Real Estate Practice

Question 1

Earnest Money

Answer 1

An amount of money, deposited by a prospective buyer as evidence of good faith under the terms of the contract, that is to be forfeited if the buyer defaults but is applied to the purchase price if the sale is closed. The amount of earnest money is set by agreement of the
parties. Earnest money is a non-judicial remedy. If earnest money is liquidated or returned then
neither party can file a lawsuit. If either party wants to sue the other for default, the earnest money
stays on deposit in an escrow account until the lawsuit is settled. It takes the signature of the buyer
and seller to liquidate earnest money.

Question 2

Commingling

Answer 2

This is the placing money of other parties in the brokers business or personal account. All money
collected and being held by the broker must be in a separate account designed only for holding the
money of others. This would be earnest money held, deposits held, and owner’s money held if you
are doing property management. If earnest money is collected and will be held by the title company,
this money should be received by the title company within 48 hours or within two business days after
the signing of a contract or other agreement.

Question 3

Conversion of Funds

Answer 3

Conversion refers to using money that is being held by the broker or agent that is being held by the
broker for another party. By depositing other person money into the business or personal account
and commingling the money and then writing a check from that account to pay a business expenses
(although there was more than enough to reimburse the other parties money) you have committed
conversion.

Question 4

Printed or published advertisements

Answer 4

cannot include language that indicates a
preference, limitation, or discrimination of any protected class, such as “adult community, Catholic, no wheelchairs, integrated”.

Question 5

Pictorial representations

Answer 5

using human models that depict one segment of the population while not including others is discriminatory

Question 6

Media Targeting

Answer 6

The media used for promoting property cannot target one population to the exclusion of others

Question 7

In Trust

Answer 7

Ownership by a third person for the benefit of another. The Trustor covey’s property to a trust, the trustee holds and manages the trust for the benefit of the beneficiary. The trustee is a fiduciary to the beneficiary and must act in the beneficiary’s best interest. If the Trustor coveys real property to a trust it is a Deed in Trust. Don’t confuse this term with a Deed of Trust

Question 8

Partnership

Answer 8

An association of two or more people who operate a business as co-owners and share in the business profits and losses.

Question 9

Limited Partnership

Answer 9

One party (the general partner) organizes, operates and is responsible for the entire syndicate. The other members of the partnership are passive investors with no voice in the organization and direction of the organization (limited partners). Each limited partner stands to lose only as much as he/she invested. The general partner is totally responsible for any excess losses
incurred by the investment.

Question 10

General Partnerships

Answer 10

All partners participate in the operation of the business and may be held personally liable for business losses and obligations.

Question 11

Limited Liability Company

Answer 11

Not a corporation, partnership, or limited partnership. Neither, members or managers are liable for company debts, obligations, or liabilities. Regarding licensure,
a limited liability company must designate one of its managers to act for it. The designated manager must (as with the corporation) be a licensed broker as shown in the records of the commission.

Question 12

Independent Contractor

Answer 12

under the “qualified real estate agent” category in the
IRS Code, meeting three requirements can establish independent contractor status: Individual must have a current real estate license.

Question 13

Percent of income based on sales production

Answer 13

90% or more

Question 14

A broker shall maintain, on a current basis, written policies and procedures to ensure

Answer 14

(1) Each sponsored salesperson is advised of the scope of the salesperson’s authorized activities
and is competent to conduct such activities.
(2) Each sponsored salesperson maintains their license in active status at all times while they are
engaging in real estate activities.
(3) Any and all compensation paid to a sponsored salesperson for acts or services paid by, though,
or with the written consent of the sponsoring broker.
(4) Each sponsored salesperson is provided on a timely basis, before the effective date of the
change, notice of any change to the Act, Rules, or Commission promulgated contract forms.
(5) In addition to completing continuing education requirements, each sponsored salesperson
receives such additional educational instruction the broker may deem necessary to obtain and
maintain, on a current basis, competency in the scope of the sponsored salesperson’s practice.
(6) Each sponsored salesperson complies with the Commission’s advertising rules.
(7) All trust accounts, including but not limited to property management trust accounts, and other
funds received from consumers are maintained by the broker with appropriate controls
(8) Records are properly maintained

