Real estate principles

Question 1

There are two parts to a mortgage loan:

Answer 1

A Pledge or promise to pay, and Collateral, which allows a lender the right to foreclose if the borrower does not pay.

Question 2

A promissory note is?

Answer 2

A promissory note sometimes called a mortgage note (Pledge) is the promise to repay the debt. If a person only signs a note, without using property as collateral, it is referred to as a DEBENTURE. A DEBENTURE is defined as a long-term note that is not secured by a specific property.

Question 3

Most real estate loans are collateralized loans. There are two types of security instruments:

Answer 3

They are a MORTGAGE or a DEED OF TRUST.

Question 4

There are two types of promissory notes:

Answer 4

The straight note (also known as an “interest only” note)

Installment note (including fully amortized loan and partially amortized loan that require a balloon payment at the end (or begining) of the loan

Question 5

In a mortgage, there are two parties involved:
MORTGAGOR = ?
MORTGAGEE = ?
In a Deed of Trust, there are three parties involved. They are:
Trustor = ?
Beneficiary = ?
Trustee = ?

Under a Deed of Trust, ? holds the promise to repay (Promissory Note) from ? and ? holds the security (Deed of Trust) for the debt.

Answer 5

In a mortgage, there are two parties involved:
MORTGAGOR = Borrower
MORTGAGEE = Lender
In a Deed of Trust, there are three parties involved. They are:
Trustor = Borrower
Beneficiary = Bank
Trustee = Bank Vice-President or anyone else designated by the lender (holds naked legal title and the right to foreclose with directions from the beneficiary)
Under a Deed of Trust, the beneficiary (lender) holds the promise to repay (Promissory Note) from the borrower. The trustee holds the security (Deed of Trust) for the debt
* Remember that in CALIFORNIA , lenders use a DEED OF TRUST (also called a TRUST DEED) to secure an interest in the borrower’s real property. Mortgages are RARE in California , since most lenders insist on using deeds of trust, which favor the LENDER OVER THE BORROWER.

Question 6

Duties of the borrower in a mortgage or deed of trust:

Answer 6

1. Payment of the debt in accordance with the terms of the note.
2. Payment of all real estate taxes on the property given as security.
3. Maintenance of adequate insurance.
4. Maintenance of the property in good repair at all times.
5. Lender authorization prior to making any major alterations to the property.

Question 7

Acceleration Clause:

Alienation Clause:

defeasance clause:

A Prepayment penalty clause:

A Subordination clause:

Subrogation:

Answer 7

If a borrower defaults on the loan the lender can call the entire balance due and payable immediately. Without this clause in the mortgage or deed of trust the lender would not have the power or right to foreclose.

“Due on Sale Clause.” The mortgagee or beneficiary declares the entire balance of the loan becomes due and payable when the property is transferred. This type of clause is not allowed in an FHA (Federal Housing Administration) or VA (Veteran’s Administration) loan.

When a mortgage or deed of trust is paid off, a defeasance clause allows the lender to release the mortgage or deed of trust rights and issue a Satisfaction Piece

A Prepayment penalty clause is a clause that allows a lender to charge extra interest if the loan is paid off before the normal completion date.This clause is not allowed on an FHA or VA loan

A Subordination clause is a clause in a Mortgage or Deed of Trust wherein a subsequent mortgage or deed of trust takes priority.

Subrogation is the substitution of a third person in place of a creditor to whose rights the third person succeeds in relation to the debt. Example: A title company that pays a loss within the scope of its policy is subrogated to any claim that the buyer has against the seller for a loss. Or if you have an automobile accident, your insurance company will pay any claims against you.

Question 8

Satisfaction Piece:

Answer 8

When the borrower has paid the entire balance, the lender is required to execute a satisfaction of mortgage or a release deed of trust (Deed of Reconveyance/deed of release) - A document used to transfer legal title from the trustee back to the borrower (trustor) after a debt secured by a deed of trust has been paid to the lender (beneficiary).
The Satisfaction Piece puts on public record that the loan was paid, and that the lender no longer has a lien on your property. Recording the satisfaction piece releases the Mortgage or Deed of Trust lien.

Question 9

An assumption is when the buyer takes over the original payment, the original loan, and the original interest rate of the seller’s existing loan. This can be accomplished in one of two ways:

Answer 9

If a Mortgage or Deed of Trust is taken over:
“Subject to” an existing Mortgage or Deed of Trust. If the clause in the deed states that the buyers are purchasing the property “subject to the existing loan,” the buyers acknowledge the existing loan and promise to pay. If the buyer does not pay, the original borrower will be held responsible. If the original borrower (grantor) does not pay, the buyer (grantee) will lose the property, and thus his or her equity, in a foreclosure sale.

If a Mortgage or Deed of Trust is:
“Assumed,” the purchaser is accepting the debt and is, therefore, personally liable for the entire debt. The bank could require the original seller to remain secondarily liable if the new borrower does not pay. The seller would no longer be liable if the lender will consider a novation*.
*Novation is a second contract to assume liability for the debt for the purchaser and relieve the liability to the seller.

Question 10

Tax and Insurance Escrows:

Answer 10

also may be called an Impound or Reserve Account.

As a result of a lender requiring tax and/or insurance escrows, a “Budget Mortgage or Deed of Trust” occurs. By placing money in the account, the lender is assured that the bills will be paid. The lender (mortgagee or beneficiary) also benefits from holding the money.

Question 11

A monthly loan payment consists of:

Answer 11

Principal - The amount borrowed from the lender.

Interest - The amount paid to the lender for allowing the money to be borrowed.

Taxes - The amount due to the government for the privilege of private ownership of real property.

Insurance - The amount paid to the insurance company in case of damage to the property. There could also be mortgage insurance due.

Question 12

Oder of payment in foreclosure:

Answer 12

1. Cost of Sale - advertising, attorney fees, trustee fees, etc.
2. Special assessment taxes, and general taxes which are called “ad valorem,” according to value taxes, are paid after the costs of the sale.
3. The first mortgage, which is determined by the order of recording.
4. Whatever is recorded next would then be paid because of a foreclosure.

Question 13

Judicial foreclosure:

Non-Judicial foreclosure:

Answer 13

Judicial foreclosure is required to foreclose a Mortgage. One must go through the courts to foreclose.

Non-Judicial foreclosure is required to foreclose on a Deed of Trust. The lender does not have to go through the courts to foreclose; and it is, therefore, a quicker process. The trustee holds a “naked title” (one without possessory rights) and can claim the property.

Question 14

The Equitable Right of Redemption:

The Statutory Right of Redemption:

Answer 14

The Equitable Right of Redemption gives the borrower the right to clear up the debt prior to the foreclosure sale.
The Statutory Right of Redemption gives the borrower a certain amount of time after the sale to clear the debt.

Question 15

Deficiency Judgment:

Deed in lieu of foreclosure:

Answer 15

Deficiency Judgment and Deed in Lieu of Foreclosure
If the proceeds from the foreclosure sale are not sufficient to cover the debt, the lender can go to court and seek:
A Deficiency judgment against the borrower. This is a general lien and would apply to all of the borrower’s assets.
Deed in lieu of foreclosure is referred to as a “friendly foreclosure.” Lender and borrower agree that the lender will become the owner of the property instead of going through the formal foreclosure process. However, this process does not clear any junior liens.

Question 16

? discount points are required to increase the percentage yield for one percentage point spread

Answer 16

eight discount points.

If the current rate in the market is a 12% interest rate, and the lender will give the loan to the buyer for 11.5% interest, the lender will need to charge 4 discount points.

1000 * 4% = 40.

Question 17

A buyer got a 30-year loan of $50,000 with an interest rate of 10%, a factor of 8.78. What will the buyer’s monthly P & I be?

Answer 17

$50,000 = 50 thousands. Take 50 times factor of 8.78 = $439.00 per month for 30 years.

$439.00 x 12 months x 30 years = $158,040 = total amount paid in P & I.

$158,040 - $50,000 = $108,040.00, which is the amount of interest paid over the life of the loan.

Question 18

If the loan is for $15,000 at 10% interest for 25 years and the payment is $140 per month (including principal and interest), what is the principal balance after one payment?

Answer 18

$15,000 X 10% = $1,500.00 year interest

$1,500.00/12 = $125.00 month interest

$140 - $125.00 = $15.00 (principal paid)

$15,000 - $15.00 = $14,985.00 (new balance)

Now, how do we determine the loan balance after the second payment?

$14,985.00 X 10% = $1,498.50 annual interest amount.

$1,498.50/12= $124.88 interest a month

$140 - $124.88= $15.12 principal paid

$14,985.00-$15.12 =$14,969.88 loan balance after the second payment.

Question 19

Type of loans:

Answer 19

1. A Straight Term Loan, or Interest Only Loan: The borrower must be prepared to pay the entire principal at the end of the time period!
2. Apartially amortized loan: A type of loan where interest and principal are paid on an equal basis until the final ballon payment, the remaining balance that is due at the maturity of a note.
3. Fully Amortized - Regular payments of principal and interest are made and the entire loan is paid off by the end of the term. The liquidation of a debt by periodic installments.
4. A Budget Mortgage is a loan, which has a payment composed of principal, interest, taxes, and insurance.

Question 20

Adjustable-rate Loan (sometimes called ARM): Interest rate fluctuates and is usually tied to an index; increases are capped for each period and for the term of the loan.

Answer 20

INDEX is often tied to U.S. Treasury securities.

The interest rate is usually the index plus a premium called the Margin.

Yearly caps limit the amount of the interest rate that may be charged during any one adjustment period.

Lifetime caps limit the amount the rate may increase over the life of the loan.

Adjustment period determine how often the loan rate may be changed.

Remember that an Adjustable Rate Mortgage is tied to an index, and the rate of the loan goes up or down, depending on the caps, margin, and adjustment period.

Question 21

Graduated Payment Plan:

Reverse Annuity Mortgage (RAM):

Purchase Money Mortgage (PMM):

Package Mortgage:

Blanket Mortgage:

Open-end Mortgage/deed of trust:

Wraparound:

Buydown:

Construction Loan:

Takeout Loan:

Sale-Leaseback:

Participation Mortgage:

Bridge Loan:

Contract for Deed:

Answer 21

Lower payments first year, then payments increase.

Homeowner receives monthly payments based on accumulated equity rather than a lump sum. Loan must be repaid upon the death of the owner or sale of the property.

Buyer borrows from the seller instead of, or in addition to, a bank. It is sometimes used when a buyer cannot qualify for a bank loan for the full amount. It may also be referred to as seller financing or owner financing.

