Real estate

Question 1

Characteristics of Real Estate

Answer 1

Indestructibility
(physical durability, permanence, land is indestructible)

Fixity and Situs
(Permanence is known as Fixity, while desirability is known as Situs)

Economic Scarcity
(created by demand for land, short supply and high demand)

Question 2

Land

Real estate

Real property

Improvement

Personal Property

Fixtures

Trade fixtures

Fructus Naturales - trees, decorative plantings, uncultivated plants. Considered real property.

Fructus Industriales - annually cultivated crops known as emblements. Considered personal property even prior to harvesting.

Answer 2

Land includes surface, subsurface, and air rights.

Real estate includes land and human-made improvements attached.

Real property includes real estate PLUS bundle of legal rights (exclusion, possession, disposition, quiet enjoyment)

Human-made addition attached to land (fences, decks, roads)

Personalty or chattel. Transferred through Bill of Sale.

Chattel attached to real estate (chandelier, ceiling fan)

Personal property owned by and needed for tenant’s business. Remains property of tenant.

Question 3

Ownership rights

Answer 3

-Surface rights
-Subsurface rights (mineral rights)
-Air rights
-Water rights

Question 4

Commercial Property

Industrial Property

Answer 4

• Office Buildings, Retail Stores, Gas stations
• Manufacturing, Storage, Distribution Centers, Research, Warehousing

Question 5

Comparative Market Analysis

Answer 5

Number of homes currently on the market, their listing prices, and purchase prices of recent sales. Best guide for establishing market price.

Question 6

TRELA

Texas Occupations Code

The Texas Real Estate Commission (TREC) is responsible for enforcing TRELA.

Sunset Act is a common state law in Texas requires Sunset Commission to evaluate all state agencies every 12 years based on efficiency and need for services. TREC reviewed.

Answer 6

Texas Real Estate License Act governs the activities of real estate sales agents.

TRELA is one section of a larger law passed by the State Legislature called the Texas Occupations Code.

Real Estate License Act is Chapters 1101 and 1102 of the Texas Occupations Code. Chapter 1101 pertains to real estate brokers and sales agents and Chapter 1102 pertains to real estate inspectors.

Question 7

TRELA anti-discrimination laws

Answer 7

Race, color, religion, sex, disability, familial status, national origin, ancestry

Question 8

License holders requirements

Answer 8

-18 years
- US Citizen
- Good moral character and integrity
-Sponsoring broker

Question 9

Type of Homeowership

Answer 9

-Single-Family

-Condominium (unit itself and share of common elements). Have to pay assessments for upkeep.

-Cooperative (shares of stock in corporation). Have to pay assessments for upkeep.

-Townhouse (dwelling and land it sits on)

Planned Unit Development (PUD) - (subdivision or development includes single family dwellings and common elements)

Multi-family homes (duplex, triplex, fourplex)

Timeshare (take turns using)

Question 10

PITI

Tax Benefits

Capital Gains Tax

Homestead Rights (protects from creditors - excludes mortgage and tax liens)

CLUE report check for any claims made on specific property in last 5 years. Used by insurance companies.

HOA - Homeowners Association

Interest pad in arrears (after it is received/issued)

Answer 10

Principal, Interest
Taxes, Insurance

Deduct annual loan interest and loan financing expenses. Homestead, senior citizen, disability.

Taxes on profit made by selling an asset. Exemption for joint $500k and single $250k. Can be used every 2 years and must have occupied as primary residence for min 2 of past 5 years.

Question 11

Fiduciary relationship

Principal, Client, Customer, Third Party

Duties owed to Client vs. Customer”

Client = OLDCAR (obedience, loyalty, disclosure, confidentiality, accounting, reasonable care) *forever

Customer = Honesty and fair dealing, Disclosure (agency, material facts), Accounting, Reasonable Care. NOT Confidentiality and Obedience.

Answer 11

Between broker and client

Principal (buyer, seller, landlord, tenant)

Client (signed agreement aka your Principal)

Customer (person on other side of transaction)

Third party (others involved).

Accounting for all funds entrusted. NO commingling (mixing funds) it is illegal. No longer than COB 2nd business day after signing contract to make deposit.

Question 12

Agency relationship types

License holders’ first duty in agency relationship is Disclosure.. IABS Notice at first substantive dialogue about specific property. Also disclose relevant agency relationship at first contact.

Answer 12

Special agency (broker-client)

General agency (sales agent-broker) actions entrusted.

Universal agency (child-parent) such as General Power of Attorney.

