 260,000 = 0.05076923 or 5% rounded to the nearest half percent).
6.bThis describes an exclusive-agency buyer agency (representation) agreement. It allows the buyer to purchase property without broker assistance and not be required to pay compensation.
7.aA (general) warranty deed contains covenants of seisin, further assurance, quiet enjoyment, freedom from encumbrances. and warranty forever.
8.aIt is steering, regardless of the licensee’s motivation.
9.aThe grandson has received a remainder interest.
10.dRight of survivorship is the distinctive feature of joint tenancy. Any number of persons can own a property in joint tenancy—providing they all have equal shares and identical interests, come into ownership at the same moment and on the same granting document, and have equal rights of possession.
11.dThe licensee meets the IRS’s three requirements to be treated as self-employed, which are that the licensee (1) is a real estate licensee, (2) has an agreement with the broker indicating the licensee will not be treated as an employee by broker contributions to Social Security or the withholding of income taxes, and (3) earns the preponderance of income from the firm in commissions, not wages.
12.aIn a title theory state, a borrower-owner gives legal title to real estate to the mortgage lender when giving the lender a mortgage.
13.bA rental tenancy that will expire on a fixed date is an tenancy for years.
14.aBecause suburban homes today are expected to have ample indoor plumbing, a home that does not suffers from functional obsolescence; it is lacking in the usual amenities of properties in its class.
15.aA nonconforming use is one that is currently not permitted by zoning but that began before the restriction. It is allowed to continue because it is already there. It is grandfathered.
16.cTwo steps: (1) Find the entire commission of by doubling listing broker’s half (2 × $12,584 = $25,168). (2) Find the sales price by dividing the entire commission by the brokerage rate ($25,168 ÷ 5.5% = $457,600).
17.dA licensee facilitates transactions and is called—depending on his state’s law—a transaction broker or a facilitator. Many states prohibit brokers from offering such nonagency brokerage.
18.cWhen two of three original joint tenants have died, the surviving party owns the entire property in severalty.
19.aFour steps: (1) Find the total commission by multiplying commission rate by the sales price (7% × $295,900 = $20,713). (2) Find the selling broker’s half ($20,713 ÷ 2 = $10,356.50). (3) Find the selling salesperson’s 65 percent of his broker’s half (65% × $10,356.50 = $6,731.73 rounded to the nearest cent). (4) Subtract $1,300 in expenses from the selling salesperson’s commission to find the salesperson’s net ($6,731.73 - $1,300 = $5,431.73).
20.bDeed restrictions are an example of private land-use control. Zoning, building codes, and subdivision regulations are examples of the exercise of police power.
21.dTwo steps: (1) Find what percentage of the selling price the seller will get after the broker takes 6 percent (100% - 6% = 94%). (2) Because the amount the seller wants to net is $165,000 plus closing costs (or $165,000 + $2,635 closing costs = $167.635), which is also 94 percent of the gross selling price, find the actual gross selling price (to the nearest dollar) by dividing $167,635 by 94 percent ($167,635 ÷ 94% = $178,335.106383 or $178,335 (rounded to the nearest dollar).
22.bBecause one acre contains 43,560 square feet, three acres will contain three times that amount (3 × 43,560 sq ft = 130,680 sq ft).
23.bWhat is implied here is a mortgage loan. A lender (mortgagee) always receives a mortgage (document); the borrower (mortgagor) always gives one in order to get the loan.
24.bThree steps: (1) Find the assessed value by multiplying the $140,000 (market) value of the property by assessment ratio of 40 percent and multiplying the result by the equalization factor of 1.5 ($140,000 × 40% × 1.5 = $84,000). (2) Find how many 100s there are in 84,000 by dividing 84,000 by 100 (84,000 ÷ 100 = 840). (3) Because each hundred is taxed at $4, multiply 840 (the number of 100s) by $4 (840 × $4 = $3,360).
25.cPresuming the origination fee is to be paid in cash and not financed, the total cash used in this purchase will be the down payment plus the origination fee. Four steps: (1) Find the down payment by multiplying the purchase price by 10 percent ($260,000 × 10% = 26,000). (2) Find the loan amount by subtracting the down payment from the purchase price ($260,000 – $26,000 = $234,000). (3) Compute the origination fee of 1 percent of the loan amount ($234,000 × 1% = $2,340). (4) Add the down payment and the origination fee to find cash needed ($26,000 + $2,340 = $28,340).
26.dIf the assessment, $274,550, is 85 percent of the market value, find the market value by dividing the assessment by 85 percent ($274,550 ÷ 85% = $323,000).
27.bIn the income approach to appraisal, the capitalization rate is the relationship of the net annual income to the appraised value, expressed by the following formula: Net annual income ÷ Appraised value = Capitalization rate. Therefore, it expresses the return an income property will produce.