Loan on real estate, plus fixtures, and appliances; always includes personal property as well as real property. Used extensively in the sale of condominiums

Loan on several pieces of land. Blanket mortgages usually contain a Partial Release Clause. This is a clause in a mortgage/deed of trust under which the mortgagee/beneficiary agrees to release certain parcels from the lien of the blanket mortgage/deed of trust upon payment by the mortgagor/trustor of a certain sum of money.

a mortgage with that allows the mortgagor to borrow additional money in the future without refinancing the loan or paying additional finance charges. Open-end provisions often limit such borrowing to no more than the original loan amount.

Additional financing from a second lender. One payment–two loans. The new lender pays the first loan, but charges higher interest for a second. Original loan must be assumable with no alienation clause.

The payment is subsidized at the beginning by a builder or other party for 3 to 5 years, and thereafter, the purchaser takes over and pays the regular payment amount.

Construction Loan: construction-only loan and the construction-to-permanent mortgage loan. A builder’s construction loan is considered by lenders to be a much higher risk loan than a residential home loan.

Takeout Loan: Long term permanent financing for large construction projects, usually commercial. Replaces construction loan on large commercial projects.

Sale-Leaseback: Owner sells his or her improved property and at the same time signs a long-term lease.

Participation Mortgage: A mortgage in which the lender participates in the income of the mortgaged property beyond a fixed return, or receives a yield on the loan in addition to the straight interest rate. Example: An insurance company teams with a bank and a purchaser to buy a property.

Bridge Loan: Short-term interim loan for buyer, usually six months to one year in duration. May be placed on former house to buy new house until first house sells.

Contract for Deed: Also called an installment land contract where the buyer does not receive legal title until the final payment is made. Seller is vendor, buyer is the vendee. Seller keeps legal title until the debt is paid in full. Buyer receives equitable title until debt is paid in full.

Question 22

FHA Loans
The Federal Housing Administration (FHA) insures loans on real property made by qualified or approved lending institutions. The Department of Housing and Urban Development oversees the FHA. If a buyer wants to obtain an FHA loan, a licensee should send them to a qualified lender, such as a savings & loan or a bank.
Following are the requirements to receive an FHA loan:
The borrower must have cash for a down payment and closing costs.
The borrower is charged a one-time insurance premium, which provides security to the lender in addition to the real estate in case of borrower default. The one time charge is paid at closing by the borrower or some other party (seller).
Lender can charge points and the borrower or the seller or both can pay them.
There are no prepayment penalties allowed on FHA loans.
Loans are assumable with certain qualifying conditions depending upon when the original loan was obtained. (You just need to know that FHA loans are assumable.)
The mortgaged real estate must be appraised by an approved FHA appraiser.
FHA regulations set minimum standards for the type and construction of buildings and credit-worthiness of borrowers.

Question 23

FHA Loans
FHA does NOT build homes nor does it lend money itself. The term “FHA Loan” refers to a loan that is insured by the agency. Just to be sure you’ve got it, following are important issues to remember concerning FHA lending policies:
The Federal Housing Administration (FHA) insures loans on real property made by qualified or approved lending institutions.
The Department of Housing and Urban Development (HUD) oversees the FHA.
If a buyer wants to obtain an FHA loan, a licensee should send him/her to a qualified lender, such as a savings and loan, mortgage broker or banker, and/or a bank.
Following are requirements to receive an FHA loan:
The borrower is charged a one-time insurance premium, which provides security to the lender in addition to the real estate in case of borrower default.
The one-time charge is paid at closing by the borrower or some other party (seller).
The lender can charge points, and either the borrower or the seller can pay them.

Question 24

VA Loans
 VA Loans (Veterans Administration) = Guaranteed Loans - Authorized to guarantee repayment of loans up to a specific amount.

The Veterans Administration (VA) will guarantee that a loan made by an approved lending institution will be paid.
The veteran must have served 181 days active service in the military since 1940.
A veteran’s basic entitlement is $104,250 in counties where the loan limit is $417,000. Lenders will generally lend up to 4 times the veteran’s available entitlement without requiring a down payment, provided the veteran’s income and credit qualify and the property appraises for the asking price.
There is no maximum VA loan, but lenders will generally limit VA loans to $417,000. This is because lenders sell VA loans in the secondary market, which currently places a $417,000 limit on the loans. For loans up to $417,000, it is usually possible for qualified veterans to obtain no down payment financing. (These numbers change from time to time and there are counties that are considered “High-Cost Counties” and their loan limits are higher.)
VA will guarantee real property, mobile homes, and plots for the mobile home.
The VA requires that a veteran assume liability for the loan. If a veteran does not pay the mortgage as agreed there will be a foreclosure.
The property must be owner-occupied for at least one year.
A qualified veteran may borrow up to 100% of the loan with no down payment.
Veteran must first apply for a Certificate of Eligibility in order to obtain a VA loan.
The amount of the loan is limited to the amount shown on the Certificate of Reasonable Value.
The house must qualify with an appraisal and is issued a Certificate of Reasonable Value.

VA Loans
Loans may be assumed by non-veterans, but veteran still liable.
VA will lend money in rural areas where there is no financial institution available (200-acre residence for example).
Points can be paid by either the seller or the buyer.
VA does not allow prepayment penalties to be charged if a veteran pays off a loan early.
If a veteran has died, his/her widow or widower may be eligible for a VA loan. In order to be eligible for a VA loan, the widow or widower may not be married again at the time of application.
If a loan is assumed by another veteran and the seller has used all of his/her eligibility, the seller cannot use his/her eligibility again, unless he/she is given a novation because he/she will still be liable for the loan.
FHA and VA will allow buyer to pay more than appraised value, if he pays the difference in CASH.

Remember: FHA and VA do not allow prepayment penalties.
The difference between VA and FHA is FHA insures and VA guarantees repayments of loans.
On the following screen, we will begin our discussion of the CalVet loan program.

Question 25

California Veterans Farm and Home Purchase Program
The CalVet loan program has been a great success, and the demand for loans has usually been found to exceed the supply of available loans. This is due, primarily, to the low interest rate offered to California veterans.
The CalVet program is administered by the State of California, Department of Veteran Affairs, Division of Farms and Home Purchases. There is no other lender involved in the program, and the veteran/buyer deals directly with the agency. (However, note that recent rules now allow a mortgage loan broker to begin the loan process on the vet/buyer’s behalf.) The money loaned is obtained from the sale of State Veteran Bonds. The loan itself is made directly from the State to the veteran.
For a veteran to qualify, he must meet the following requirements:
He must have had a minimum of 90 days’ active duty.

He must have been given an honorable discharge from the military OR, if he is still on active duty, he must have a Statement of Service to verify his status; AND

He must be willing to buy a California home or farm.

Either peacetime or wartime veterans are eligible for a CalVet loan. HOWEVER, if the funds are limited, then wartime veterans are given priority. The very highest priority is always given to a service-connected disabled war veteran.
Additional information about the CalVet loan:
The maximum loan amounts vary depending on whether a home or farm is purchased, and these rates CHANGE FREQUENTLY. The current maximum amount for a home loan is $521,250.00. The current interest rate is 6.5%, is variable, and changed as needed. For the most recent maximum loan amount, or for current interest rates, check the website at http://www.cdva.ca.gov/.

The CalVet loan property standards are generally the same as those of the FHA or VA, which means the property must be a single-family dwelling or a unit in a planned development, condo, or mobile home. In some cases, farms are approved.

CalVet requires a structural pest control report and a roof inspection on properties it finances.
down payment, or put up to 20% of the sale price
A CalVet can borrow the entire or appraisal value down, whichever is LOWER.

The terms are usually 30 years.

A veteran must occupy the financed property.

This loan may be assumed by ANOTHER California veteran who meets the CalVet loan requirements.

There is no prepayment penalty.

Monthly payments include principal and interest; 1/12 of the annual property taxes; hazard insurance; disability; and life insurance premiums.

There are two basic differences between the CalVet Home Loans and other financing. According to the California Department of Veteran’s Affairs, these differences are as follows:
“The State of California has chosen to provide CalVet Home Loans as a benefit to veterans who want to live in our state. Because it is a veteran’s benefit we make every effort to make the loan available to all veterans. We qualify you for the loan using the same criteria as other lenders, but because we are a direct lender and we service the loans we make, we are able to give every veteran extra consideration, and if we can qualify you for a loan you get the same rate as everyone else. We will not classify you as a higher risk and increase the interest rate.
CalVet uses a Contract of Sale as the financing instrument for our loans. What that means is that CalVet purchases the home you selected and takes legal title to the property at close of escrow, and then sells the property to you using a contract of sale. When the loan is paid in full, either when the last payment is made or if you refinance or sell, we issue a grant deed to transfer legal title to you. A document called a Memorandum Agreement of Sale is recorded to show that the contract exists, and you hold what is referred to as the equitable title to the property which gives you all the rights of ownership. One of the major advantages of a Contract of Sale is that CalVet is able to obtain Fire and Hazard insurance, and Disaster Insurance and provide superior insurance coverage at group rates. The technicality of holding legal title also assists us in obtaining the best possible bond ratings for the bonds that we sell to finance the program. For the very small number of veterans who default on their CalVet Home Loan, the Contract of Sale makes it easier for us to recover the property and minimize losses to the program.”

Question 26

Rural Economic and Community Development
The Rural Economic and Community Development (RECD), formerly known as Farmers Home Administration (FmHA) is a federal lender with the U.S. Department of Agriculture that makes loans for home purchases or construction in rural areas and small communities outside metropolitan areas. (If you see the letters FmHA on your state examination, it is always a detractor.)
These areas for direct loans from RECD are defined as having a population of 20,000 or less. In addition to the property location, RECD requires that borrowers demonstrate a limited income record and a need for housing. Loans are either made directly by RECD or made by a private lender with RECD guaranteeing a certain percentage.
Remember:
RECD does not make direct loans to the public in areas with a population of more than 20,000. FHA never makes direct loans. VA will make a direct loan if there are no lenders in the area where a veteran wants to buy property.
FHA insures loans only for one-to four-family housing. The FHA section 203 B program requires a minimum down payment with the maximum loan based on local market conditions, which vary across the nation. This is the “standard” and most popular type of FHA loan.

Question 27

What Is a Qualified Buyer?
A qualified buyer is one who has demonstrated the financial capacity and credit worthiness required to afford the asking (or agreed upon) price. Before submitting an offer to buy, some buyers become pre-qualified or pre-approved with a lender for a loan up to a certain amount. Assessing the buyer’s price range depends on three basic factors: stable income, net worth, and credit history.
On the next few screens, you will review the issues that are important to a lender when considering making a loan to a buyer.
Qualifying the Buyer
Ability to repay the loan
Income
Employment history
Mortgage to income ratio - The ratio between the monthly housing expense and stable monthly income.
Assets
Liquid savings, checking, CDs, etc.
Other (personal property, real estate)
Liabilities
Revolving and installment accounts
Child support and alimony payments
Pledged assets, unsecured loans
Debt Coverage ratio - The ratio of annual net income to annual debt service. For example, a lender may require that a qualified corporate borrower have net income of 1.5 times the debt service of the loan being approved.