Intermediary broker (representing both parties) requires mutual consent.

Question 13

DTPA (Texas Deceptive Trade Practices Consumer Protection Act)

Puffing describes in a flattering way without misrepresenting.

Answer 13

Make sure to disclose all known facts and source of facts.

TREC can suspend or revoke the individual’s license.

Unconscionable Action - take advantage of lack of knowledge, ability, experience or capacity of person to a grossly unfair degree.

Misrepresentation - unintentional mistake written or spoken.

Fraud - Intentional deception

Question 14

Civil Rights Act of 1866 (Grants all citizens of US basic rights regardless of their race, color.)

Fair Housing Act (1968) (7 protected classes - race, color, national origin, sex, religion, familiar status, disability). Does NOT govern commercial real estate. Protects against discrimination of protected classes.

Americans with Disabilities Act (ADA) -
Protects civil rights of individuals with disabilities.

Equal Credit Opportunity Act (illegal for lender discrimination)

Community Reinvestment Act of 1977

Home Mortgage Disclosure Act of 1975 (requires lender disclosure)

HUD (Secretary of Department of Housing and Urban Development): Enforcing Fair Housing Laws - victims have 1 year to file a complaint.

Texas Department of Housing and Community Affairs: (i) develop affordable housing, (ii) regulate affordable properties, (iii) set and enforce standards.

Answer 14

Blockbusting - panic selling or panic peddling.
Steering
Redlining - lender limits loans or LTV ratio

Fair Housing Act Exemptions: Religious Organization (may not discriminate rate, color, national origin).

Private Club Exemption (cannot restrict due to protected class)

Housing for Older Persons (at least 80% must be 55 and older)

Drug Use Record Exemption

Owner-only Transaction Exemption

NO EXEMPTION for Race and Color, established by Civil Rights Act of 1866.

Question 15

NAR Code of Ethics adopted in 1913.
Consists of Preamble and 17 Articles:
- First 9 are Duties to Clients and Customers
- Articles 10-14 are Duties to Public
- Articles 15-17 are Duties to REALTORS
*Requires higher standard than law.
Golden Rule: “Whatsoever ye would that others should do to you, do ye even so to them”.
REALTOR connotes “competency, fairness, and high integrity”

Canons of Professional Ethics and Conduct enforced by TREC Chapter 531 of Texas Administrative Code.

Answer 15

Article 12 of NAR Code of Ethics related to “Issues with Advertising”. When REALTOR writes ad copy required to put the word REALTOR(R) in the ad somewhere.

TRECs Canons of Professional Conduct:
- Fidelity (protect promote client interests)
- Integrity
- Competency (informed of market, performs)
- Consumer Information (Consumer Protection Notice TREC No. CN 1-2 with 10-point font) (IABS)
- Discriminatory Practices
- Information About Brokerage Services

Question 16

TREC has 9 members (appointed by governor and confirmed by 2/3 of Texas Senate). 6 year terms. Enforce TRELA.

Broker-Lawyer Committe has 13 members (6 brokers appointed by TREC, 6 lawyers appointed by president of Texas Bar, 1 public member appointed by governor). 6 year terms. Draft revise contract forms for approval and adoption by TREC.

Answer 16

TRELA is part of Texas Occupations Code. Chapter 1101 is known as TRELA.

Section 1101.106 states TREC executive director must maintain written policy to ensure equal opportunity employment program.

TREC oversees: inspectors, easement/right-of-way agents/education providers/timeshare developers/residential service companies/real estate brokers and sales agents.

Recovery Trust Account: commissions monetary fund to reimburse public financially harmed by unlawful actions of license holders. Limited to $50k single incident or $100k per license holder. Must be filed within 2 years of incident.

Notice of violation 20 days to accept decision or ask for hearing. Otherwise penalty is applied. Up to $5k per violation per each day a violation continues.

Errors & Omissions Insurance - cover mistakes but not fraud or intentional misconduct.

Question 17

Legal Description:
- Metes and Bounds
- Rectangular Survey System
- Recorded Plat (Lot and Block)

MEMORIZE!!!!!!!
43,560 square feet in an acre
5,280 feet in a mile
640 acres in a township section

Air Lot
Contour Maps (hills/valleys/plateaus - clear picture of terrain)

Answer 17

Metes and Bounds is the oldest method. Traces boundaries of property in reference to a fixed monument. Point of beginning (POB) or point of commencement. In clockwise fashion.
Benchmarks are permanent reference points marker attached to durable object. Records location and elevation in relation to sea level.

