Real estate scenarios

Question 1

Margaret buys a home from Daniel. Under the terms of the purchase, Margaret assumes Daniel’s existing loan. The lender consents, issuing a substitution of liability. What best describes the outcome of this arrangement?

a. Daniel remains primarily responsible for the loan. However, in the event Daniel goes into default, Margaret will become secondarily liable.
b. Margaret is primarily responsible for the loan. However, in the event Margaret goes into default, Daniel will become secondarily liable.
c. The lender may immediately accelerate the loan.
d. Daniel is relieved from liability and further performance under the loan.

Answer 1

d – Under a substitution of liability agreed to by the lender, Daniel, as the original borrower, is fully relieved from liability and further performance under the loan. Only Margaret, the party assuming the loan, is liable.

Question 2

Agent Andrew examines an appraisal report written by an appraiser. Agent Andrew observes the appraisal report is divided into three primary sections: (1) Introduction, (2) Description of the area, neighborhood and property, and (3) Analysis, conclusions and opinions of value. Based on its format, the appraisal report being viewed by Andrew is most likely a:

a. Short form report.
b. Narrative report.
c. Letter report.
d. Broker price opinion (BPO).

Answer 2

b – The narrative report is the best answer selection provided, and is the most thorough appraisal report format. It documents all of the reasoning and data involved in the appraisal process in a long-form format. Addenda can also be attached, making the total length of the narrative report near that of a book. A narrative report is most commonly used for commercial properties and residential properties containing greater than four units. A short form report is considerably abridged compared to a lengthy narrative report. A letter report usually contains only the appraiser’s investigations and analyses.

Question 3

Seller Octavio enters into an exclusive listing agreement with Broker Waters. Agent Jackson, who is employed by Waters, prepares marketing materials to advertise the property. The marketing materials indicate the property features multiple large structural additions and is in good condition. Buyer Lupe sees the advertising and contacts Jackson. Jackson shows Lupe the property, indicating the roof is brand new and that the additions were built to code and constructed with the proper permitting. Based on these representations, Lupe submits an offer to purchase the property to Octavio. One day after the close of escrow, Jackson provides a
Transfer Disclosure Statement (TDS) to Lupe which indicates the roof is 15 years old and none of the additions are properly permitted. Lupe attempts to recover from Waters, Jackson and Octavio for fraud. Lupe is awarded damages from Octavio but is unable to recover from Waters and Jackson who have become insolvent. What remedy is the best option for Lupe?

a. Errors and Omissions (E&O) insurance.
b. Private mortgage insurance (PMI).
c. Homeowners’ insurance.
d. The Real Estate Recovery Fund.

Answer 3

d – The Real Estate Recovery Fund, also known as the Consumer Recovery Account, is available to individuals who have obtained a final-court judgment against a real estate licensee for losses caused while acting as an agent and are unable to recover the judgment from the licensee. Note the question provides extraneous details and distractions from the core issue of the Real Estate Recovery Fund. This question is an excellent example of a long story which yields a simple answer.

Question 4

An appraiser is hired to appraise a single family residence (SFR) in an older community. The appraiser observes an abandoned industrial plant next door with large tanks for the storage of chemicals and is concerned about contaminants. Of the following choices, which is the appraiser most likely to recommend first?

a. A soil report by a certified home inspector.
b. A survey conducted by a Phase I environmentalist.
c. A toxic waste report from the environmental protection agency (EPA).
d. A natural hazard mitigation plan.

Answer 4

c – An appraiser ought to be primarily concerned about whether the property has been contaminated by a leak in any of the chemical storage tanks. A leak of chemicals poses serious health concerns for occupants of neighboring properties, and greatly impacts the value of the property being appraised. Here, a toxic waste report from the environmental protection agency (EPA) is the best way to acquire this information.

Question 5

Jennifer is a mortgage broker. Harold is a mortgage banker. How would you describe the differences in Jennifer and Harold’s duties and functions?

a. Jennifer finds the loan. Harold funds it.
b. Jennifer services the loan. Harold finds it.
c. Harold services the loan for a financial institution. Jennifer funds it.
d. Harold and Jennifer do the same thing, but Jennifer possesses an additional endorsement on her license.