Attitude - Buyer has demonstrated the financial capacity and creditworthiness required to afford the asking price.
Credit report
Explanation of derogatory items (judgments, late payments, tax liens, etc.)
Mortgage history rating

Question 28

Qualifying the Title
Qualifying the Title

Abstract and opinion - A full summary of all consecutive grants, conveyances, wills, records, and judicial proceedings affecting title to a specific parcel of real estate, together with a statement of all recorded liens and encumbrances affecting the property and their present status. The abstract of title does not guarantee or ensure the validity of the title of the property. It is a condensed history that merely discloses those items about the property that are of public record. It does not reveal such things as encroachments and forgeries. Therefore, the abstracter is usually liable only for damages caused by his or her negligence in searching the public records.
Chain of Title - The recorded history of matters that affect the title to a specific parcel of real estate, such as ownership, encumbrances, and liens, usually beginning with the original recorded source of the title. The chain of title shows the successive changes of ownership, each one linked to the next so that a “chain” is formed.
Title insurance - A comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances thereon. Title insurance protects a policyholder against loss from some occurrence that has already happened, such as a forged deed somewhere in the chain of title.
All of these above issues must be to the satisfaction of the lender. In other words, for the title to qualify the abstract, chain of title, and the title insurance policy must meet the standards of the lender.
Other Terms: Once a buyer and seller are “in contract,” the buyer must obtain a loan for that specific property. A loan underwriter evaluates a loan application to determine the desirability of the loan. An underwriter is a person working for a lender who reviews a loan application and makes recommendations to the loan committee based on all of the issues we have discussed in this unit of the course.

Question 29

Qualifying the Property
Type of property (residential, commercial, agricultural)
Location
Area zoning
Value range
Neighborhood
Actual age/Effective age/Remaining economic life
Condition (repairs and predications)
Special clearances (code compliance, well and septic certifications etc.)
Overall marketability

Question 30

Loan Definitions
Following are ten (10) definitions that you need to be able to recognize for the examination.

NON-RECOURSE LOAN - A loan in which the borrower is not held personally liable on the note. The lender of a non-recourse loan generally feels confident that the property used as collateral will be adequate security for the loan.

NON-RECOURSE CLAUSE - Real estate loans are often sold in the financial market. When a non-recourse clause is included in the sale’s agreement, the seller of the security is not liable if the borrower defaults.

DEFAULT - The non-performance of a duty or obligation that is part of a contract. The most common occurrence of default on the part of a buyer or lessee is nonpayment of money when due. A default is normally a breach of contract, and the non-defaulting party can seek legal remedies to recover any loss. A buyer’s good faith inability to obtain financing under a contingency provision of a purchase agreement is not considered a default (The performance of the contract depends on the buyer getting the property financed.), and in this case the seller must return the buyer’s deposit.

CONDITIONAL APPROVAL (conditional or qualified commitment) - A written pledge by a lender to lend a certain amount of money to a qualified borrower on a particular piece of real estate for a specified time under specific terms. It is more formal than a preliminary loan approval. After reviewing the borrower’s loan application, the lender usually decides whether to make a commitment to lend the requested funds. This application contains such information as the name and address of the borrower, place of employment, salary, bank accounts, credit references, and the like.

UNDERWRITING - The analysis of the extent of risk assumed in connection with a loan. Underwriting a loan includes the entire process of preparing the conditions of the loan, determining the borrower’s ability to repay and subsequently deciding whether to give loan approval.

APPRAISAL FEES - An appraiser’s fees are typically based on time and expenses; fees are never based on a percentage of the appraised value.
ESTOPPEL CERTIFICATE - A legal doctrine by which a person is prevented from asserting rights or facts that are inconsistent with a previous position or representation made by act, conduct, or silence. For example, a mortgagor/trustor who certifies that he or she has no defense against the mortgagee/beneficiary would be estopped to later assert any defenses against a person who purchases the mortgage in reliance on the mortgagor’s certificate of no defense.
EXCULPATORY CLAUSE - A clause sometimes inserted in a mortgage note in which the lender waives the right to a deficiency judgment.
As used in a lease, a clause that intends to clear or relieve the landlord from liability for tenants’ personal injury and property damage. It may not, however, protect the landlord from injuries to third parties.
IMPOUNDS - A fund of the buyer’s money that the lender sets aside for future needs relating to the parcel of property. Most lenders require an impound account to cover future payments of insurance and taxes. Sometimes this is referred to as the buyer’s escrow (not the broker’s).
DISINTERMEDIATION - The process of individuals investing their funds directly instead of placing money with banks, savings and loans, and other savings institutions. Disintermediation has a direct influence on the scarcity of money or surplus of money available for mortgages.

Question 31

Loan Sources
Savings and Loans - Specialize in long term residential loans. They are one of the largest lenders of residential funds. Commercial Banks in the last several years have made more loans than Savings and Loans.
Deposits must be insured for at least $100,000.
Banks - Make short-term loans. They are becoming more active in home mortgage loans, FHA, and VA. Examples of short-term loans are: Automobile, mobile home, and household loans.
Insurance companies - Prefer large commercial projects, but will make residential loans. They like to have an equity position. They are sometimes partners with developers. This type of lending is called:
Participation financing - A mortgage in which the lender participates in the income of the mortgaged property beyond a fixed return, or receives a yield on the loan in addition to the straight interest rate.
Mortgage Broker - A person, corporation, or firm–not otherwise in banking and finance–that either provides its own funds for loans or negotiates, sells, or arranges loans for compensation. Sometimes this person or firm continues to service the loan(s).
Mutual savings banks are also lenders in the primary market, but they are primarily in the Eastern states.

Question 32

The Secondary Mortgage Market
Major warehousing agencies in the Secondary Mortgage Market are:
Federal National Mortgage Association or Fannie Mae - (FNMA) - Sells seasoned mortgages and deeds of trust to individual investors and financial institutions. A seasoned mortgage is one that has been in existence for some time and has a good record of repayment by the mortgagor. Fannie Mae was established in 1938 for the purpose of purchasing FHA loans from loan originators to provide some liquidity for government insured loans.
Please note the following about the Federal National Mortgage Association:

Quasi Government Corp – Was government when originally formed, but is now a private corporation.
Buys FHA loans, VA loans, and conventional loans.
FNMA is referred to “Fannie Mae.”
Largest purchaser in secondary market.
Government National Mortgage Association or Ginnie Mae (GNMA)
Buys FHA loans or VA loans.
“Ginnie Mae”
“Ginnie Mae is controlled by an agency of the Department of Housing and Urban Development.
When “Ginnie” and “Fannie” work together, it is called the Tandem Plan. It is a mortgage subsidy program offered by Congress from time to time through the Government National Mortgage Association. When assistance is needed, GNMA is authorized to purchase certain mortgages at below market interest rates so that borrowers can be granted low interest loans. GNMA then sells these loans in the secondary market at deep discounts, the discount loss being the amount of the subsidy. When these programs are available, they are offered through, or “in tandem” with, local mortgage lenders, generally administered under a contract with the Federal National Mortgage Association (FNMA).
Federal Home Loan Mortgage Corporation or Freddie Mac (FHLMC)
BUYS CONVENTIONAL LOANS.
“Freddie Mac”
HUD (Department of Housing and Urban Development) is the regulator for Fannie Mae, Ginnie Mae and Freddie Mac. You must be able to recognize these three major players in the secondary market by their full names, nicknames, and initials.
Property appreciates in value due to inflation and due to an increase in the intrinsic value of the property.
Selling shares (securities) of FNMA, GNMA, FHLMC requires a securities license.

Question 33

In the California mortgage market, the traditional loan sources are savings and loans, savings or commercial banks, thrift and loans, and credit unions; these are known collectively as “depository institutions.”
California real estate lenders are divided into 3 major categories:
Institutional lenders - In California, the 3 MAJOR types of institutional lenders are commercial banks, savings banks (formerly known as savings and loan associations), and life insurance companies.
Noninstitutional lenders - Mortgage lenders, REITs, credit unions, private lenders, and pension funds.
Government-backed programs - FHA, VA, and CalVet
The California mortgage market has the following characteristics:
Usually a high demand, depending on the economy.
Financial institutions - A large amount of the country’s biggest commercial banks and savings banks
Loan companies - Many mortgage companies from out-of-state lenders that can be anxious to invest in California real estate loans.
Population growth - More people mean more homes are needed.
Title and escrow companies - Many originated in California, and are the largest in the U.S.
Deeds of Trust used rather than mortgages, which allows lenders greater flexibility and protection.
A very active secondary mortgage market, in which existing loans are sold to other, out-of-state lenders.

Question 34

Conventional Loans - No government guarantees or insurance.
Loans obtained at local savings and loans, mortgage brokers, and mortgage bankers.
Minimum down payment of 20%.
However, there are conventional loans available with lower down payments if the buyer is willing to pay a Mortgage Insurance Premium (MIP).
Conventional Loans normally require a larger down payment (20% down or more) than FHA or VA, but do not require insurance with 20% or more down payments.
Most loans are packaged by the lenders and sold in the secondary market to the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac).

Conventional Insured Loans
Conventional Insured Loans - No government guarantees of insurance, but insurance from private insurance companies.
Private Mortgage Insurance (PMI) is insurance provided by a private insurer that protects the lender against loss in the event, of a foreclosure and deficiency. Insurance is required for all loans with less than 20% down payment.
Largest private insurer is M.G.I.C.
MORTGAGE GUARANTEE INSURANCE CORPORATION
The amount a lender will loan is generally based on the appraised value for loan purposes or the sale price, whichever is lower.
Remember, whether an FHA, VA, or conventional loan is made to a consumer, the lender and/or investor:
Is concerned with the current and future value of the property.
Is concerned with the income and income potential of the loan applicant.
Is concerned with the attractiveness of other investments that could be made for a better return.
A lender or investor is really not interested or concerned with the loan applicant’s need for financial assistance.