Longitude lines or Meridians (North to South)
- Principal Meridians
- Baseline (intercepting latitude line)
Latitude lines or Parallels (East to West)
Range columns run parallel to meridian (north-south) while township lines run parallel to baselines (east-west) intersecting to create 36 square mile areas called townships.

Lot and Block is most common type of legal description i.e. Lot and Block number, name or number of subdivision plat, name of county and state.

Plat - drawing of development
Parcel - individual lots combined to make block
Lot - land measured by metes and bounds
Block - collection of lots (parcels)
Tract - totality of property shown on plat

Developer or surveyors Recorded Plat shows borders of individual lots in particular Tract.
Lot number for each parcel, block number for each block (collection of parcels), number for tract (collection of blocks).

Question 18

Performance Agreement (agrees to perform)
Forbearance Agreement (agrees not to take action i.e. lender foreclosure)

Bilaterial Contracts (both parties bound to perform)
Unilateral Contracts (only 1 party bound to perform)

Executed Contracts (all terms fulfilled)
Executory Contracts (partially or wholly incomplete)

Breach of contract
Discharge
Forfeiture (seller keeps earnest money)
Rescission (selller returns payments)
Sue for specific performance
Sue for compensatory damages

Assignment (transfer rights and obligations)
Novation (replace with new contract)

Answer 18

TREC has 15 promulgated addenda.

Essential elements of a contract:
-Mutual assent (everyone agrees)
-Legally competent parties (age and mentally)
-Consideration (compensation)
-Lawful objective (not unlawful)
-Adherence to statute of frauds (in writing)

Contract acceptance:
-Express
-Implied
-Conditional

Counteroffer is a rejection of the offer with a substitute offer.

Contingencies:
- Financing
- Inspection/appraisal

Question 19

Property Ownership:
-Severalty (sole ownership)
-Trust (3rd party trustee temp holds title)
-Co-ownership:
- Tenancy in common
- Joint Tenancy
- Community Property
- Partnership

Answer 19

Tenancy in Common:
- No division of physical property
- Divided interest
- Can pass ownership rights in a will
- Can sell, lease, dispose of interest
- No right of survivorship

Joint Tenancy:
- Right of survivorship (surviving joint tenants inherit)
- Cannot pass ownership in will
- Cannot transfer
- New joint tenancy needed for new tenants
*Must satisfy these four: (i) Unity of possession, (ii) unity of interest, (iii) unity of time, (iv) unity of title.

Community Property:
- Texas is a community property state
- Anything acquired during marriage is community property
- Equal ownership interest

Partnerships:
- General Partnerships (all partners responsible)
- Limited Partnerships (general partners full liability / limited partners limited liability).

Question 19

Estate (extent of interest one owns)

Four types of estates:
- Freehold (owner has degree of ownership)
- Leasehold (tenant right to possess)
- Equitable (less interest after offer acceptance)
- Concurrent (two or more owners)

Mortgage Liens (property itself as security)
Mechanic’s Liens (payment for labor/material)
Judgment Liens (court order forcing payment)
Lis Pendens (notice of potential future claim)
Attachment Lien (stops conveyance of title)

Riparian rights (rivers and streams)
Littoral rights (lakefront and oceanfront)
Open Beach Law (public right to use beach)

Texas Commission on Environmental Quality (TCEQ) apply federal and state laws under Texas Water Code.

Homestead limits:
- Urban cannot exceed 10 acres
- Rural cannot exceed 200 acres family, 100 acres single

Answer 19

Fee Simple Determinable (ends automatically when event occurs). Grantor recovers estate.

Abstract of title (history of title)
Title insurance (protects)

Four types of encumbrances:
- Lien
- Easement
- Deed restriction
- Encroachments

Liens are legal claims or rights to property that serve as security for obligations or debt.

Lien priority based on filing date at courthouse. However taxing entities take priority i.e. IRS, then lender, etc.

Tax lien is statutory (brought by government) and imposed on real property.

Question 19

Total Revenue - Net costs = Profit
Annual Interest = Interest rate * Principal
Property taxes = Tax rate * Assessed value

Prorated taxes = daily tax rate * total seller days
Proration (property taxes, HOA dues)

Amortization (repayment of loan over time in equal installments including principal and interest).