Answer 5

a – A mortgage banker is a person whose principal business is originating, funding and servicing loans secured by real property for mortgage brokers and institutional lenders on a contractual basis. A mortgage broker “shops” a borrower’s loan, competitively locating a lender to fund the loan on the terms sought by the borrower.

Question 6

Harvey has been hired to conduct a survey of raw land located outside of the city center. Public utilities have yet to be connected to the land. The land is a quarter of a section. How many acres is it?

a. 640.
b. 320.
c. 160.
d. 36.

Answer 6

c – Under the Public Land Survey System (PLSS), a township contains 36 sections. A section contains 640 acres — nominally one square mile. A quarter section contains 160 acres. Note the question comments on the lack of public utilities. This comment has no relation to the answer and is included as a distraction. Ultimately, it is purely about the conversion of a
section to an acre equivalent.

Question 7

Betsy purchases a property in a rural area that receives water from a local tributary and obtains stock in a mutual water company. Which of the following statements is incorrect?

a. The mutual water company possesses the right to take water from a local source and share the water with the landowners who live in the area.
b. When Betsy sells her property, she retains ownership of her stock.
c. The mutual water company is a corporation formed by the state of California.
d. The stock owned by Betsy is appurtenant to the land.

Answer 7

b – Stock in a mutual water company is appurtenant to the land. Thus, when Betsy sells her property, she does not retain ownership of the stock.

Question 8

Michael is hired to conduct an appraisal of a residential property. The neighbor’s property recently sold for $445,000. The neighbor’s house is of a similar age, size and condition as the owner’s house, except it has a fireplace worth $5,000 which the owner does not have. Adjusting
for the difference in the improvements (the fireplace) between the owner’s and neighbor’s house would establish the value of the owner’s house at $440,000. This is an example of what appraisal approach?

a. Market comparison approach.
b. Cost approach.
c. Income approach.
d. Gross rent multiplier method

Answer 8

a – The market comparison approach is the most commonly used approach to establish the fair market value (FMV) of real estate. Applying the market comparison approach, the appraiser looks at the current selling prices of similar properties to help establish the comparable value of the property being appraised. Adjustments are made for any differences in the similar properties, such as amenities.

Question 9

Sally would like to purchase property in a common interest development (CID). After viewing multiple projects with an agent and considering her options, Sally ends up buying shares of a stock in a corporation that owns an apartment complex. In return, Sally receives the right to occupy one of the apartments. What best describes this type of ownership?

a. Stock cooperative.
b. Condominium.
c. Long-term apartment lease.
d. Land sales contract.

Answer 9

a – A stock cooperative refers to an apartment building that is owned by a corporation. Tenancy in an apartment unit is obtained by the purchase of shares of stock in the corporation. The owner of such shares is entitled to occupy a specific apartment within the building.

Question 10

Samson would like to purchase a newly built home that is close to good schools for his children. He locates a two-story property that features a brick and wood façade. A kitchen and family room are located on the first floor. Multiple bedrooms are contained on the second floor.

What property style best describes the house being considered by Samson?

a. Ranch.
b. Contemporary.
c. Walk-up.
d. Colonial.

Answer 10

d – The question describes a colonial style home — one of the most popular styles homes in the United States.

Answer selection A. Ranch is only one story.
Answer selection B. Contemporary refers to a wide range of homes built in recent decades. The contemporary style tends to feature open floor plans and concentrate on simple forms, free of elaborate ornamentation.
Answer selection C. Walk-up refers to a multi-story apartment complex that doesn’t contain an elevator, and thus is the least appropriate of the answer selections.

Question 11

Chad occupies a property along the coast as his primary residence. Chad later loses his job and begins to have a difficult time budgeting his mortgage, property tax payments and maintenance costs. Chad makes property tax payments twice per year. What is the latest date Chad can make the second property tax payment before it is late?

a. December 10th.
b. February 10th.
c. April 10th.
d. September 10th

Answer 11

c – California’s fiscal year runs from July 1st to June 30th. Property taxes are generally collected in two equal installments. The first installment for July 1st through December 31st is due on November 1st and becomes late after December 10th. The second installment for January 1st through June 30th is due on February 1st and becomes late after April 10th.