Question 35

California Mortgage Financing Alternatives
There are several means of financing real estate in California that do not involve using mortgages. These are as follows:
Syndicate Equity Financing: Syndicates offer small investors the opportunities to invest in high-yield real estate.
Commercial Loan: A straight bank loan that the borrower obtains based either on good credit or some NON-real property collateral.
Bonds or Stocks: Some large corporations sell stocks or general obligation bonds so that they may buy real property without a mortgage.
Long-Term Lease: A good approach if the property is usable as is; many advantages to the tenant, including 100% of rent being deductible as expense; and tenant’s total debt load remains the same; but there are some disadvantages to the landlord.
Exchange: Basically, a trade of properties (provided that the properties are not mortgaged AND the trade involves NO financing). AND
Sale-Leaseback (AKA purchase-lease, sale-lease, lease-purchase or leaseback): A situation in which a property owner sells his parcel of property, but then leases it BACK from the purchaser, so that the original owner retains possessory rights. This is popular for companies that have excellent credit.

Question 36

The California Sales Contract and the Civil Code
Sales Contract (AKA Land Contract, Installment Sales Contract, Agreement to Convey, Agreement for Purchase and Sale, Land Sale Contract, or Land Contract of Sale): This is a contract in which the seller, or vendor, agrees to convey the title to the real property after the BUYER, or vendee, has met certain named conditions, and which does NOT require conveyance within ONE YEAR. This type of contract is ordinarily used in the case of a buyer who can only make a small down payment and monthly installments.
The requirements for a sales contract of this sort are set forth under the California Civil Code, Section 2985, et seq.
Note that under an installment sales contract, the seller becomes the LENDER.
Although historically, the primary advantage of this financing instrument to the seller was how easily the seller could eliminate a defaulting purchaser’s interest in the property, recent court cases, including Barkis v. Scott (34 Cal. 2d 116, 208 P. 2d 367), have significantly reduced the ease by which the seller can remove a purchaser who is in default.
The buyer, on the other hand, is at risk because he holds no immediate title to the property. This means that should the seller die, go bankrupt, or otherwise be unable to fulfill his part of the contract, the buyer could face time and money in court battles to free the title.
Due to the disadvantage for both the seller and buyer in installment contracts, these contracts are NO LONGER a popular financing instrument in the State of California. (They are still used regularly in other states.)

Question 37

Alternate Forms of Financing
Welcome to Unit 15. In this unit, we will discuss some non-mortgage financing available in California, and then move on to a few last finance topics.

Let’s begin here with conventional loans.

Conventional Loans - No government guarantees or insurance.

Loans obtained at local savings and loans, mortgage brokers, and mortgage bankers.

Minimum down payment of 20%.

However, there are conventional loans available with lower down payments if the buyer is willing to pay a Mortgage Insurance Premium (MIP).

Conventional Loans normally require a larger down payment (20% down or more) than FHA or VA, but do not require insurance with 20% or more down payments.

Most loans are packaged by the lenders and sold in the secondary market to the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac).

Conventional Insured Loans - No government guarantees of insurance, but insurance from private insurance companies.

Private Mortgage Insurance (PMI) is insurance provided by a private insurer that protects the lender against loss in the event, of a foreclosure and deficiency. Insurance is required for all loans with less than 20% down payment.

Largest private insurer is M.G.I.C.
MORTGAGE GUARANTEE INSURANCE CORPORATION

The amount a lender will loan is generally based on the appraised value for loan purposes or the sale price, whichever is lower.

Remember, whether an FHA, VA, or conventional loan is made to a consumer, the lender and/or investor:

Is concerned with the current and future value of the property.
Is concerned with the income and income potential of the loan applicant.
Is concerned with the attractiveness of other investments that could be made for a better return.
A lender or investor is really not interested or concerned with the loan applicant’s need for financial assistance.

Question 38

California Mortgage Financing Alternatives
There are several means of financing real estate in California that do not involve using mortgages. These are as follows:

Syndicate Equity Financing: Syndicates offer small investors the opportunities to invest in high-yield real estate.
Commercial Loan: A straight bank loan that the borrower obtains based either on good credit or some NON-real property collateral.
Bonds or Stocks: Some large corporations sell stocks or general obligation bonds so that they may buy real property without a mortgage.
Long-Term Lease: A good approach if the property is usable as is; many advantages to the tenant, including 100% of rent being deductible as expense; and tenant’s total debt load remains the same; but there are some disadvantages to the landlord.
Exchange: Basically, a trade of properties (provided that the properties are not mortgaged AND the trade involves NO financing). AND
Sale-Leaseback (AKA purchase-lease, sale-lease, lease-purchase or leaseback): A situation in which a property owner sells his parcel of property, but then leases it BACK from the purchaser, so that the original owner retains possessory rights. This is popular for companies that have excellent credit.

Question 39

Non-mortgage financing

Sales Contract (AKA Land Contract, Installment Sales Contract, Agreement to Convey, Agreement for Purchase and Sale, Land Sale Contract, or Land Contract of Sale): This is a contract in which the seller, or vendor, agrees to convey the title to the real property after the BUYER, or vendee, has met certain named conditions, and which does NOT require conveyance within ONE YEAR. This type of contract is ordinarily used in the case of a buyer who can only make a small down payment and monthly installments.

The requirements for a sales contract of this sort are set forth under the California Civil Code, Section 2985, et seq.

Note that under an installment sales contract, the seller becomes the LENDER.

Although historically, the primary advantage of this financing instrument to the seller was how easily the seller could eliminate a defaulting purchaser’s interest in the property, recent court cases, including Barkis v. Scott (34 Cal. 2d 116, 208 P. 2d 367), have significantly reduced the ease by which the seller can remove a purchaser who is in default.

The buyer, on the other hand, is at risk because he holds no immediate title to the property. This means that should the seller die, go bankrupt, or otherwise be unable to fulfill his part of the contract, the buyer could face time and money in court battles to free the title.

Due to the disadvantage for both the seller and buyer in installment contracts, these contracts are NO LONGER a popular financing instrument in the State of California. (They are still used regularly in other states.)

Question 40

California Business and Professions Code, Article 7, Sections 10240-10248. The Mortgage Loan Broker Law requires all loan brokers to give all borrowers the Mortgage Disclosure Statement BEFORE the borrower becomes obligated for the loan. The Mortgage Disclosure Statement is a form that clearly and completely states ALL the information and charges associated with a particular loan.

The Mortgage Loan Broker (Real Estate Salesperson or Broker) in this situation must:

Present this statement to the prospective borrower within 3 days of receipt of a completed written loan application OR before the borrower is obligated to take the loan, whichever is earlier.
Have the borrower sign the statement before the borrower becomes obligated to complete the loan.
Keep this form on file for 3 years

Question 41

within 30 days of commencing the activity whichever is later, all licensees must report to the Department of Real Estate if they make, arrange or service loans secured by real property. This requirement applies to both residential and commercial businesses. The report must be completed online using Form RE 866- Mortgage Loan Activity Notification. Future business activity reporting will also be required.

Penalty fees can apply for failure to submit this required notification. Penalties are fifty dollars ($50) per day for the first 30 days the report is not filed and one hundred dollars ($100) per day for every day thereafter not to exceed a maximum of $10,000.

Question 42

Remember that anyone who negotiates real estate loans MUST BE A REAL ESTATE LICENSEE. In addition to this regulation, anyone who makes COLLECTIONS on real estate loans, if that person makes more than 10 collections per year OR collects more than $40,000.00, he or she must be licensed as a California real estate BROKER.

Under Article 7, brokers who negotiate trust deed loans have specific limitations regarding commissions and expenses.

The maximum commissions for loans subject to Article 7 are:

1. For first loans:
   a. 5 percent of the principal of a loan of less than 3 years;
   b. 10 percent of the principal of a loan of 3 years or more;
2. For second or other junior loans:
   a. 5 percent of the principal of a loan of less than 2 years;
   b. 10 percent of the principal of a loan of at least 2 years but less than 3 years;
   c. 15 percent of the principal of a loan of 3 years or more.

Any costs and expenses of making a loan must meet the requirements set forth in Article 7. The charges made to a borrower cannot exceed 5% of the loan or $390.00, whichever is greater, to a maximum of $700.00. Such charges include appraisal fees, escrow fees, notary and credit investigation fees, but EXCLUDE actual title charges and recording fees. Under Regulation 2843, the amount charged cannot exceed the actual costs and expenses paid, whether these are incurred or “reasonably earned.” In addition, no charge can exceed the amount customarily charged for the same or comparable service in the community in which the services take place.

Question 43

Here are some additional regulations set forth under Article 7:

On “hard money loans” (cash) of $30,000.00 and over for first trust deed loans, and $20,000.00 and over for JUNIOR deeds of trust, the broker MAY CHARGE as much commission as the borrower will agree to pay. *

The regulations also require that the broker provides to BOTH the buyer and seller, on first trust deed loans UNDER $30,000.00, and on junior trust deed loans UNDER $20,000.00, copies of the appraisal report.

Loans on owner-occupied homes that are negotiated by a broker for a term of 6 or more years may not have a balloon payment. In any situation that involves a balloon payment, the SELLER is required to notify the BUYER between 60 and 150 days BEFORE the payment is due.

If the home is NOT occupied by the owner, then the loans are exempt from balloon payments, IF the loan term is less than 3 years.

Threshold Reporting is the requirement to report annual and quarterly loan activities (review of trust fund) to the California DRE, IF, within the past 12 months, a broker has negotiated any combination of 10 or more loans to a subdivision OR a total of more than $1,000,000.00 in loans. Regulations for “big lending,” as this is known, include the requirement that advertising must be reviewed by the DRE. The intent of the threshold reporting regulations is to protect the public by overseeing the loan activity of these “big lenders,” who are using their real estate licenses to take on such activities.
*Note that usury laws have been passed to establish the maximum rate of interest that may be charged on specific types of loans. In CALIFORNIA , this maximum rate is 10%, or 5% over the Fed discount rate, whichever is greater. However, as noted above, there ARE cases in which the lender is exempt from this law.

Question 44

Articles 5 and 6
Under Article 5, licensees are prohibited from pooling funds. This means that a broker must NOT accept funds UNLESS the funds are meant, and so noted, to be for a specific loan transaction. Before a broker can accept the lender’s money, he must first OWN the loan OR have an unconditional written contract to buy a specific note; AND the broker must also have the authorization from the prospective borrower, giving him permission to negotiate a secured loan for the borrower.

Under Article 6, regulations are set forth for a real property securities dealer. A DRE broker license and the following endorsement are required. In California, anyone who wishes to sell real estate investment type security must FIRST obtain a Commissioner’s Permit. This permit is the approval of the proposed real property security and plan of distribution, and will be granted if the Commissioner finds that the security and plan of distribution are fair. The permit is not a recommendation, but merely the Commissioner’s authorization of the sale. The Commissioner’s Permit is valid for one year, and it may NOT be used in advertising unless the permit is shown in FULL. The cost of the permit is $100.00. Note that the Commissioner’s Permit requires a $10,000.00 surety bond.