Arrears (after receiving benefit/service)

Answer 19

Loan origination points (loan application srvcs)
1 point = 1%

Discount Points (purchasing lower interest)
1 point = 0.25%

Question 19

Listing Agreement
Buyer Representation Agreement

Seller’s Disclosure Notice (on day property is listed, preferably before listing included in MLS)

Open Listing (anyone has right to sell)
Exclusive Right to Sell (agent brokerage has claim to commission)
Exclusive Agency (in event owner secures sale)
Net Listings (seller sets price and brokers receives difference as commission)

Cooperating broker brings buyer to listing agent. “Procuring cause” of sale and entitled to fee or commission.

Answer 19

Material Fact - anything significant expected to influence a prudent individual’s decision regarding transaction.

HOA - Addendum for Mandatory Membership in Property Owners Association

Question 19

Actual Notice (action others can directly observe taking possession of property)

Constructive Notice (recording deed)

Question 20

Economic Principles of Value:
- Anticipation
- Contribution
- Substitution
- Change
- Conformity
- Regression
- Progression
- Supply & Demand

Market Value is an opinion of what the property will sell for if offered openly under normal conditions.

Depreciation (effective age)

Comparative Market Analysis (CMA) uses recently sold homes to arrive at indication of fair market value.

Answer 20

DUST:
- Demand
- Utility (useful purpose)
- Scarcity (low supply)
- Transferability (encumbrances?)

8 steps of appraisal:
- State objective
- List data needed
- Gather and record data
- Determine highest and best use
- Estimate land value
- Estimate property value using approaches
- Reconcile final value estimate
- Complete and present value report

3 ways to calculate value:
- Sales Comparison Approach (prev sales)
- Cost Approach (replacement cost i.e. new const)
Quantity survey / Unit-in-place / Square foot
- Income Approach (Net Operating Income (I) / Capitalization Rate (R) = Value (V)

Question 21

FDIC insures deposits up to $250k per depositor per account.

Federal Reserve System (12 federal reserve banks) - affect economy by raising or lowering fund reserve requirements or discount rate

Primary Market:
Banks, Insurance Companies, Credit Unions

Secondary Market:
Fannie Mae (Federal National Mortgage Assoc.)
Freddie Mac (Federal Home Loan Mortgage)
Ginnie Mae (Gov National Mortgage Assoc.)
Farmer Mac (Federal Agricultural Mortgage Corp.)

Fannie and Freddie are privately held government-sponsored enterprises (GSEs). Whereas Ginnie Mae is a wholly-owned government organization.

Amortized Loans (fixed-rate)
Adjustable Rate Mortgage (ARM)
Balloon payment loans
Conventional Loans (not backed by gov agencies)
FHA loans (insured by agency)
VA Loans
Conforming vs. nonconforming (Fannie Mae/Freddie Mac guidelines)

Subprime mortgage (mostly ARMs) offered to borrowers with impaired credit scores.

Private Mortgage Insurance (PMI) required on conventional loans with less than 20% down payment. Loans with LTVs over 80%.

Loan Eligibility:
- Prequal (lender information)
- Pre-approval (financial status)
- Loan application
- Final approval (creditworthiness and value of property)

Answer 21

Real Estate Settlement Procedures Act (RESPA) (1974) protects consumers from abusive lending practices. RESPA enforced by Consumer Financial Protection Bureau (CFPB). Outlaws kickbacks and unearned referrals fees and requires closing cost disclosures (Good Faith Estimate, HUD-1)

Truth In Lending Act (TILA) lenders disclose loan terms in uniform ways.

Regulation Z enforces laws that put TILA into action.

Dodd-Frank Act (created CFPB stricter regulating banks)

TILA/RESPA Integrated Disclosures (TRID) introduces new disclosure forms Loan Estimate (LE) and Closing Disclosure (CD).

Equal Credit Opportunity Act (ECOA) prohibits lending discrimination.

Fair Credit Reporting Act (FCRA) protects consumers from inaccurate credit reporting agencies.

Fair and Accurate Credit Transaction Act (FACTA) 3 major credit reporting agencies must provide free report every 12 months.

Question 22

Public Land Use Controls (PETE):

• Police Power (zoning, building codes, reg of
  subdivisions, application of rules)
• Eminent Domain
• Taxation
• Escheat

Restrictive covenants CC&Rs (Covenants, Conditions, and Restrictions) are found in dedicatory instruments. Also known as deed restrictions.

Subdivider = divides unimproved land
Developer - develops unimproved land

Answer 22

Variances permission granted to use property not allowed by current zoning. Such as height of building, setback requirements, parking spaces, etc. These are called area variances. Other type is called use variance and is usually handled through rezoning.

