Laws of agency and fiduciary duties

Question 1

A property owner suffers a loss because of the fraudulent misrepresentation of a broker. The owner is advised to first:

a. file a claim with the Real Estate Commissioner.
b. file a claim with the Real Estate Education Research and Recovery Fund.
c. sue the broker for damages.
d. collect from the broker’s errors and omissions (E&O) insurance carrier.

Answer 1

c — When a principal feels there is a grievance with a broker, they need to first pursue the broker for damages. If unsuccessful in collecting after prevailing in court, they can then submit the judgment to the Recovery Fund for payment.

Question 2

Which of the following is an example of a trust fund violation?

a. Holding a deposit check uncashed prior to acceptance at the direction of the buyer.
b. Holding a deposit check uncashed after acceptance at the direction of the seller.
c. Holding a deposit check uncashed at your own discretion.
d. Failing to disclose a material defect to a buyer which negatively affects the value of a property.

Answer 2

c — This question concerns the person that has authority to act regarding deposits. Only the principals can decide the proper handling of the check. Answer selection D, while a violation of disclosure law, is not a trust fund and accounting violation.

Question 3

The Real Estate Law is part of:
a. the Corporations Code.
b. the Business and Professions Code.
c. the Statute of Limitations.
d. Penal Code.

Answer 3

b — The Real Estate Law is located in a specific state code. Not all real estate companies are corporations, so it would not be reasonable for the law to come from the Corporations Code. The Statute of Limitations has to do with time limits before which action need to be taken. Real estate brokerage is considered a profession, and thus is controlled under the Business and Professions Code.

Question 4

Commingling means the opposite of:

a. subrogation.
b. mixing.
c. subordination.
d. separation.

Answer 4

d — Commingling is nearly identical to the meaning of the word mixing. Therefore, separation would be its opposite.

Question 5

A property owner tells the broker that the house is connected to the sewer. The broker relays this information to the buyer, who later finds that the house has septic system in need of repair.

The buyer would sue:
a. the broker and the owner.
b. no one, as they should have checked.
c. the broker.
d. the owner.

Answer 5

a — In this instance, the buyer includes the owner in the suit as they are required to disclose a septic system on the Transfer Disclosure Statement (TDS). The broker is also named since they failed in their due diligence to be aware of the septic system.

Question 6

A salesperson representing a buyer, in selling properties listed with another broker, is directly responsible to:

a. the selling broker.
b. the Multiple Listing Service (MLS).
c. the listing broker.
d. the owner.

Answer 6

a — The salesperson is always responsible to their broker. Unique to real estate, “selling broker” refers to the buyer’s broker.

Question 7

A valid agency requires a(n):

a. written agreement.
b. express agreement.
c. attorney-in-fact.
d. None of these.

Answer 7

d — A valid agency doesn’t require any of these. It can be triggered by the actions of the principal or agent.

Question 8

A listing broker may not be:

a. the sole agent of the owner.
b. the sole agent of the buyer.
c. a sole agent of the seller.
d. a dual agent.

Answer 8

b — The listing broker, also known as a seller’s broker, would naturally represent the seller. They could also represent the buyer and therefore be a dual agent. They could never represent solely the buyer.

Question 9

An agency relationship would not be created by:

a. a verbal agreement.
b. ratification.
c. implication.
d. subrogation.

Answer 9

d — Subrogation is the substitution of one person for another. Therefore, it would not create an agency relationship whereas all of the others are possible.

Question 10

A broker may never:

a. accept a commission from the buyer and the seller.
b. sell their own property to a customer.
c. act as an escrow.
d. None of these

Answer 10

d — All of those are legal actions for a broker

Question 11

A seller’s broker receives a full price offer on their listing. As they were leaving the office to present the offer, a broker of a second buyer hands them a separate cash offer for $10,000 less than the listed price. What should the seller’s broker do?

a. Present both offers at the same time.
b. Suggest to the first buyer that they improve their offer before the seller’s broker will present it to the seller.
c. Tell the other broker the property has already been sold.
d. Present the first offer and see if the seller accepts that before submitting the other offer.

Answer 11

a — Offers need to be submitted to the seller, whether only one or multiple. Any other choice would fail in the agent’s fiduciary duty.

Question 12

Failing to provide financing in certain communities is called:

a. redlining.
b. redevelopment.
c. panic selling.
d. subordination.