A Real Property Securities Dealer is anyone acting as the principal or agent, who engages in the business of selling real property securities, including promissory notes or sales contracts, OR who accepts funds to be reinvested in real property securities or to be placed in an account. A California licensed broker is permitted to act in this capacity IF he first receives an RPSD endorsement on his broker license. This endorsement requires a broker to submit the endorsement fee of $100.00, along with the proof of a $10,000 surety bond.

Question 45

Financing Laws - Truth in Lending
There are three major laws regarding financing.

Truth In Lending Law: ( Regulation Z)
The purpose of this law is DISCLOSURE. The law requires lenders to disclose to buyers the true cost of obtaining credit so that the borrower can compare the costs of various lenders. The regulation requires that the consumer be fully informed of all finance charges, as well as the true annual interest rate, before a transaction is consummated. The Truth in Lending Law does not control interest rates and does not control costs to close a transaction. (RESPA, the Real Estate Settlement Procedures Act, covers costs to close. This law will be covered shortly.)

Truth In Lending applies to residential loans, federally related 1-4 family properties, non-commercial properties, and family farms.

Commercial transactions are not covered under the Truth in Lending law.

Two major sections of Truth In Lending:

Annual Percentage Rate (A.P.R.)

Advertising
Advertising - All terms listed in Column B must be disclosed if ANY ONE of the triggering terms in Column A is advertised.

Column A
Column B

Trigger Terms:
Required Disclosure:

Amount or percentage of down payment
The amount or percentage of down payment

Amount of any installment
Terms of repayment

Finance charge in dollars or that there is no charge for credit
Annual percentage rate and if increase is possible

Number of installments
Total finance charge

Period of repayment
Total # of payments and due dates

Truth in lending is violated when the phrase “no down payment required” is advertised without any other information.

Truth in Lending and the APR
Annual Percentage Rate - An expression of the relationship of the total finance charge to the total amount to be financed. Use of APR permits the consumer to compare rates.

A standardized yardstick expressing the true annual cost of borrowing is expressed as the “APR.” This law does not include a computation of unearned finance charges.

Legal fees to prepare deeds, survey fees, recording fees, and title insurance premiums, are not included in the finance charges.

In order to be considered a creditor under TRUTH IN LENDING, a lender must lend funds 25 times a year and/or must lend the funds for at least 5 housing loans annually. An owner of property advertising acreage for sale could advertise “no down payment.” The owner is not considered a lender under Truth In Lending guidelines.
Rescission Clause - (Does not apply to residential purchase money or first mortgage or deed of trust loans.) A clause in a contract, required by some state subdivided land sales laws, that informs a purchaser of his/her rescission rights as provided by state law.*
HOME IMPROVEMENTS - APPLIANCES - FURNITURE! 3-day Right of Rescission applies here.

* In California, the right of rescission generally does NOT APPLY to first deeds of trust to buy a home, NOR does it apply to loans carried back by the seller in the transaction.

Question 46

REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) - Created to ensure that the buyer and seller in a residential real estate transaction involving a new first mortgage loan have knowledge of all settlement costs. Administered by HUD.

Applies only when the purchase is financed by a federally related mortgage loan. FHA - VA Loan to be sold to GNMA or FHLMC.

Must be a new first mortgage loan, second mortgage (junior), or a refinance. Does not apply to loans secured by mortgaged property larger than 25 acres, installment land contracts, contracts for deed, construction loans, or home improvement loans.
Lenders must give a copy of the HUD booklet “Real Estate Settlement Costs and You” to every person at the time of application for a loan.

Lenders must provide a good faith estimate of settlement costs at the time of loan application or within three business days of application.
Uniform Settlement Statement (HUD Form 1) - This is a form designed to detail all financial particulars of a transaction. This must be made available to the borrower at or before closing. The borrower may request to see the form one business day prior to closing.

RESPA prohibits kickbacks or unearned fees paid to lender for referring customers to insurance agencies, etc.
RESPA is administered by the Department of Housing and Urban Development.

R E S P A K (a memory tool to help you remember that RESPA prohibits KICKBACKS to real estate licensees

Violators of RESPA can face punishments of up to one year in jail, and/or a $10,000.00 fine.

Question 47

Equal Credit Opportunity Act
Equal Credit Opportunity Act - A law for lenders that prohibits them from discriminating against race, color, religion, national origin, sex, family size, handicap, marital status, age, or dependency on public assistance in the granting of credit to consumers.
ECOA indicates that a lender can base lending decisions on an individual’s income, net worth, job stability, and credit rating.

Income would most interest a lender when making a loan. If a person applying for a loan is relying on income from child support for repayment of a loan, the income must be revealed to the lender.

Question 48

CHANGE TYPE SIZE: Default
Real Estate Principles - Unit 16 Screen #9 of 10

Fair Lending Laws
Federal legislation passed in 1974 to ensure that the various financial institutions and other firms engaged in the extension of credit exercise their responsibility to make credit available with fairness and impartiality and without discrimination on the basis of race, color, religion, national origin, sex or marital status, age, receipt of income from public assistance programs (food stamps, social security), and ensure good faith exercise of any right under the Consumer Credit Protection Act. (Creditor must state reasons for denial of credit.) The act applies to all that regularly extend or arrange for the extension of credit. A real estate licensee is considered a “creditor” if the licensee routinely assists sellers in determining whether a proposed buyer in a land contract or purchase-money mortgage is creditworthy. Regulation B, which implements the act, contains partial exemptions from procedural provisions for business, securities and public utilities credit. The overall enforcing agency for ECOA is the Federal Trade Commission.

Lenders can base lending decisions on a consumer’s:

Incomes
Net worth
Job stability
Credit rating
A lender cannot discriminate based on minority background, but can refuse a loan if the person cannot qualify financially (bad credit).

The Housing Financial Discrimination Act, or the Holden Act, is the California State law prohibiting financial institutions from engaging in discriminatory loan practices. This law attempts to prohibit redlining. Redlining, as you may recall, is the illegal loan practice under which a lender refuses to grant a housing loan in a certain geographic area, based on the neighborhood trends, and without regard for any merits of the borrower or the home itself.

Question 49

Real Estate Syndicates and Real Estate Investment Trusts
Welcome to Unit 17!

In this unit, we will cover two topics: real estate syndication and real estate investment trusts. By the time you’ve reached the end of this lesson, you will know the answers to the following questions:

Question 50

Real Estate Syndication
Real estate syndication gives a person the chance to channel his or her private savings into real estate investments for which other financing cannot be obtained or is not available because of the large amount of money involved.

In addition, syndication allows for professional management. Professional management, which is a service that might not be within the financial reach of the smaller investor, is considered essential to a successful syndication.

So we know that real estate syndication combines the money of individual investors, along with the management of a sponsor, to invest in real estate and achieve a good rate of return on that investment. Now you’re probably wondering HOW, exactly, this is done. Syndication is accomplished through three phases:

Origination (planning and buying the property, following registration and disclosure mandates, etc.);
Operation (in which the sponsor generally manages BOTH the syndicate and the actual property); and
Completion or Liquidation (the property’s resale).

Question 51

Today, the Department of Corporations has the authority to grant either a permit or an exemption in deciding whether a given form of business for pooling investment money constitutes a securities offering.

In 1977, Section 25206 was added to the Corporations Code, permitting real estate brokers to engage in the sale of real estate syndicate security interests without having to obtain a broker-dealer license from the Department of Corporations. A related provision was also added to the Real Estate Law at that time, should a real estate broker violate the Corporations Code or its regulations in these real estate syndicate interest sales, exchanges, or trades.

Question 52

Syndications can be undertaken in different forms, including:

The Corporate Form, which allows for both centralized management and limited liability for the investors, but, on the downside, has negative tax features that make it unappealing for modern syndicates.
The General Partnership, or Joint Venture, which avoids the double taxation (which a “regular” corporation would incur), but, on the negative side, there is an unlimited liability provision, as well as a lack of centralized management.
The Limited Partnership offers many of the advantages found in both of the above syndication forms: the corporate advantages of limited liability and centralized management, and the tax advantages of a partnership. Because of this, the limited partnership form is one of the most frequently used organizational forms for real estate syndicates. *

Question 53

A real estate investment trust, also known as a REIT, is a type of company that sells securities specializing in real estate ventures, and requires a minimum of 100 investors. REITS, sometimes referred to as the “mutual funds” of the real estate business, were created in 1960 as an aspect of the federal tax law to encourage small investors to combine their resources with the resources of others so the companies could, together, raise venture capital for real estate transactions. REITs invest in an assorted portfolio of real estate and mortgage investments.

There are two types of REITs:

An Equity Trust : A company that invests in real estate itself or in several real estate projects; or

A Mortgage Trust : A company that invests in mortgages and other types of real estate loans/obligations
There are also combined trust companies that engage in both equity AND mortgage trust investments, known as “combination trusts.” These companies are not as prevalent as either equity trusts or mortgage trusts.

Question 54

Regarding taxation, there are many legal mandates that must be fulfilled to meet the qualification for a “trust” and thereby qualify for the tax benefits of other regulated investments, such as mutual funds, as mentioned previously. One of these requirements is that the company must distribute at LEAST 90% or MORE of its income to its shareholders. (If this requirement is met, then that company does NOT pay federal taxes on that distribution, but only on the retained earnings, which are taxed at corporate rates.) Additional regulations are as follows:

The REIT must be beneficially owned by at least 100 investors.Have no more than 50% of the shares held by five or fewer individuals during the last half of each taxable year (5/50 rule)
Transferable shares or certificates of interest must prove the beneficial interest.
In California , each share or certificate of interest must carry with it an equivalent vote.

Question 55

CMA Vs. Appraisal
Real estate salespeople are called upon to provide comparable sales to a seller who wants to list a property for sale. This is called a Competitive Market Analysis, or “CMA.” This task is usually accomplished by looking at the properties that have been sold recently in the marketing area of the property. However, the CMA is not the basis upon which a lender determines a loan amount or an insurance company issues a policy for a potential purchaser. To establish market value, insurance value, salvage value, and/or tax value, an independent licensed fee appraiser is employed to determine value.

A Real Estate Appraisal is an estimate or opinion of value. There is no question that making an appraisal is one of the most important functions in the entire chain of selling and purchasing a property. There is also not any doubt that two appraisers could appraise the same property for totally different values. During this section of the course, we will take you through the appraisal process.

The goal of the appraiser is to determine:

Either the market value, insurance value, salvage value, and/or the tax value of a property.