Question 15

Recruiting License Holders from Other Brokerages

Answer 15

There is no provision in the Act or the TREC Rules prohibiting a broker from recruiting a salesperson or
broker-associate affiliated with another broker. Generally, however, recruitment of a salesperson by a
broker is not regulated with the exception that instructors or other persons associated with a school may not recruit or solicit prospective salespersons or brokers in a classroom during class time

Question 16

Leasing Agent Responsibilities

Answer 16

Many brokers list homes for lease without providing property management services. Even when the lease
form states the broker won’t be providing property management services, landlords and tenants are often
confused. The duty of the broker and the sponsored salesperson ends when the lease is signed between
the landlord and the tenant. Situations arising after the lease is signed, such as rekeying the home, and
tenant walk through should not concern the broker

Question 17

Safe Harbor Policy

Answer 17

TREC has adopted a safe harbor policy for staff and enforcement to use in directing license holders as to
what might be considered clear and conspicuous in advertising. On a sign or other advertising media, the
broker’s name or assumed name must be at least 50 percent of the size of the largest item of contact
information.

Question 18

Personal Information

Answer 18

Businesses are required to have procedures to protect against the unlawful use or disclosure of sensitive
personal information received in the regular course of business. It requires the business to destroy such
records that are not required or needed for business operations. Sensitive personal information includes
an individual’s first name or first initial and last name in combination with any one or more of the following:
Social Security number
Driver’s license number or government-issued identification number;
Credit or debit card number in combination with any required security code, access code, or password
that would permit access to an individual’s financial account

Question 19

Receiving Compensation

Answer 19

A license holder may not receive compensation from someone other than the person whom the client
represents unless the license holder obtains the client’s consent. This does not apply to referral fees
between license holders.

Question 20

Compensation from a Service Provider

Answer 20

If a license holder intends to accept compensation from a service provider, the license holder must also
obtain the consent of that person (non-client). As used in this rule, the term “service provider” is not
limited to Settlement Service Providers as defined by RESPA. It includes any person who provides a
service to a consumer.

Question 21

Compensation from a Residential Service Company

Answer 21

A license holder must use Form RSC-1, Disclosure of Relationship with Residential Service Company if
the license holder (or the brokerage firm) will receive compensation from the residential service company.

Question 22

License Holders Buying or Selling Their Own Property

Answer 22

A broker should maintain a policy related to transactions in which a license holder is involved in buying or
selling his or her own property. Items to consider when developing such a policy include

Question 23

Sharing Fees with Attorneys

Answer 23

The Texas Real Estate License Act prohibits brokers from sharing fees received for services as a real
estate agent with anyone not licensed as a real estate broker or salesperson in Texas or any other state.
With such seemingly clear statutory prohibitions, why is this still an issue with many brokers?
It is permissible for listing brokers to reduce their fee agreement with a seller, so that the seller can pay
an attorney for his or her services, whether those services are performed for the seller or buyer.
Such a reduction of the listing fee would be a matter of private agreement between the listing broker and
the seller. While brokers are not required to forgo their contractual rights to compensation, some circumstances might require brokers to balance their right to a fee against the best interest of their client.

Question 24

Text and Email Negotiations

Answer 24

Brokers and salespersons need to exercise care to avoid any statements in these communications that
may be later construed as “misrepresentations” of any type, including but not limited to misrepresentations about the intentions of the client(s) with respect to making or accepting offers.

Question 25

Duty to Respond

Answer 25

A supervising broker, perhaps more so than other license holders, has a duty to respond to parties in a
transaction. A sponsoring broker must also promptly respond to a sponsored salesperson.
Promptness will be judged on the nature of the request, the time of day and the type of transaction. A
supervising broker should be reasonably available to supervised salespersons to provide needed advice
and counsel.
Being responsible for the supervised salesperson, the supervising broker should be available during all
normal business hours of the brokerage. The supervising broker should monitor transactions handled by salespersons.