28.cIgnore the compass directions and use the fractions of a section. Two quarters of a section are being sold. A section is 640 acres, so 320 acres are being sold (2/4 × 640 = 320). Each acre sells for $875. Two steps: (1) Find the sales price by multiplying the price per acre by the number of acres sold ($875 per acre × 320 acres = $280,000). (2) Find the broker’s commission by multiplying the sales price by the brokerage rate ($280,000 × 5% = $14,000).
29.dA point is 1 percent of the loan amount, not of the purchase price. Two steps: (1) Calculate what one point will be on the mortgage loan of $288,000 (1% × $288,000 = $2,880). (2) Calculate what two points would amount to (2 × $2,880 = $5,760).
30.bCommission is found by multiplying the sales price by the brokerage (commission) rate ($250,000 × 7% = $17,500).
31.dThe question is about terminating an offer, not a contract. Death of the offeror, revocation before acceptance, and a counteroffer from the seller would all terminate an offer. The seller’s simply receiving a better offer from another purchaser would not terminate the original offer.
32.dThe purchaser under a land (installment) contract holds equitable title during the life of the contract, usually until all payments have been paid.
33.bWhen a new contract replaces an old one, the process is novation. The new contract may be between the same parties or between one of the original parties and a new party. In any event, the parties’ obligations under the old contract are terminated.
34.bIf the buyer borrowed $25,000, he signed a note for $25,000, the face amount of the note.
35.bA signed offer already has the buyer’s signature, but to be a ratified contract, both buyer’s and seller’s signatures are necessary.
36.aA document signed by the lender, showing that the loan is paid off, is called a certificate of satisfaction, or satisfaction piece. Until this document is recorded, the public record will continue to show that the loan is unpaid.
37.dIn the income approach to appraisal, the net annual income divided by the capitalization rate is the appraised value of a property (75,000 ÷ 8% = $937,500).
38.bThis is a net listing, which is illegal in most states.
39.aCooperative owners hold shares in the cooperative corporation.
40.aIf persons who hold possible claims against a property will sign quitclaim deeds extinguishing their potential claims, the cloud can be removed. Title insurance does not protect against known defects in title. Neither paying all cash nor recording a title deed after closing will remove the cloud from a title.
41.dIf a seller signs an exclusive-right-to-sell listing with a broker, the seller owes the broker a commission, regardless of who sells the property.
42.bThe tenant under a net lease pays all property expenses, including taxes and insurance, utilities, maintenance, and so on, but not debt service (the landlord’s mortgage payment).
43.cThe Civil Rights Act of 1866 protects the property rights of all citizens regardless of race.
44.b
One square yard has nine square feet. Three steps: (1) Find the area of the floor to be covered in square feet by multiplying length by width (45 ft × 20 ft = 900 sq ft). (2) Change square feet to square yards by dividing by 9 (900 ÷ 9 = 100 sq yd). (3) Multiply the price per square yard by the number of square yards needed ($16.95 × 100 = $1695). (4) Add the installation charge to the carpet cost ($1695 + $250 = $1945.)
45.dA specific lien is one against a certain property, but a general lien covers all the debtor’s property, both personal and real. Both are enforceable in court.
46.dThe optionee, in an option to purchase, is the party with the right to buy during the option period. But buying is optional; the optionee is not required to buy.
47.cBy paying the homeowner the amount set in a condemnation suit, the city may force the homeowner to sell the city the property. It can than be cleared for a parking lot. The city may do this under the right of eminent domain.
48.dA entire section contains 640 acres. Three steps: (1) Find ½ of ¼ of a section, which is 640 acres (½×¼× 640 acres = 80 acres). (2) Find ¼ of ¼ of 640 acres (¼ ×¼× 640 acres = 40 acres). (3) Combine (add) the two areas (80 acres + 40 acres = 120 acres).
49.bThe large, expensive houses nearby raise the value of the smaller house by the principle of progression. At the same time, the smaller house’s effect on the more expensive houses is to lower their value by the principle of regression.
50.bEach creates a general lien—a claim against all the personal and real property of the debtor.
51.bWhen an offer has already been accepted and the party making the offer has been told of the acceptance, it is too late to revoke the offer without incurring possible penalties.
52.bWhen the man sold his share, that action destroyed the joint tenancy (because there were only two joint tenants to start with). The remaining tenants now each own 50 percent of the property but as tenants in common.
53.cA lease of less than a year is enforceable.
54.dA counteroffer constitutes a rejection of an offer. The buyer’s original offer was rejected by the owner’s counteroffer. The owner may not later accept the offer after previously rejecting it.
55.bBecause the man’s property serves the neighbor, it is the servient tenement (parcel).
56.cTwo steps: (1) Multiply the interest for one quarter by 4 to get one year’s interest ($562.50 × 4 = $2,250). (2) Find the principal by dividing the amount of annual interest by the interest rate ($2,250 ÷ 7.5% = $30,000).