Answer 12

a — This is an example of redlining. Panic selling is similar to blockbusting

Question 13

Which of the following is not a possible agency relationship in California?

a. Agent for the buyer.
b. Dual agent.
c. Agent for the seller.
d. Agent for themselves.

Answer 13

d — An agent is a person who acts on behalf of another. Thus, an agent cannot be an agent for themselves. Here, they are a principal acting for their own account.

Question 14

Which will not terminate an agency relationship?

a. Mutual consent.
b. Death of the agent or principal.
c. Estoppel.
d. Destruction of the property.

Answer 14

c — Estoppel is a legal theory under which a person is barred from asserting or denying a fact because of the person’s previous acts or words. This would not terminate an agency relationship. All the other answer selections are valid ways to terminate an agency relationship

Question 15

What is not essential to the creation of an agency relationship?

a. Agreement to pay consideration.
b. Competency of the principal.
c. Consent of the principal.
d. A fiduciary relationship.

Answer 15

a — The creation of agency does not require payment of a fee to be valid.

Question 16

Agency relationships may not be created by:

a. voluntary offer by the agent.
b. implied contract.
c. ratification.
d. necessity or emergency

Answer 16

a — Agency requires agreement of the parties. A volunteer action by the agent without the corresponding consent of the principal is insufficient.

Question 17

A real estate agent may represent all principals in a transaction if:

a. they have obtained the consent of all parties to this dual agency relationship.
b. they have informed all principals that they are the agent for each principal.
c. they are collecting a commission from each principal with the knowledge of the other party.
d. All of the above.

Answer 17

d — In order to properly be a dual agent, the dual agency status needs to be disclosed as soon as possible and all parties must consent.

Question 18

The real estate disclosure law which became effective on January 1, 1988 refers to:

a. agency relationships.
b. people who arrange credit.
c. disclosures made by sellers.
d. the Truth-in-Lending Act (TILA).

Answer 18

a — The agency disclosure law governing agency relationships became effective January 1, 1988.

Question 19

A buyer’s agent prepared a purchase offer on a home for their buyer. When should the agent give the buyer the Agency Law Disclosure form?

a. As soon as practicable.
b. Before showing the buyer the house.
c. Before preparing the offer for the buyer.
d. On the opening of escrow.

Answer 19

a — The Agency Law Disclosure is to be made as early as practical, but always before the principal signs any contract.

Question 20

A seller’s agent listed a ranch for sale under an exclusive right to sell listing. A buyer’s agent, working through the local multiple listing service (MLS), presented an offer which the seller accepted. During escrow, the seller’s agent discovered the buyer had recently purchased many similar ranches in the area at a far higher cost per acre than had been offered in this transaction.

What should the seller’s agent do?

a. Do nothing because the deal is in escrow.
b. Disclose all information to the seller and let the seller decide what to do.
c. Cancel the escrow on behalf of the seller and try to resell the property for a higher price.
d. Inform the seller, but insist the deal must stay in escrow

Answer 20

b — The listing agent’s fiduciary duty requires them to disclose all material facts to their client, including the existence of the other transactions.

Question 21

Which of the following would be a fiduciary duty of the agent of the buyer?

a. Acting with the utmost care, integrity, loyalty and honesty when dealing with the buyer.
b. Steering the buyer to ‘appropriate’ neighborhoods.
c. Telling the buyer which lender to use.
d. Communicating to the seller the maximum price the buyer will be willing to pay.

Answer 21

a — Answer choices B and C are wrong since they work against the concept of the client as the decision maker. Answer selection D is clearly wrong as it is improper to reveal confidential pricing information to the opposing party. Only A meets the requirement of fiduciary duties.

Question 22

A real estate broker acts from a position of trust for the seller or buyer. This is described legally as a(n):

a. fiduciary relationship.
b. ostensible agent.
c. dual agent.
d. independent contractor relationship

Answer 22

a — The relationship is described as fiduciary. None of the other answer selections describe a relationship of loyalty and trust

Question 23

A seller listed their home for sale with their broker for $400,000. The seller told their broker it was imperative that the property be sold quickly. The seller’s broker showed the property to a buyer and told them the seller was financially insolvent and would accept $380,000. Based on the seller’s broker’s statement, the buyer submits a $380,000 offer which the seller accepts. Concerning the seller’s broker’s actions, which of the following is true:

a. the seller’s broker violated their fiduciary obligation to the seller since they acted in excess of their authority.
b. when the seller accepted the offer, the broker’s actions were vindicated.
c. the broker’s action were proper since the seller indicated they wanted an immediate sale.
d. the broker interpreted the seller’s wishes and produced a sale accordingly. Acceptance of the offer made the broker’s actions acceptable.