Question 26

Business Entity Requirements

Answer 26

If a license holder establishes a business entity, the entity must be licensed in order to be paid commissions. The legal entity must designate an individual broker who will be responsible for the actions of the
licensed business entity. The designated broker must bean officer of the corporation, a manager of the limited liability company, a general partner of the partnership.
If the designated broker owns less that 10 percent of the business entity, the business entity must obtain
and maintain E&O insurance of at least $1 million.

Question 27

Misrepresentation

Answer 27

A false statement or concealment of a material fact made with the intention of inducing some action by another party

Question 28

Implied Duty of Good Faith

Answer 28

In contract law, the implied covenant of good faith and fair dealing is a general presumption that the parties to a contract will deal with each other honestly, fairly, and in
good faith, so as to not destroy the right of the other party or parties to receive the benefits of the
contract
Courts have found that the covenant of good faith and fair dealing calls for parties to a contract to
refrain from doing “anything which will have the effect of destroying or injuring the right of the other
party to receive the benefit of the contract.”

Question 29

Due Diligence

Answer 29

in part as “making a reasonable effort to provide accurate, complete information.”

Question 30

Unauthorized Practice of Law

Answer 30

A person, not licensed to practice law, may not charge or receive, either directly or indirectly, any compensation for all or any part of the preparation of a legal instrument affecting title to real property, including a deed, deed of trust, note, mortgage, and transfer or release of lien.
(b) This section does not apply to:
(1) an attorney licensed in this state;
(2) a licensed real estate broker or salesperson performing the acts of a real estate broker pursuant to Chapter 1101, Occupations Code; or
(3) a person performing acts relating to a transaction for the lease, sale, or transfer
of any mineral or mining interest in real property.

Question 31

Fair Housing Laws

Answer 31

1866 Civil Rights Law
Title VIII of the Civil Rights Act of 1968
Community Development Act of 1974
Fair Housing Amendments Act of 1988

Question 32

1866 Civil Rights Law

Answer 32

Prohibited discrimination based on race only for buyers, sellers, landlords, and tenants. There are no exceptions anywhere that would allow for racial discrimination. Any violations of the 1866 law go directly to federal court.

Question 33

Title VIII of the Civil Rights Act of 1968

Answer 33

Created the Fair Housing Act or Law and forbids
discrimination and discriminatory practices in connection with the selling or renting of residential real estate not only by owners but also by lenders, investors, builders, brokers (in residential real estate) and real estate organizations and services. The law prohibited discrimination on the basis of race, color, religion and national origin.

Question 34

Fair Housing Amendments Act of 1988

Answer 34

Prohibits discrimination in housing based on handicap
(disabled, AIDS-HIV) or familial status. (Single mother or a single father with children under age of 18). Included are pregnant women.

Question 35

Protected Classes Include

Answer 35

Race, color, religion, sex, national origin, physical handicap, or familial status. These same guidelines pertain to advertising.

Question 36

Americans with Disabilities Act (ADA)

Answer 36

Applies to employers with 15 or more employees or any
business that is open to the general public regardless of how many employees. All real estate brokers who operate a storefront (not brokers with home office) are included. Must make reasonable accommodations or modifications for people with disabilities. ADA includes all of the following requirements: work site accessibility, modifying equipment, designated parking, curb ramps,
elevators, and restrooms.

Question 37

First time violation of Fair Housing

Answer 37

maximum penalty of $10,000, not exceeding $25,000 if

another offense within past five years, or not exceeding $50,000 if two or more violations in the past seven years.

Question 38

Megan’s Law

Answer 38

enacted in 1996 allowing the public information regarding convicted sex offenders. This law basically requires that convicted sex offenders’ subject by law to notify the local police department of any change of address and requires or allows the police to then notify schools, parents and ECT. Some states require that sellers or lessors inform buyers or lessees on where
they can find this information

Question 39

Steering

Answer 39

Directing or channeling a minority to or away from an area to maintain or change the
character of the neighborhood

Question 40

Reverse Steering

Answer 40

Directing or channeling a white person to an all-white neighborhood.