Compensation of the appraiser is based on time and effort, never on the established price of the property.
The first step in the appraisal process is to define the problem. The appraiser has to ask himself/herself “Why am I doing this appraisal? Is the purpose of this appraisal for market value, insurance value, salvage value, or tax value?”

Question 56

The Rules of an Appraiser
If an appraiser is hired to determine Market Value, he/she is looking for what the sales price would most likely bring in an open market if the following conditions were met:

Appraiser’s Ground Rules

Payment must be in cash or its equivalent - The appraiser assumes the buyer is either paying cash for the property or is in the process of obtaining a loan.

Buyer and seller must be unrelated and acting without undue influence, menace, or duress. - The transaction is “Arms Length,” meaning there is no relationship between the buyer and seller. For example, a sale from a father to a daughter would not be considered an “Arms Length” transaction, nor would a sale of a property in a divorce situation be a comparable for an appraiser to use to establish market value.

Other examples of an “Arms Length Transaction” violations:
The seller is being forced to sell at a reduced price because of an impending divorce or other similar situation.

A buyer is being forced to purchase because he has been transferred to a new town, and his home has been sold in the area from which he is relocating. Example: His wife and 5 children are on the way to town, and it is either buy something today, or find a motel or a rental property.

The property must be marketed for a reasonable time in an open and free-flowing market.

Both buyer and seller must be well-informed consumers.

Question 57

Appraisal Process
The appraisal process is outlined below:

State the problem. The appraiser determines why he/she has been hired to make an appraisal on the property. As stated earlier, is the job to determine market, insurance, salvage, and/or tax value?

Gather, record, and verify the necessary data using all of the tools available. The appraiser uses the three appraisal processes: market data or sales comparison, cost, and income approaches. (More later in this section about these approaches to value.)

Analyze and Interpret using the following information:

Neighborhood Analysis: A gathering of facts about a neighborhood to determine the appeal to the buyer. These facts include: employment stability, convenience to employment, convenience to shopping, adequacy of public transportation, recreation facilities, adequacy of utilities, property compatibility, protection from detrimental conditions, police and fire protection, general appearance of properties, appeal to the market, zoning ordinances, topography and building codes.

Neighborhood Cycle: The process of neighborhood change, involving the four phases of change. (See Principle of Change.)

Site Analysis: A gathering of facts about a particular location. These include: estimate of highest and best use, identification of key features, and identification of possible legal or physical problems.
Example, if an appraiser is comparing a home with another property that had low taxes, good community programs, and was located in a convenient area, he/she should conclude that this home has economic desirability.

Estimate Land Value - For appraisal purposes, land never depreciates in value.

Estimate the value of the property by each of the three approaches to value (explanation to follow)

Market Data (sales comparison)

Cost (or Summation)

Income
Reconcile estimated values for the final value estimates - This is the final step in the appraisal process, in which the appraiser reconciles the estimates of value received from the sales comparison, cost, and income approaches to arrive at a final estimate of market value for the subject property. An appraiser never averages comparable sales to obtain a final value. The appraiser evaluates all three methods of appraising property–market data (sales comparison), cost, income–and determines which would be best to use for the property in question. Example: If an appraiser is asked to appraise a single family home or a vacant lot, the approach to value most often used is the Market Data or Sales Comparison. Assuming recent comparable sales can be found, the appraiser would compare the subject property to the comparable and determine value. If there are no comparable properties, then the appraiser may have to use the cost approach to value, and determine replacement cost of the components of the property. Usually, this approach is used for unusual properties where comparable properties cannot be found. (Church, school, post office, etc.) Last, the appraiser may apply the income approach if the property is income producing. Usually, this is not the case in a residential property.

Report final value estimates - Types of Appraisal Reports:

Letter: A short business letter stating all essential data but not including supporting data.
Short or Form: Contains all basics of a regular appraisal and is used primarily for homes.
Narrative: The most comprehensive of all appraisal reports. Used for commercial and investors.

Question 58

10 Principles of Real Estate Value
Next, we are going to cover the 10 Principles of Real Estate Value.

Highest and Best Use: The possible use of a property that would produce the greatest net income and thereby develop the highest value. Example: An area of the municipality has developed into commercial office buildings. If there is a vacant piece of land or a single family home in the area, one could assume that the highest and best use for this property at that time would be for an office building. This is the first “principal” that an appraiser should determine when establishing value. An appraiser would ask him/herself, “What is the highest and best use for this property at this time?”

Substitution: The maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property. (Comparison shopping- basis for market data approach.) Example: this is the principle used when determining value based on the Market Data or Sales Comparison approach to value. This principle is based on the fact that similar properties will bring similar values. (Substituting one property for another)
Market

Sale Price

Sale Price

Value?

$80,000

$80,000

Example: Assuming the three properties above are identical, the presumption would be that the market value of the property in question is $80,000.

The Law of Supply and Demand: The value of a property increases when the supply is short and decreases when there is too much. Similarly, the value increases when the supply is short, and decreases when there is little demand. Example: In an area where few properties are sold from year to year, when a property is placed on the market it will usually sell quickly. Conversely, when there are many properties to choose from, the market for an individual property will be in less demand. If a large employer in an area closes, the likely effect on the area’s real estate values will reflect the principal of supply and demand.

Conformity: An appraisal principle of value based on the concept that the more a property or its components are in harmony with the surrounding properties or components, the greater the contributory value. (The more the properties are alike, the more they retain value.) Example: A million dollar home in a neighborhood of one hundred thousand dollar homes will not usually return the investment. Conversely, a one hundred thousand dollar home in a neighborhood of million dollar homes may benefit because of the value of the million dollar homes.

Regression and Progression: As stated earlier, regression and progression occur between dissimilar properties. This means the value of the better quality property is affected adversely by the presence of the lesser quality property and a lesser house will benefit from a larger house.

Anticipation: Property can increase or decrease in value in expectation of something in the future, such as appreciation or rezoning. Example: If a person discovers that an airport is going to be built in an area and buys the land in “Anticipation” of a future value.
Another example would be if a person has knowledge that a zoning change is about to take place, which will make the property more valuable, and buys the property in “Anticipation” of a future value increase.

Contribution: Means the value of any component of a property is what it gives to the value of the whole or what its absence detracts from the whole. Example: A fully remodeled kitchen or bathroom adds to the value of a property. A kitchen or bathroom that has not been remodeled would subtract from value. Think of the items that would be the most important to you as a consumer, and usually they will add value to a property. While a finished basement that is below grade is nice to have if you live there, the seller may not realize full value from the improvement. Appraisers will not give full value to the improvement if it does not have a walkout from that level. These types of components either add or subtract from value.

Conformity: An appraisal principle of value based on the concept that the more a property or its components are in harmony with the surrounding properties or components, the greater the contributory value. (The more the properties are alike, the more they retain value.) Example: A million dollar home in a neighborhood of one hundred thousand dollar homes will not usually return the investment. Conversely, a one hundred thousand dollar home in a neighborhood of million dollar homes may benefit because of the value of the million dollar homes.

Regression and Progression: As stated earlier, regression and progression occur between dissimilar properties. This means the value of the better quality property is affected adversely by the presence of the lesser quality property and a lesser house will benefit from a larger house.

Anticipation: Property can increase or decrease in value in expectation of something in the future, such as appreciation or rezoning. Example: If a person discovers that an airport is going to be built in an area and buys the land in “Anticipation” of a future value.
Another example would be if a person has knowledge that a zoning change is about to take place, which will make the property more valuable, and buys the property in “Anticipation” of a future value increase.

Contribution: Means the value of any component of a property is what it gives to the value of the whole or what its absence detracts from the whole. Example: A fully remodeled kitchen or bathroom adds to the value of a property. A kitchen or bathroom that has not been remodeled would subtract from value. Think of the items that would be the most important to you as a consumer, and usually they will add value to a property. While a finished basement that is below grade is nice to have if you live there, the seller may not realize full value from the improvement. Appraisers will not give full value to the improvement if it does not have a walkout from that level. These types of components either add or subtract from value.

Conformity: An appraisal principle of value based on the concept that the more a property or its components are in harmony with the surrounding properties or components, the greater the contributory value. (The more the properties are alike, the more they retain value.) Example: A million dollar home in a neighborhood of one hundred thousand dollar homes will not usually return the investment. Conversely, a one hundred thousand dollar home in a neighborhood of million dollar homes may benefit because of the value of the million dollar homes.

Regression and Progression: As stated earlier, regression and progression occur between dissimilar properties. This means the value of the better quality property is affected adversely by the presence of the lesser quality property and a lesser house will benefit from a larger house.

Anticipation: Property can increase or decrease in value in expectation of something in the future, such as appreciation or rezoning. Example: If a person discovers that an airport is going to be built in an area and buys the land in “Anticipation” of a future value.
Another example would be if a person has knowledge that a zoning change is about to take place, which will make the property more valuable, and buys the property in “Anticipation” of a future value increase.

Contribution: Means the value of any component of a property is what it gives to the value of the whole or what its absence detracts from the whole. Example: A fully remodeled kitchen or bathroom adds to the value of a property. A kitchen or bathroom that has not been remodeled would subtract from value. Think of the items that would be the most important to you as a consumer, and usually they will add value to a property. While a finished basement that is below grade is nice to have if you live there, the seller may not realize full value from the improvement. Appraisers will not give full value to the improvement if it does not have a walkout from that level. These types of components either add or subtract from value.

Assemblage: The combining of two or more adjoining lots into one larger tract to increase their total value. Example: An investor wants to buy property in an area because he/she believes that it will have a future value. He/she purchases one building after another until all the property desired is “assembled.” Individually, the properties had a lower value, but once they are all “assembled” into one piece, that piece should be worth more money. “Plottage” value is the increased value resulting from the combining of adjacent lots into one larger lot.

Competition: When one business attracts another business of similar type; together they may make more money then they would have singularly. Too much competition is ruinous. As an example, just look at what some of the large chain stores have done to the downtown areas in small towns. On the other hand, shopping centers in large cities attract shoppers every day.

Change: Real property is constantly changing–expanding, stabilizing, declining or being reborn. We are all familiar with areas that have or may be going through these changes. Example: Downtown Chicago has gone through all of the cycles above, and many other areas of the country are experiencing the same.

Question 59

I. Sales Comparison Approach (also called Market Data Approach):

Used for appraising residential property or vacant land. This approach compares the subject property to similar properties and makes adjustments on the basis of the date of the sale, the location, the physical features, and/or amenities.

An appraiser is asked to appraise a residential property.