Interstate Land Sales - Full Disclosure Act
- Protects consumers
- Sale or leasing of 100 or more lots
- Property report required

Lead Based Paint (constructed prior to 1978). EPA enforces lead-based paint disclosures.

Certificate of Mold Remediation (5 years)

Foreclosure remains on record for 7 years vs. short sale 2 years. Credit history is affected.

REO (Real Estate Owned): Lender sells property through their loss mitigation department.

Absolute auction: no reserve price
Min Bid auction: min sale price set
Reserve auction: seller reserves right to accept

Question 23

Feasibility study
Leverage (taking on debt to realize return)
Debt service
Capital gains (defer taxes on sale using Section 1031 Exchange)
After-tax cash flow (bottom line)
Joint venture

IRS allows residential property to be depreciated over 27.5 years.

Answer 23

Gross Rent Multiplier (GRM)
Property price / annual rental income = GRM
*Before taxes and insurance, etc.

Real Estate Investment Syndicate (pool resources and forces). Types: Corp, GP, LP,

Real Estate Investment Trust (REIT) - similar to mutual fund

Real Estate Mortgage Investment Conduit (REMIC) - type of Special Purpose Vehicle (SPV) comprised of pool of mortgages loans sold as investment-grade bonds known as mortgage-backed securities (MBS).

MBS sold at different risk levels and classes known as “tranches”.

Question 24

Landlord (lessor)
Tenant (lessee)

Gross Lease (flat rent each month, landlord responsible for taxes, maintenance, utilities)

Net Lease (tenant pays a base rent plus all or part of operating expenses)

Percentage Lease (base rent + percentage of business profits)

Answer 24

Security deposit must be mailed within 30 days of tenant moving out of residence.

Landlord late fees must be included in lease, be reasonable, at least one full day late.

Question 25

Deed - written instrument to convey right, title, interest in real estate.

Deed types:
- General warranty
- Special warranty
- Bargain and sale
- Quitclaim

Abstract of Title (abbreviated history)
Chain of Title (more detailed)

Title Policies:
- Owner’s
- Lender’s

Documents filed in county where property is located.

Constructive Notice - assumption (possession)
Actual Notice - created when accessed and seen

Answer 25

General Warranty (covenants):
S: Seisin (Ownership)
A: Against Encumbrances
F: Further Assurance
E: Quiet Enjoyment
W: Warranty Forever

Special Warranty:
- not encumbered

Bargain and sale:
- only implies grantor holds title and possession
- does not guarantee free of encumbrances

Quitclaim deeds:
- least protection (as-is)
*Typically used to clear title defect (cloud).

Question 26

Freehold estates:
- Fee simple (highest)
- Defeasible fee (subject to event)
- Fee simple determinable (ends automatically)
- *Fee simple subject to condition subsequent
(owner has to go to court to reclaim)
- Conventional life (limited to life of owner)
- Legal life

Voluntary alienation
Involuntary alienation
Adverse possession (open, notorious, hostile, uninterrupted)

Easements:
- Prescription (adverse possession)
- Appurtenant (dominant/servient tenement)
- Gross (allowed to be on property for a reason)
- Necessity (cannot be accessed)

Answer 26

Remainder - estate that passes
Reversion - reverts back to person who granted
Remainderman - recipient of remainder

Intestate (without will) pass to heirs according to statute of descent and distribution.

Testate (with will)

Probate (legal process to determine validity of will)

Question 27

Closing Disclosure (closing statement)
*no later than 3 days before loan closing.

Loan Estimate (during loan application)

Seller must furnish “affidavit as to debts and liens” sworn statement to assure title company no liens or unpaid bills, or undisclosed defects in the title.

Prorated items: taxes, interest on loan

Earnest money deposit (at closing buyer receives credit for amount prepaid)

Answer 27

Escrow (disinterested 3rd party acts as escrow agent and coordinates closing activities)

Seller deposits deed, title evidence (abstract or title insurance), payoff letter from mortgagee, affidavits of title, other instruments.

Buyer deposits balance of cash (certified check) loan documents, hazard insurance policy, survey if required, other documents.

Question 28

Bundle of Rights:
- Right of Exclusion (no trespass)
- Right of Possession (live)
- Right of Disposition (sell/lease)
- Right of Quiet Enjoyment (enjoy legally)

Answer 28

Leasehold estate:
- Estate for Years (start/end - no auto renewal)
- Periodic Estate (renews unless canceled)
- Estate at Will (occupy with landlord consent)
- Tenancy at Sufferance (holdover tenant)

Landlord (lessor)
Tenant (Lessee)