Question 41

Blockbusting

Answer 41

Using scare tactics (panic selling), (panic peddling) to induce people to sell their property by telling them that minorities are moving into the neighborhood and their property values are going to drop.

Question 42

Errors and Omissions Insurance

Answer 42

Cover professionals for errors or oversights that occur when providing services. It typically covers the costs of legal defense, judgments and settlements. Although
not normally required except in special cases The National Association of REALTORS® strongly
encourages members to maintain E&O insurance

Question 43

General Liability Insurance

Answer 43

For real estate professionals is when a third party sustains bodily injuries or experiences property loss or damage on your business premises.

Question 44

Homeowner’s insurance Policy

Answer 44

A standardized package insurance policy that covers a residential real estate owner against financial loss from fire, theft, public liability and other common risks.

Question 45

Fire and Extend Coverage Insurance Policy

Answer 45

Fire and extended coverage programs are designed for
owner or tenant-occupied one-to-four family dwellings, mobile homes, household contents, related private
structures, miscellaneous structures, farm personal property and farm structures on both owner occupied
and non-owner occupied properties.

Question 46

Contents (Renter Insurance) Policy

Answer 46

“Contents insurance” typically refers to coverage for property you own. It does not cover the dwelling but does covers the personal belongs of the insured

Question 47

Flood Insurance

Answer 47

Specific insurance coverage against property loss from flooding. To determine risk factors for specific properties, insurers will often refer to topographical maps that denote lowlands, floodplains, and floodways that are susceptible to flooding

Question 48

Record Keeping

Answer 48

Each licensed employing broker shall keep records of all real estate transactions handled by or through the broker and shall keep employment records, including copies of employment status, for all current and former employees. The records required by this section shall include copies of earnest money receipts, confirming that the earnest money has been handled in accordance with the transaction, closing statements showing all receipts, disbursements and adjustments, sales contracts, leases, property management agreements and, if applicable, copies of employment agreements. The records shall be open at all reasonable times for inspection by the commission or the commission’s
representatives. The records of each transaction and employment records shall be kept by the broker
for a period of at least four years from the date of the termination of the transaction or employment.
The records shall be kept in the employing broker’s principal office or licensed branch office in this
state or at an off-site storage location in this state if the broker provides prior written notification of the
street address of the off-site storage location to the commission.

Question 49

Regulation Z (Truth in Lending)

Answer 49

Developed by the Federal Reserve System and administered by the Federal Trade Commission, commonly referred to as the Truth-in-Lending Act, requires that credit institutions inform borrowers of the true cost of obtaining credit so they can compare the costs of various lenders and avoid the uninformed use of credit. Regulation Z must provide a Truth-InLending Statement to the buyer that includes the annual percentage rate (APR), the name of the lender, the total payment, and the late payment charges.

Question 50

Regulation Z (Advertising)

Answer 50

Requires that in real estate advertising, if one of the following terms is used, the other terms must also be disclosed: The amount or percentage of the down payment The terms of repayment (number, amount, and due date. The annual percentage rate (APR).
The amount of loan or cash price
(Do not have to disclose closing costs, taxes or insurance here.) Disclosure of closing costs and
settlement will be covered under RESPA (Real Estate Settlement and Procedures Act).

Question 51

Three-day Right of Rescission

Answer 51

With most consumer credit transactions covered by Regulation Z, the borrower has three days in which to rescind the transaction by merely notifying the lender. However, this right of rescission does NOT apply to residential first mortgage loans. It DOES apply to refinanced second lien loans and home equity loans

Question 52

Regulation Z

Answer 52

Gives borrowers the right to cancel credit transactions, including a lien on a borrower’s dwelling, to regulate some credit card practices, and to provide consumers with the access to fair and timely credit billing disputes.

Question 53

Real Estate Settlement Procedures Act (R.E.S.P.A.)

Answer 53

Created to ensure the buyer and seller have
knowledge of all the settlement costs before closing. All first lien loans on residential property (from
one to four families) that are federally related are required to be settled under the RESPA provision.
“Federally related” means any loan made from federally insured deposits; guaranteed or insured by the Federal Government; or is intended by the originating lender to be sold to FNMA, GNMA, or FHLMC.