Answer 23

a — This activity is a violation of the fiduciary duty regardless of the later actions or results.

Question 24

A seller’s broker receives a written offer on a listed property. They are certain the seller will not accept it. What would NOT be an acceptable action for the seller’s broker:

a. write new terms on the back of the offer and return it to the buyer for approval.
b. change the offer price to what the broker thinks the seller will accept, and initial the change.
c. present the offer to the seller, and upon rejection, induce the seller to make a counter offer.
d. present the offer to the seller as written.

Answer 24

b — Changes and counteroffers must be made by the principals. Any action instigated by the agent would be wrong.

Question 25

In a real estate sale, when a broker represents only the buyer, this is referred to as a(n):

a. single agency.
b. implied agency.
c. dual agency.
d. general agency.

Answer 25

a — Either representing only the buyer or the seller would constitute a single agency

Question 26

Before a broker may solicit for an advance fee, the advance fee paperwork must be submitted to the for approval at least 10 days prior to use.

a. Department of Real Estate (DRE).
b. Secretary of State.
c. Department of Housing and Urban Development.
d. State Insurance Commissioner.

Answer 26

a — A broker needs to obtain approval from Department of Real Estate (DRE) prior to soliciting for an advance fee. The other government entities provided in the answer selections have no jurisdiction over the documents.

Question 27

When a broker or their agent, acting on behalf of a client, has a competing professional or personal bias which hinders their ability to unreservedly fulfill the fiduciary duty they have undertaken, this is referred to as a(n):
a. conflict of interest.
b. sub agency.
c. dual agency.
d. violation of law

Answer 27

a — A personal bias suggests a conflict of interest. The other choices would be inappropriate to the question. Agency, whether dual agency or subagency, would imply a relationship with the client as opposed to some personal or professional conflict.

Question 28

A real estate broker is guilty of conversion if they:

a. acted as a dual agent without the approval of all parties.
b. split their commission with an unlicensed party.
c. used trust funds for their personal use.
d. commingled funds.

Answer 28

c — Unlike commingling which is the mixing of client funds, conversion requires the personal use of client monies.

Question 29

The best guideline to determine whether an action is ethical can be found in:

a. state legislation.
b. the Business and Professions Code.
c. the Preamble of the National Association of REALTORS®.
d. what is in the best interest of the real estate licensee

Answer 29

b — The Real Estate Law is found in the Business and Professions Code, which also covers the ethical practice of licensees.

Question 30

Any broker negotiating a transaction as an agent for either party has a(n) to disclose title conditions affecting ownership or use of the property to both parties, not just their client.

a. agency duty
b. general duty
c. fiduciary duty
d. common law duty

Answer 30

b — A fiduciary duty is owed only to a broker’s client. However, the broker also owes a general duty to all parties to disclose any material facts about a property, such as title conditions affecting the property’s use.

Question 31

A real estate broker sends all of their title business to Wonderful Title Co. In appreciation of the business, the title company pays the broker $10 for each transaction. According to the Real Estate Settlement Procedures Act (RESPA), this practice is:

a. standard business practice in the real estate industry.
b. permissible.
c. permissible if the seller is going to pay for the title services and is told about it and approves.
d. forbidden.

Answer 31

d — The Real Estate Settlement Procedures Act (RESPA) explicitly protects consumers from kickbacks and uncompetitive or duplicated fees.

Question 32

These are practices which are not openly discriminatory, but result in discriminatory effects.

a. Implicit discrimination.
b. Sanctioned discrimination.
c. Overt discrimination.
d. Complicit discrimination.

Answer 32

. a — Implicit suggests something that is implied or understood, though not directly expressed, eliminating answer selection B. Sanctioned discrimination and C. Overt discrimination.

Question 33

Which of the following is an attorney-in-fact?

a. A principal who has been given implied powers of agency.
b. An agent performing a dual agency.
c. A legally competent person who has been given a power of attorney to act on behalf of another.
d. A lawyer acting as the administrator of an estate

Answer 33

c — Note that the question contains the word ‘attorney’ yet the correct answer demonstrates any competent person in possession of a power-of-attorney is qualified. Thus, answer choice C is the best answer.