Example: The appraiser finds a property located in the same neighborhood and wants to use it as a comparable sale. The comparable has more bedrooms than the subject, one less bath, and one less garage. The appraiser will have to subtract the extra bedrooms, from the comparable, add a bathroom to the comparable, and add a garage to make the properties equal.

Memory Tools:

SBA: If the subject property is better, add value to the comparable.
CBS: If the comparable property is better, subtract value from the comparable. Example: The comparable has a fireplace and the subject property does not: Subtract the fireplace (value) from the comparable. The subject property has a fireplace and the comparable does not: Add the fireplace (value) to the comparable. Adding and subtracting are always done to the comparable, never to the subject property.

II. Cost Approach (also called Summation Approach)

Used on buildings that do not have market data because they are unusual properties (school, post office, library, etc., or a building without income).

Reproduction cost: To replace with the same materials as original construction (much more expensive!)

Replacement cost: To replace with current materials and methods with utility and function similar to original.

Question 60

In California, there are 4 levels of licensing for real estate appraisers:

Residential License, also known as “Licensed” — Residential licensed appraisers may appraise any non- complex, one-to-four unit residential property with a transaction value up to $1 million, and nonresidential property with a transaction value up to $250,000. To receive this license, an individual must complete 150 hours of appraisal-related education including 15 hour National USPAP course module.
Certified Residential License — Certified residential appraisers may appraise any one-to-four unit residential property, and non-residential property with a transaction value up to $250,000. To receive this license, an individual must complete 200 hours of appraisal-related education including 15 hours National USPAP Course and an Associate Degree. In lieu of a Degree 21 semester credits in specific subject matters may be substituted.
Certified General License — Certified general appraisers may appraise any type of real property. To receive this license, an individual must complete 300 hours of appraisal-related education including 15 hours National USPAP Course and a Bachelors Degree. In lieu of a Degree 30 semester credits in specific subject matters may be substituted.
Trainee License — Trainee licensed appraisers must be supervised by a certified residential or general licensee in good standing. Supervising appraiser may have no more than three trainees. To receive this license, an individual must complete 150 Hours of education including 15 hour National USPAP course module. Education may not be more than 5 years old.

In addition to the required educational hours, the following experience requirements also apply:

Licensed: 2,000 hours encompassing 12 months of acceptable experience.
Certified-Residential: 2,500 hours encompassing at least 30 months of acceptable experience.
Certified-General: 3,000 hours, encompassing at least 30 months of acceptable experience. At least 1,500 hours of the experience must be non-residential.
Once the person has met the educational and experience requirements, he must pass an examination. Then his appraisal license or certification is issued for a 2-year period. For those who meet the educational but not the experience requirements, the training license is issued for the least complicated of the appraiser designations: the “Licensed” appraiser. (This was explained under “D” on the previous screen.) NO training licenses exist at higher appraiser certification levels.

Real estate appraiser licenses are valid for two years. However, continuing education requirements are submitted every four years.

Question 61

There are two types of real estate taxes. Both are levied against specific parcels of property and automatically become liens on those properties. Taxes need not be recorded to be valid!

Special Assessment Taxes: A tax or levy imposed by a city, county, or state only on those specific parcels of real estate that will benefit from a proposed public improvement, such as a street or a sewer. These taxes are usually assessed by frontage foot and are always paid before general taxes and first deed of trust in case of a foreclosure. These taxes must also be paid before the property can be transferred, unless there is an agreement in writing otherwise. This is not the same as a special assessment required by subdivisions as required by restrictions and covenants.

General Tax: Used for the general operation of the governmental agency authorized to impose the tax. These taxes are called “Ad Valorem.”

The words “AD VALOREM” are Latin for “according to valuation,” usually to a type of tax or assessment. Real property tax is an Ad Valorem tax based on the assessed valuation of the property. Each property bears a tax burden proportionate to its value, as opposed to a specific tax per unit based on quantity, such as a tax per gallon of gasoline or package of cigarettes.

Real estate is ASSESSED for tax purposes by county assessors or appraisers. An assessment is an official valuation of real property for tax purposes based on appraisals by local government officials. Sale prices of comparable land are used to estimate land values, whereas building values are based on an amount representing the improvement’s replacement cost less depreciation.

Occasionally one county or another is out of line with others in the state in real estate taxes. When this is the case, an Equalization Factor is multiplied times the taxes to make the rate more equal to the rest of the state.

Question 62

Let’s take a look first at Property Taxes and Proposition 13. Proposition 13 limits the maximum annual tax on real property at 1% of market value, PLUS the cumulative increase of 2% in market value each year after, due to the annual inflation factor. This means that rather than using a pure ad valorem system, the property taxes in California are now levied using a system that is based on the date of acquisition. Note that the new owner often ends up, as a result of this regulation, paying DRAMATICALLY more real property taxes than the previous owner was paying

NOTE that the following conveyances are considered transfer exclusions: transfers between spouses; a transfer of a principal residence of $1 million or LESS, between parents and children; replacing a property due to government eminent domain; or replacing a property due to a disaster. The county assessor will not reappraise such a property and will not increase the property taxes on it in these situations.

Question 63

Under Proposition 60, homeowners 55 years of age and over are allowed to transfer their base-year property tax value to another home of equal or lesser value in the same county and keep their low assessment from their former home.
Proposition 90 follows the same general idea, but allows the privilege to be applied to a home purchased in ANOTHER county, IF that county’s Board of Supervisors CHOOSES to apply Proposition 90.
Real property taxes run from a fiscal year beginning July 1 until June 30 of the following year.
Real property tax becomes a lien on the January 1 that precedes the fiscal tax year.
This tax can be paid in two equal installments, with the first installment due November 1 (delinquent by December 10, or the following business day by 5:00 p.m. if December 10 falls on a holiday or weekend); and the second installment due February 1 (delinquent by April 10, or the following business day by 5:00 p.m. if April 10 falls on a holiday or weekend). Or, if the taxpayer prefers to make a single payment, then both installments may be paid when the first installment is due (November 1).
Should an owner fail to pay his property taxes when they are due on June 30, then the tax collector will publish a notice of “intent to sell” the property to the state of California because of these unpaid taxes! This is not a REAL sale, however; it is known as a book sale. In a book sale, the property owner still owns the real estate, but the owner’s name is entered into a delinquent account book, and this begins a 5-year period of redemption. During this 5-year period, the owner can redeem the property by paying all back taxes, interest, penalties, and any other applicable fees. If the CURRENT taxes are paid on time, then the delinquent taxes may be paid in 5 annual installments.
If, after 5 years, the taxes remain unpaid, the delinquent property reverts to the state, and the former owner loses the title.
A seller or his or her agent is required to deliver to the prospective purchaser a disclosure notice that includes both of the following:

1102. 6c. (a) In addition to any other disclosure required pursuant to this article, it shall be the sole responsibility of the seller of any real property subject to this article, or his or her agent, to deliver to the prospective purchaser a disclosure notice that includes both of the following:
1103. A notice, in at least 12-point type or a contrasting color, as follows:

“California property tax law requires the Assessor to revalue real property at the time the ownership of the property changes. Because of this law, you may receive one or two supplemental tax bills, depending on when your loan closes.

The supplemental tax bills are not mailed to your lender. If you have arranged for your property tax payments to be paid through an impound account, the supplemental tax bills will not be paid by your lender. It is your responsibility to pay these supplemental bills directly to the Tax Collector.

If you have any question concerning this matter, please call your local Tax Collector’s Office.”

2. A title, in at least 14-point type or a contrasting color, that reads as follows: “Notice of Your ‘Supplemental’ Property Tax Bill.”
   Keep in mind that including the required information in the Mello-Roos disclosure may satisfy the disclosure notice requirements of this section. Supplemental taxes may be assessed whether a new loan is obtained or an existing loan is assumed to accomplish the purchase of the property, or whether the property is purchased without financing.

Question 64

Under Section 218, an owner-occupied residential dwelling is entitled to a $7,000.00 DEDUCTION from the full appraisal value. (This also applies to an owner-occupied unit in a multiple unit residential structure, an owner-occupied condominium, cooperative apartment, or unit in a duplex). To claim this California Homeowner’s Exemption, a person must have been the owner and lived in the home on or before January 1, and must file for the exemption with the assessor’s office by February 15. Once claimed, the homeowner’s exemption remains in effect until the title is transferred or the exemption is terminated by the owner. The bottom line savings from the Homeowner’s Exemption is $70.00 (take the $7,000.00 x 1% tax = $70.00).

Section 205 provides for a California resident who has served in the military during war time an exemption of up to $4,000.00 of full value of the property. This applies to property owned by qualifying veterans or the unmarried spouses of deceased veterans. This exemption results in a tax savings of up to $40.00. This exemption may NOT be applied to a property on which the homeowner’s exemption has been successfully applied. Under Section 205.5, upon the death of an eligible veteran, the exemption rights are extended to EITHER the unmarried spouse OR the pensioned father or mother of the veteran. Note that there are also special rules for disabled veterans. In some cases, depending on a veteran’s income and extent of disability that has resulted from injury or disease incurred during military service, a disabled veteran may receive an exemption of $40,000, $60,000, $100,000, or $150,000 of the full cash value of his/her residence. A veteran may contact either the California Department of Veterans Affairs or the county assessor for more information regarding the disabled veteran’s exemption. In some cases, a disabled veteran may not be required to pay ANY property tax.

In California, there are special laws that allow a partial OR FULL refund of property taxes for certain senior citizens. In addition to this, the California legislature has passed laws that allow certain senior citizens to defer the payment of property taxes due to the county and city. The regulations that concern senior citizens and property taxes change frequently; so always contact the local tax assessor for current information

Question 65

Police Power
Earlier in this course, we explored the topic of police power. Police power is the constitutional right of the government to regulate private activity to promote the general safety, health, and welfare of society. As we discussed earlier, police power includes such things as zoning, health codes, building codes, set-back requirements, and environmental regulations. Police power also allows the government the power to regulate private land use WITHOUT being compensated.

Eminent domain gives the government the power to acquire the title to private land for public use, in exchange for a PAYMENT of “just compensation,” as we discussed earlier in this course. Through eminent domain, the state may acquire land for streets, parks, public buildings, public rights-of-way, and similar uses. No private property is exempt from this exercise of government power.

Now it’s time to focus on another way in which police power is used in the United States - to control and direct land use regarding subdivisions. Subdivision regulation will be our focus for much of this unit.

Let’s move on to discuss specific legal land descriptions used throughout the United States . You’ll need to understand these legal descriptions before you can fully grasp the subdivision laws in California.