Question 12

Martha is the escrow officer overseeing the closing of a purchase transition involving Seller Jason and Buyer Lena. A dispute arises between Jason and Lena regarding repairs agreed to be made to the property by Jason. Escrow fails to close. No mutually agreed to instructions are given to Martha concerning the disbursement of the funds in escrow. What should Martha do with the deposit held in escrow?

a. Give the deposit to Jason since he incurred expenses to repair the property.
b. Give the deposit to Lena since she was the source of the good faith deposit.
c. Return the funds in accordance with which party initially deposited them.
d. Deposit the funds with the court.

Answer 12

d – Unless escrow receives mutual instructions to disburse the funds held in escrow when escrow fails to close, escrow is to deposit the funds with the court. This relieves escrow of any further responsibility to account for the funds, called an interpleader. Thus, escrow can close out its trust account on this escrow file.

Question 13

Kari is interested in purchasing a commercial property to hold as an income-generating investment. Kari locates a property that may be suitable. To quickly determine an estimate of the rate of return generated by the property, Kari divides the property’s net operating income (NOI) by the price she would offer to purchase the property. What does this calculation provide Kari?

a. The yield spread.
b. The capitalization rate (cap rate).
c. The net income multiplier (NIM).
d. The return of investment.

Answer 13

b – The capitalization rate (cap rate) is the annual rate of return produced by the operations of an income property. The cap rate is calculated by dividing the net operating income (NOI) by the price asked or offered for the income property. The cap rate is used to estimate the annual rate of return on invested capital.

Question 14

Agent Seth is employed by Broker Rachel. Seth enters into an exclusive listing with a property owner to sell their property. At the same time, Agent Bethany, who is also employed by Rachel, works separately with a buyer to locate qualifying properties listed with other brokers. Agent Bethany shows her buyer a property that is the subject of an in-house listing. What does this
do to Rachel’s agency status?

a. Rachel becomes a dual agent the moment Bethany’s buyer is exposed to a property that is the subject of an in-house listing.
b. Rachel becomes a subagent of Bethany’s buyer.
c. Rachel may not allow Bethany to show her buyers any in-house listings.
d. Nothing about Rachel’s agency status changes.

Answer 14

a – When the agent of a buyer shows their buyer an in-house listing that is owned by the buyer’s employing broker, the broker becomes a dual agent. Here, the broker, through their agents, is concurrently representing both the buyer and the seller of the property the buyer is being exposed to. This relationship will be documented in the Agency Confirmation Provision included in transaction documents.

Question 15

Harry is hired to appraise an apartment complex in a populous area close to areas of employment. To determine the property’s value based on the property’s future income and operating expenses, Harry divides the property’s net operating income (NOI) by a capitalization rate (cap rate). What appraisal method does this practice best represent?

a. Income method.
b. Gross rent multiplier method.
c. Cost approach.
d. Capitalization method.

Answer 15

d – The capitalization method is the best answer of the selections provided. The capitalization method is used by an appraiser to arrive at a property’s value based on the present worth of a property’s future net operating income.

Answer selection B. Gross rent multiplier method uses the potential or gross rent multiplied by a gross rent multiplier (GRM) to determine
value. Both of these answers are methodologies applied under the income approach that is used for properties that generate rental income.

Note answer selection A. Income method incorrectly uses the term “method” versus “approach,” and can thus be eliminated.

Question 16

A new development is constructed under the smart growth planning theory. The development contains compact, walkable areas that are designed to avoid sprawl. This concept of smart growth is most applicable to what type of property?

a. Rural.
b. Urban.
c. Suburban.
d. Both rural and urban property equally

Answer 16

b – Smart growth is primarily an urban planning theory which seeks to concentrate growth in dense, compact urban centers. The principal objective of smart growth is to avoid sprawl. While this methodology could also be applied to other types of property to a lesser extent, it is most applicable to urban properties.

This question illustrates the need to select the best answer. Though other selections may be partially correct, only B. Urban is the best option.