57.aIt is an interesting type of defeasible fee estate called a determinable fee. The grantee’s ownership can be terminated by the tearing down of the building. The language used creates the possibility of reverter because of the words as long as. If the building were torn down, the property would instantly revert to the ownership of the grantor, even if the grantor did not know anything about it or take any action.
58.aThree steps: (1) Find a year’s interest by multiplying the first month’s interest by 12 ($460 × 12 = $5,520). (2) Find the principal of the loan by dividing the annual interest by the interest rate ($5,520 ÷ 6% = $92,000). (3) Find the appraised value by dividing the loan amount by 80 percent because the principal (the loan) is 80 percent of the appraised value ($92,000 ÷ 80% = $115,000).
59.dZoning may have some impact on market value, but it does not regulate it.
60.bIf the seller has been declared legally incompetent, the listing is void.
61.cTo recover the deficiency of $14,000, the lender would seek a deficiency judgment. If granted, the judgment would become a general lien on all the remaining assets of the delinquent borrower.
62.aWhatever the other details of the sale, when the seller of a home uses a broker, the terms of the federal Fair Housing Act of 1968, as amended, are binding.
63.dThree steps: (1) Find the amount of the loan (75% × $137,000 = $102,750). (2) Find the amount of the required down payment ($137,000 – $102,750 = $34,250). (3) Subtract the deposit from the required down payment ($34,250 – $3,000 = $31,250).
64.dValid contracts are voluntary agreements. Undue means inappropriate or improper. Undue influence is a solid basis for rescinding a contract because such influence on a party to a contract prevents the party’s agreement from being truly voluntary.
65.bThis is a special warranty deed because the grantor accepts responsibility only for encumbrances that arose during the grantor’s ownership.
66.dThe unmarried couple are tenants in common because they own unequal interests. Even if they were husband and wife, as long as they owned unequal interests, they would still be tenants in common.
67.bFour steps: (1) Find the buyer’s required down payment by subtracting the loan from the price ($184,500 – $167,600 = $16,900). (2) Find the monthly taxes by dividing the annual taxes by 12 ($1,880.96 ÷ 12 = $156.747). (3) Find the value of 9½ months' taxes at $156.747 per month (9½ × $156.747 = $1,489.097). (4) Find how much cash the buyer needs so far, and then subtract the deposit already paid ($16,900 down payment + $1,489.097prorated tax + $1,250 other closing costs – $2,000 deposit= $17,639.097,or $17,639.10 to the nearest cent).
68.dQuoting different prices or terms based on the prospect’s membership in a protected group is a blatant violation of the federal Fair Housing Act.
69.aA deed given by a trustee to someone other than the trustor is a trustee’s deed.
70.aIf the property’s use is to be continued as a restaurant, the appraiser will look at its income to reach an opinion of value. The appraiser will emphasize the income (capitalization) approach.
71.dIn a term (straight) loan, the periodic payments are made on interest only. The entire original principal will come due at the end of the term of the loan.
72.dCommon areas, including amenities such as swimming, biking, and tennis areas, are owned by the unit owners in undivided percentage interests as tenants in common.
73.aEarnest money is a credit to the buyer (borrower). No notation is made for the seller.
74.aIf taxes are not yet due and payable, sellers will receive a debit and buyers a credit.
75.bIf part of the real estate is severed from the structure or the land, it becomes personal property. The process is known as severance.
76.cPersonal, revocable, and unassignable permission to use another’s land is a license.
77.dFive steps: (1) Find the length of the entire fence by adding the sides together (90 ft + 175 ft + 90 ft + 175 ft = 530 ft). Linear feet means feet all in a line. (2) Find the cost of erecting the fence by multiplying the length of the fence by the cost per linear foot (530 ft × $1.25 per linear foot = $662.50). (3) Find the square-foot area of the fence material by multiplying its length of 530 feet by its height of 6½ feet (530 ft × 6½ ft = 3,445 sq ft). (4) Find the cost of the fencing material at $.825 per square foot (3,445 sq ft × $.825 per sq ft = $2,842.125). (5) Add the cost to erect the fence to the cost of material ($662.50 + $2,842.125 = $3,504.625, or $3,504.63 rounded to the nearest cent).
78.bIn an open-listing contract, the seller agrees to compensate the broker only if that broker sells the property. If the owner also engages a second broker who then produces a buyer, the first broker gets nothing and the second broker is compensated. The seller apparently engaged a second licensee, who produced a buyer. The initial licensee gets nothing, having had nothing to do with the buyer.
79.dCommission-setting agreements and allocation of markets on any basis between and among different companies violate antitrust law. However, commission setting within a company is not a violation.
80.dA landlord’s persistent failure to heat an apartment during the winter, even when repeatedly informed of the condition, is negligence and could result in constructive eviction—the tenant being forced to move. Actual eviction occurs as a result of a tenant’s breaching a lease, when the landlord must force the tenant from the unit.
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