Question 54

The Four Primary Aims of RESPA are

Answer 54

To eliminate “kickbacks”, fee splitting, or referral fees that tend to add to the cost of settlement services.
To provide more effective advance disclosure to home buyers and sellers of settlement costs.
To reduce the amounts homebuyers are required to place in escrow to ensure payment of taxes
and insurance.
To reform and modernize the local record keeping of land title information
Under RESPA, the lender is required to furnish the buyer with:
Copy of the booklet “Settlement Costs &
You”. A good faith estimate of settlement costs.
Must be done within three business days from loan application
Closing expenses must be prepared on a Uniform Settlement Statement (HUD-1).

Question 55

Subdivides vs. Developers

Answer 55

sub dividers buy undeveloped land and divide it into smaller lots for sale. Developers improve land, construct buildings on land, and sell them.

Question 56

Regulation of Land Development

Answer 56

The land development plan must comply with a municipality’s comprehensive plan, zoning regulations, and environmental regulations. The plat map will illustrate the geographic boundaries of specific lots. The plat must present restrictive covenants and
engineering data established by deeds, declarations, etc. The subdivision plans will define lot
sizes (generally regulated by local zoning ordinances) and will provide for water, sewer, and utility
easements.

Question 57

Federal Interstate Land Sales Full Disclosure Act

Answer 57

The objective is to avoid fraudulent marketing
schemes and regulates unimproved parcels sold through an interstate sale. Law requires developers
to file reports with HUD prior to offering unimproved lots in interstate commerce. The law does not cover subdivisions with fewer than 25 lots or lots of 20 acres or more.

Question 58

Taxpayer Relief Act of 1997

Answer 58

Married homeowners who file jointly are able to exclude $500,000 of capital gains realized on the sale or exchange of a principal residence. Single homeowners–
$250,000. Must have lived in the house two years of the last five years prior to the sale. There is no age requirement. If one of the married couples has used their exclusion within the past two years they are still able to use the remainder of the exclusion, or $250,000. A first time homebuyer (one that has not owned a personal resident in the past three years) can withdraw
up to $10,000 penalty free from IRA or tax deferred accounts.

Question 59

Income tax purposes

Answer 59

homeowners can deduct from their gross income:
Mortgage interest on first and second homes
Real estate taxes, but not penalties for late payments.
Certain loan origination fees
Certain loan discount points can be deducted in the year of the purchase.
Prepayment penalties on loans paid off early.

Question 60

Police Power

Answer 60

The right of the government to place reasonable restrictions on privately held land. Examples of police power exercised are zoning ordinances, building codes, environmental laws.
granted by the Fourteenth Amendment to the U.S.
Constitution, each state, and in turn its counties and municipalities, has the authority to adopt
regulations necessary to protect the public health, safety, and promote the general welfare.

Question 61

Eminent Domain

Answer 61

The right of government to take private property for public use, with just compensation paid to the owner. If the owner and condemning entity cannot agree as to fair market value then a condemnation suit is filed and the courts decide on fair value. Inverse condemnation
occurs when the improvement may not take the property but causes the subject property to suffer a loss in value of 25% or more then the condemning entity must pay the owner for that loss.

Question 62

Condemnation

Answer 62

The PROCESS or ACT of taking property under the right of eminent domain

Question 63

Escheat

Answer 63

Property reverts to the state when someone dies leaving NO WILL and NOHEIRS. This is to prevent property from becoming ownerless such as when an owner who dies intestate with no heirs.

Question 64

Federal Environmental Legislation

Answer 64

has provided laws to protect air quality, water quality, protect endangered species, and disposal of hazardous and solid waste.

Question 65

Foreign Investment and Real Property Tax Act

Answer 65

A federal law aimed at ensuring that nonresident
aliens and foreign corporations pay U.S. income tax based on gains from the disposition of U.S. real
property interest. The transferee (buyer) must withhold a tax equal to 10 percent of the amount realized by the foreign transferor (seller) on the disposition of the property.