Question 66

Legal Descriptions in the United States
A legal description is NOT THE ADDRESS of the property. This method of describing a parcel of real estate is known as:

1. Lot and Block system. This legal description lists the lot, block, subdivision, county, city, and state. Specifically, this method lists lot and block numbers that refer to a recorded subdivision plat map located in the public records of the county in which the land is located. If a parcel of land is described using this method, it is necessary for there to be a PLAT MAP to locate the parcel.

Any question you might see here or on the real test concerning the best example of a “Legal description,” based on the “ Lot and Block” system, should be answered without including the address of the property. (Lot 12, Block 6, Quiet Village Subdivision, etc.)

2. The Metes and Bounds system is sometimes used to describe irregular pieces of property or in areas where a lot and block system is not in place.

A description starts at a designated place on a parcel called aPoint of Beginning (POB) and proceeds around the outside of the tract by reference to linear measurements and directions.
Monuments are fixed objects used to establish real estate boundaries.
A property description using the metes and bounds system must BEGIN AND END at the point of beginning (the same identifiable point). If the description does not meet these guidelines, it is not a valid description.
3. The Rectangular Survey System, sometimes referred to as the government survey system, or Government Rectangular Survey System, is the third method used in describing a parcel of real estate.

This system is based on sets of intersecting lines.

Principal Meridians run north and south.
Base Lines run east and west.
Township lines are lines running east and west, parallel with the base line and six miles apart.
Range Lines are lines on either side of a principal meridian and are divided into six-mile-wide strips by lines that run north and south parallel to the meridian.

A Township is a 36-square-mile area formed by the intersection of a township and range lines.

Each township square is divided into 36 Sections, each one mile square.

Question 67

California Subdivision Laws
The two basic California subdivision laws are the Subdivision Map Act, found in the Government Code, Sections 66410, et seq., and the Subdivided Lands Law, found in the Business and Professions Code, Sections 11000 – 11200.

It is necessary for every licensee applicant to be familiar with the extent and purpose of the Commissioner’s jurisdiction over the sale or lease of newly subdivided land. At some point in a California licensee’s real estate career, he will usually end up working with the sale of subdivided property or called on for advice in preparing a subdivision for the market. The term “subdivision” includes all of the following: A condominium project, a community apartment project, or the conversion of five or more existing dwelling units to a stock cooperative.

You should know that there are times when a principal is creating a subdivision without realizing it. It is up to the broker not only to recognize such an act, but also to be knowledgeable about the subdivision laws so that the principal does not inadvertently violate the law. When selling subdivided property, the broker must make certain that two important requirements of the subdivision law are followed. First, the broker must furnish the prospective buyer with a copy of the subdivision public report, obtain a receipt, and give the prospective buyer an opportunity to read the report before the prospect makes an offer to purchase. Second, it is the broker’s responsibility to handle any deposit or purchase monies as described under California law.

The Subdivision Map Act is a law that requires the mapping of all new subdivisions. This act regulates the DIVISION of 2 or more lots for the purpose of selling, leasing, or financing said lots, either at that time or in the future. The map shows the relationship of the subdivision to other lands, and each parcel in the subdivision is delineated and identified. The Subdivision Map Act is administered by LOCAL OFFICIALS, and focuses on the PHYSICAL aspects of a subdivision, including:

The streets;
The design of the subdivision;
The sewers; and
Other details that fall into the “physical aspects” category.
In addition to addressing the specific physical mandates for a subdivision, the Subdivision Map Act also outlines the procedure that must be used to file subdivision maps that result in the LEGAL creation of a subdivision.

Question 68

Subdivided Lands Act
The Subdivided Lands Act is a law that was designed to protect the purchasers of property in new subdivisions from fraud of misrepresentation when these purchasers are buying subdivided land. Keep in mind that under the Subdivided Lands Act, a subdivision is defined as a division of land into 5 or more lots for the purpose of selling, leasing, or financing, whether now or in the future. (Do not confuse this with the previously discussed Subdivision Map Act, in which subdivisions are defined as having 2 or more lots.)

The Subdivided Lands Act is primarily concerned with any marketing aspects of a subdivision, and is administered by the California Real Estate Commissioner. Under this act, a new subdivision of 5 or more lots may NOT be offered for sale until the Real Estate Commissioner issues a public report for the subdivision. The Commissioner will not issue the public report until he is certain that the developer has met all statutory requirements - including, in particular, those financial arrangements established to assure completion of any promised subdivision facilities.

Remember that the public report is simply a statement by the Commissioner that the subdivider has followed all applicable laws and regulations - it is NOT the Commissioner’s recommendation or endorsement of the development.

Before each lot in a new subdivision may be sold, the subdivider must deliver a copy of the Commissioner’s public report to the prospective buyer, who must then sign a statement attesting that he has read the public report. This statement must be kept on file by the subdivider for 3 years.

It is ONLY after ALL of the preceding steps have been completed that the subdivider can sell each lot.

The public report is valid for 5 years. Should a material change in the subdivision occur, then an amended public report must be issued by the Commissioner. Such material changes could include contract forms, the sale of 5 or more lots to a single buyer, or physical changes, such as lot or street lines. Remember that the entire public report process only applies to the first sale of each lot in a new subdivision. When a lot is resold, there is no need for the subsequent buyer(s) to receive a public report.

In some cases, the Commissioner might issue a preliminary public report. A preliminary public report gives the subdivider the opportunity to take reservations for a purchase, pending the approval and issuance of a public report. If the prospective buyer decides not to buy a property he’s reserved, he is NOT committed simply because he made a reservation. The buyer can legally back out of the reservation and receive a FULL refund, up until the time that the final report is issued and a binding purchase agreement is signed.

Question 69

Subdivided Lands Act
The Subdivided Lands Act is a law that was designed to protect the purchasers of property in new subdivisions from fraud of misrepresentation when these purchasers are buying subdivided land. Keep in mind that under the Subdivided Lands Act, a subdivision is defined as a division of land into 5 or more lots for the purpose of selling, leasing, or financing, whether now or in the future. (Do not confuse this with the previously discussed Subdivision Map Act, in which subdivisions are defined as having 2 or more lots.)

The Subdivided Lands Act is primarily concerned with any marketing aspects of a subdivision, and is administered by the California Real Estate Commissioner. Under this act, a new subdivision of 5 or more lots may NOT be offered for sale until the Real Estate Commissioner issues a public report for the subdivision. The Commissioner will not issue the public report until he is certain that the developer has met all statutory requirements - including, in particular, those financial arrangements established to assure completion of any promised subdivision facilities.

Remember that the public report is simply a statement by the Commissioner that the subdivider has followed all applicable laws and regulations - it is NOT the Commissioner’s recommendation or endorsement of the development.

Before each lot in a new subdivision may be sold, the subdivider must deliver a copy of the Commissioner’s public report to the prospective buyer, who must then sign a statement attesting that he has read the public report. This statement must be kept on file by the subdivider for 3 years.

It is ONLY after ALL of the preceding steps have been completed that the subdivider can sell each lot.

The public report is valid for 5 years. Should a material change in the subdivision occur, then an amended public report must be issued by the Commissioner. Such material changes could include contract forms, the sale of 5 or more lots to a single buyer, or physical changes, such as lot or street lines. Remember that the entire public report process only applies to the first sale of each lot in a new subdivision. When a lot is resold, there is no need for the subsequent buyer(s) to receive a public report.

In some cases, the Commissioner might issue a preliminary public report. A preliminary public report gives the subdivider the opportunity to take reservations for a purchase, pending the approval and issuance of a public report. If the prospective buyer decides not to buy a property he’s reserved, he is NOT committed simply because he made a reservation. The buyer can legally back out of the reservation and receive a FULL refund, up until the time that the final report is issued and a binding purchase agreement is signed.

Question 70

A land project is a speculative subdivision development of 50 or more vacant lots that are located in a rural area that has fewer than 1,500 registered voters within 2 miles. The current California regulation allows the purchaser of a lot in a land project 14 days after the signing of the purchase agreement in which he may rescind his offer and receive a FULL refund. out-of-state buyers have 7 days after receiving the public report to rescind the contract.

Question 71

Common Interest Developments
A Common Interest Development, or CID, is a project in which there are common areas used by all tenants, with the exception of separate interests to use as individual living units, and managed by a nonprofit association. There are 4 basic types of common interest ownership, defined as “subdivisions.” These are as follows:

Planned development (PD);
 Community apartment project;
 Condominiums (and time sharing); and
 Stock cooperatives (also known as "Co-ops").
 As you probably remember, we discussed the topics of condos and co-ops in Unit 5. We'll cover the other two - planned developments and community apartment projects - here.

A planned development, also known as a planned unit development (PUD), is a subdivision in which the lots are owned separately, but certain areas are owned in common by all owners. A Common Area is the part of the lot or unit in the subdivision that is shared equally by all owners (undivided interest). An undivided interest is the right of any owner to use ANY part of the project. An example of a PUD is a subdivided tract of homes, each on its own lot, that share a tennis court or swimming pool built on a separate lot. (The tennis court or swimming pool is owned in common with the other tract owners.) In this type of subdivision, an owner’s association is elected by all of the owners to manage and maintain the common areas of the development.

Community Apartment Projects are two or more apartments that are defined as a subdivision, in which the operation, maintenance, and control is usually exercised by the governing board elected by the owners of the individual fractional interests in the subdivision. Each owner receives an undivided interest in the land, along with an exclusive leasehold right to occupy a unit

Question 72

Condominiums are the most common type of Planned Development. A condo is the ownership of the land and buildings in common with the other owners, plus the individual ownership of specific “air spaces.” Don’t confuse the word condo with the term “townhouse;” while a condo is a type of OWNERSHIP, a townhouse is simply a type of building. Condos CAN be used for residential, industrial, or commercial reasons, but in California, the residential condo is the most common.

Keep in mind that community apartment project purchasers ONLY have a leasehold interest in the apartment. A Condominium buyer, on the other hand, gets a FEE interest, or DEED to his unit. Each condo has a separate grant deed, trust deed, and tax bill.

When selling a condominium, the seller must give a copy of the following documents: (1) The CC&Rs; (2) the governing laws, known as the by-laws, of the association; and (3) the condo association’s most recent financial statement.

Remember that Timesharing is a form of ownership in which each of the investors holds a specific unit (or home) and owns the right to occupy that home for a specified period each year. There can be 52 holders who each own a specific one-week share in one unit at a resort property.

A Stock Cooperative (better known as a cooperative or co-op) is a CORPORATION formed to own the land and improved real property, that either owns OR leases real property. The buyer does NOT receive a grant deed, but DOES own a share of the corporation, and the right to occupy a specific unit. This “right to occupy” CAN be conveyed ONLY with the share of stock in that corporation.