Question 34

A person who is not among the protected groups under the Americans with Disabilities Act (ADA) and can therefore be refused a rental is a(n):

a. alcoholic.
b. pregnant women.
c. drug addict.
d. blind individual with a guide dog.

Answer 34

c — Only a drug addict is not a protected class under the Americans with Disabilities Act (ADA).

Question 35

A real estate salesperson’s license has been suspended because money was paid out of the Recovery Account. Their license will not be reinstated:

a. until they pay the person any amount not paid by the Recovery Account.
b. until they pay the Recovery Account for half of the money, plus interest.
c. ever, as a suspended license may never be reinstated.
d. until they repay the Recovery Account for all money paid, plus interest

Answer 35

. d — As this is civil action, the answer selection C is inappropriate. Only the full restitution of the funds paid from the Recovery Fund allows for the reinstatement of the salesperson’s license.

Question 36

When approached by members of minority groups who want to be shown property, a real estate salesperson avoids showing the buyers property in integrated areas.

This would be an example of:
a. blockbusting.
b. steering.
c. redlining.
d. best business practice.

Answer 36

b — Redlining is the refusal to make loans or issue insurance in a neighborhood. Blockbusting is related to listing efforts. Also known as panic selling, blockbusting occurs when an owner is warned about demographic changes in the neighborhood. Steering refers to the discriminatory practice of restricting the rental or ownership of a property to a specific class of people to perpetuate segregated housing.

Question 37

Which of these would create an agency relationship:

a. implication.
b. ratification.
c. express agreement.
d. Any of the above

Answer 37

d — Agency can be created by any of those actions.

Question 38

Admiralty Escrow offers a $100 “referral fee” to any real estate agent who opens escrow during the month of May. Under the Real Estate Settlement Procedures Act (RESPA), such an offer:

a. is always allowed.
b. is allowed if disclosed to both the buyer and seller.
c. must be disclosed in the settlement statement.
d. is not allowed.

Answer 38

d — The Real Estate Settlement Procedures Act (RESPA) does not permit referral fees or kickbacks under any circumstance.

Question 39

When a broker deposits their own personal or business funds in a client trust fund account, that act is referred to as:

a. subrogation.
b. subordination.
c. conversion.
d. commingling

Answer 39

d — The mixing of monies is commingling, as demonstrated here. In order for this to be conversion, the broker would have to be using client funds for personal purposes.

Question 40

The Real Estate Commissioner is authorized to:

a. impose fines on any real estate licensee who is convicted of fraudulent activities.
b. promulgate rules and regulations to enforce the California real estate laws.
c. issue non-resident real estate licenses to states which prohibit their residents from holding California real estate licenses.
d. implement federal lending legislation to encourage a healthy housing market.

Answer 40

b — The chief officer of the Department of Real Estate (DRE) is the Real Estate Commissioner. The Real Estate Commissioner’s principal responsibility is to enforce all the real estate laws pertaining to real estate practice, licensing and the Subdivided Lands Act.

Question 41

If a real estate broker fires a salesperson for an illegal act, the broker should inform the Real Estate Commissioner of the firing:

a. immediately by telephone.
b. if they choose to. It is not the responsibility of the broker to inform the Real Estate Com missioner.
c. Immediately in writing. It is unconditionally required.
d. never. It is unethical to interfere between the sales licensee and Real Estate Commissioner.

Answer 41

c — Informing the Department of Real Estate (DRE) of an agent’s illegal activity is an unconditional requirement. Therefore, none of the other choices can be correct.

Question 42

Agent Andy is hired by Seller Sally to list her property for sale. Sally is under financial distress and is motivated to sell quickly. Later, Agent Andy enters under contract to help Buyer Bill purchase a suitable property. Agent Andy shows Sally’s property to Bill and lets Bill know Sally is desperate to sell and will accept a bid lower than the list price. Bill promptly decides to
purchase the property. Since Bill purchased the property so quickly, Agent Andy didn’t have the opportunity to reveal to either party that he was acting in a dual agency capacity. Which of the following statements is least correct about this scenario?

a. Agent Andy could be subject to disciplinary action by the Department of Real Estate (DRE).
b. Seller Sally can recover her money losses from Agent Andy.
c. Agent Andy cannot enforce the collection of a commission from Seller Sally.
d. Agent Andy can still timely disclose his dual agency status to both Seller Sally and Buyer Bill so long as he does so in writing within three business days of closing.