Question 17

Broker Bishop and Broker Bailey enter into an open listing to sell Seller Sanders’ property. Bailey locates Buyer Hernandez who may be interested in the property and conducts an open house tour with Hernandez. Hernandez asks about the tax aspects of acquiring the property,
and Bailey answers to the best of his knowledge, letting Hernandez know he is not a tax expert and his representations are based on his knowledge of real estate. Hernandez gets cold feet and decides not to submit an offer. One month later, Bishop comes in contact with Hernandez and conducts a second open house of Sanders’ property. Informed by both open houses and his discussion with both brokers, Hernandez submits an offer to purchase through Bishop. How is Sanders to properly handle payment of the commission?

a. The full amount of the commission agreed to in the listing is paid to both brokers since both helped to facilitate the purchase.
b. The full amount of the commission is paid to Broker Bishop only since he ultimately was the producing cause of the sale.
c. The full amount of the commission is paid to Broker Bailey only since he spent more time with the buyer and provided more information to Buyer Hernandez.
d. The commission is split evenly between both brokers since they both worked with Buyer Hernandez.

Answer 17

b – Regardless of the extent of real estate activity conducted by other brokers, only the broker who was the procuring cause of the sale is entitled to a fee under an open listing. Note the extent to which the question comments on the other activities performed by Broker Bailey, the first broker who was not the procuring cause of the sale. This is irrelevant to the collection of a fee. Once the question makes it clear the brokers are operating under an open listing, the only fact that controls is which broker was the procuring cause.

Question 18

A buyer enters into a purchase agreement with a seller conditioned on the buyer obtaining loan financing. The buyer contacts a lender who agrees to fund the loan. The buyer pays multiple points upfront to the lender. What does this do to the note rate on the mortgage?

a. The note rate will remain the same and the principal amount will decrease.
b. The note rate will increase and the principal amount will increase.
c. The note rate will decrease and the principal amount will increase.
d. The note rate will decrease and the principal amount will remain the same.

Answer 18

d – Points are a fee charged by a mortgage lender as prepaid interest. Payment of a point causes a reduction in the note rate on the mortgage. However, the payment of a point will have no effect on the principal balance of a mortgage. A point equals 1% of the amount of the mortgage.

Question 19

Riley is hired to conduct an appraisal of a property. While analyzing the location of the property, Riley observes the property is situated behind other lots and is connected to the public street by a long and narrow driveway. This kind of lot is referred to as a(n):

a. Key lot.
b. Flag lot.
c. Interior lot.
d. Corner lot.

Answer 19

b – A flag lot is located behind other lots with a long and narrow access driveway to a public street. Thus, it resembles the shape of a flag with the road representing the pole and the lot representing the flag. Flag lots generally have a reduced value due to the lack of privacy that results from being surrounded by other homes. Flag lots also lack curb appeal.

Similarly, answer selection C. Interior lot references a lot that is surrounded by lots on all three sides and does not feature a long driveway connecting it to a public street. An interior lot is the most common type of lot, and is usually rectangular in shape.

Question 20

Property developer Joaquin would like to purchase 175 acres of raw land as the site of a future subdivision. The property is being sold for $800,000 cash. Joaquin lacks the funds to purchase the property and is unable to obtain traditional financing. Joaquin convinces his friend Davidson to purchase the land for him. Davidson acquires the land with his own funds. After closing, Davidson executes a land sales contract of the property to Joaquin for $825,000.

This is an example of a:
a. valid purchase and resale of a property.
b. discounted mortgage arrangement.
c. void transfer of ownership.
d. violation of the Real Estate Settlement Procedures Act (RESPA).

Answer 20

a – This scenario describes a valid and legitimate purchase and resale of a property. Here, a colleague purchased a property at the request of his friend. In return, the friend agreed to purchase the property from his colleague under a land sales contract at a higher price. No deceit or improper conduct occurred.

Question 21

Architect Franklin is studying a document related to the construction of a neighborhood. The documentation shows how the tract of land is divided into designated lots. It also displays the boundary and size of each lot of the development, as well as nearby streets and recorded easements. What type of document is Franklin most likely looking at?

a. A plot plan.
b. A topographic map.
c. A plat map.
d. The conditions, covenants and restrictions (CC&Rs) of a community.

Answer 21

c – A plat map shows how a tract of land is divided into lots. It also displays the size, boundary locations, nearby streets, flood zones, easements and rights of way which relate to the project.

Answer selection A. a plot plan is a tempting red-herring. A plot plan shows where a building and other site improvements will be located on an individual lot. In terms of scale, a plat map relates to a whole neighborhood or development. A plot plan refers to a single property.

Question 22

Broker Wyatt would like to launch a direct mail advertising campaign in which Wyatt solicits advance fees to fund a specified short sale-related service for the benefit of the principal. Wyatt submits the planned promotional materials to the Department of Real Estate (DRE) for review.
One week later, Wyatt begins sending his mailers. What did Wyatt do wrong?

a. Wyatt did not wait fifteen days before circulating his advertisement.
b. Wyatt did not obtain approval from the DRE before circulating his advertisement.
c. Wyatt cannot solicit for advance fees in relation to any short sale activity.
d. Wyatt first needs to obtain approval from the U.S. Postal Service before he may launch a direct mail program.

Answer 22

b – A broker needs to obtain approval from the Department of Real Estate (DRE) prior to soliciting for an advance fee. The advance fee paperwork must be submitted to the DRE for approval at least 10 days prior to use.

Question 23

Palmer purchases and occupies a single-family residence (SFR) as his primary residence. Seven years into his ownership, the city constructs a freeway two blocks away from his house. The new freeway increases traffic congestion in the area. Further, Palmer is able to hear the sound of the freeway while in his backyard. What is this situation an example of?

a. Functional obsolescence.
b. Physical deterioration.
c. Demographic degradation.
d. Economic obsolescence.

Answer 23

d – Economic obsolescence is a loss in value of a property due to external factors and not due to the condition of the property itself. In this question, the construction of the freeway close to the owner’s house — an external factor — contributed to a loss in the value of the property.

Answer selection A. Functional obsolescence relates to a loss in the property’s value due to outdated style or non-usable space.

Answer selection B. Physical deterioration refers to a loss in the property’s value due to wear and tear, which is not referenced in the scenario of
the question.

Question 24

Jessica purchases a property in a homeowners’ association (HOA) community. Jessica hires a local contractor to make significant upgrades to the property, such as the installation of a renovated bathroom and an addition which adds living space to the property. A pool is also installed in the backyard. The other property owners in the neighborhood do not properly maintain their properties and do nothing to upgrade them. When Jessica later sells the property, what principle of value will be illustrated?

a. The principle of regression.
b. The principle of progression.
c. The principle of conformity.
d. The principle of substitution.

Answer 24

a – The principle of regression holds that the value of the best property in a neighborhood will be adversely affected by the value of other properties in the neighborhood. In this question, the property owner adds numerous significant upgrades. However, none of the owner’s neighbors improve their properties to a similar degree, nor do they properly maintain them. Thus, the neighboring properties exert a negative influence on the subject property which is no longer in keeping with the characteristics of the surrounding community.

Both answer selections A. and B. are tied to answer selection C. the principle of conformity. Starting with the conforming property in the neighborhood, other properties either progress or regress depending on their comparison to the conforming property.

Question 25

Jonas is a certified residential appraiser. Jonas is hired to conduct an appraisal on a commercial property in an adjacent city. Jonas diligently examines the property and the surrounding area. Over the course of his activities, Jonas arrives at different valuations of the property under the
market comparison approach, the cost approach and the income approach. What is Jonas’ next step?

a. Average the three valuations together to arrive at the final value of the property.
b. Select the highest value obtained under the three approaches, then justify their conclusion to the principal.
c. Select the value which best relates to the property being appraised from the values arrived at under the three approaches.
d. Give the principal a numerical range spanning the lowest value to the highest value.

Answer 25

c – Different values arrived at under the various appraisal approaches requires the appraiser to correlate or reconcile the values. Here, the appraiser selects the most appropriate value based on the property being appraised and its type. For instance, a value arrived at under the income approach would not be used to value residential property that is owner-occupied as it generates no income.