Answer 42

d — An agent who fails to promptly disclose their dual agency at the moment it arises is subject to the loss of their brokerage fee, liability for their principals’ money losses and disciplinary action by the Department of Real Estate (DRE).

Question 43

In regards to items of value held in trust, which of the following statements is least likely to be true?

a. Trust funds can be kept in separate interest bearing accounts.
b. Trust funds for taxes and insurance may bear interest.
c. Trust fund accounts must be insured by the FDIC.
d. Trust funds cannot take the form of precious gems or stones.

Answer 43

d — Trust funds come in many forms, including checks, precious metals/stones, stocks/bonds, collectibles, promissory notes, and any other item or evidence of value.

Question 44

Who may withdraw money from a trust fund?

a. Any person employed by the broker.
b. Only salespeople in the broker’s employ.
c. A corporate director.
d. Any authorized employee of the broker.

Answer 44

. d — The broker is required to name the employee who is authorized to withdraw trust funds. The authorized party need not be licensed.

Question 45

5. If an agent discloses to their principal the race, creed, or color of a prospective buyer or tenant, has the agent committed a discriminatory act?

a. No, since an agent is obligated to disclose to their principal all material facts that might
influence the principal’s decisions concerning any real estate transaction.
b. No, since a fiduciary relationship exists between the agent and the principal and the agent must exercise good faith in working for the principal’s best interest.
c. Yes, since the race, creed or color of the prospect does not matter.
d. Yes, however, that disclosure violates only a state law and there is no penalty

Answer 45

c — This is a Civil Rights Act question. The answer may seem obvious if one thinks ‘color blind’ – the race, creed or color of the prospect does not matter.

Question 46

In 1968, the U.S. Supreme Court barred all racial discrimination in the sale or rental of property. A person discriminated against should:

a. contact the local police.
b. file a criminal action in local and state courts.
c. plead the fifth.
d. file a civil action in federal court.

Answer 46

d — The U.S. Supreme Court has a federal jurisdiction. The action would thus be heard in a federal court.

Question 47

A buyer of a property had a real estate agent write up an offer to purchase a home. The offer was contingent upon the sale of their existing home. The seller made a counter-offer accepting the buyer’s offer, but reserved the right to continue marketing the home, seeking higher offers and granting the buyer a right of first refusal to remove their contingency if a better offer came in. The buyer accepted the seller’s counteroffer and immediately listed their existing home for sale. Shortly thereafter, the seller notified the buyer’s agent that a better offer had been received without contingencies. What should the agent advise the buyer to do?

a. Advise the buyer to get a short term bridge loan so that they can purchase the home without first selling their existing home.
b. Immediately advise the buyer to remove the contingency and open escrow with the seller.
c. Advise the buyer of the advantages and disadvantages of removing the contingency and buying the home before the sale of their existing home.
d. The buyer’s agent should not offer advice to buyer on this issue.

Answer 47

c — Any time terms must be changed, as with a counteroffer, the principal must make the decision. It is the agent’s responsibility to give the client all the information and allow them to make their own decision.

Question 48

Which of the following is not a recognized purpose of the Equal Credit Opportunity Act?

a. Standardizing the methods for obtaining credit.
b. Regulating the printing or publishing of an advertisement for the sale or rental of residential property that indicates a wrongful discriminatory preference.
c. Discouraging discrimination in lending based on age, sex, race, marital status, color, religion or national origin.
d. Regulating the total amount of credit given to a borrower

Answer 48

b — Answer selections a, c, and d each reference the stated goals of the Equal Credit Opportunity Act. However, the printing or publishing of an advertisement for the sale or rental of residential property that indicates a wrongful discriminatory preference is a violation of the Federal Fair Housing Act (FFHA).

Question 49

When a deed includes the racial identity of the parties, it can be rewritten under which of the following circumstances:

a. when the title company rewrites it.
b. it was created prior to 1968.
c. if it is offensive or discriminatory.
d. by court order.

Answer 49

d — Altering an existing signed document can never be done without serious legal consideration. Of the answer selections, D is the only one that addresses a court order.

Question 50

A real estate broker who has been appointed as a subagent for a seller, with the seller’s approval, has a fiduciary duty to:

a. the primary agent.
b. both principals.
c. the buyer only.
d. the seller only

Answer 50

d — As a subagent, approved by the seller, the fiduciary duty would be owed to the seller.