CRAM 4

Which covenant in a deed assures the grantee that there are no claims or liens on the property other than those specifically listed on the deed? a) Warrant of quiet enjoyment | b) Encumbrance clause | c) Seizin clause | d) Warrant of further assurance

Correct answer: b) Encumbrance clause. Ch. 9, Warrants or Covenants in Deeds: The covenant against encumbrances promises that the property is free from liens, easements, restrictions, or other encumbrances except those expressly disclosed in the deed. Related terms: Quiet enjoyment protects possession from superior title claims; seizin means the grantor owns and may convey; further assurance requires later documents needed to perfect title.

Which set of terms is NOT synonymous? a) Vendee, purchaser | b) Mortgagee, lender | c) Lessor, landlord | d) Grantee, seller

Correct answer: d) Grantee, seller. Ch. 9, Leases; Ch. 9, Deeds; Ch. 11, Real Estate Sales Contracts; Ch. 12, Parties to a Mortgage: A grantee receives title in a deed and is normally the buyer, not the seller. The seller who conveys title is the grantor, so these terms are not synonymous. Related terms: Vendee = purchaser; mortgagee = lender; lessor = landlord; grantor = seller; grantee = buyer.

Mr. Able sold his home to Mr. and Mrs. Baker and gave them a warranty deed. The Bakers moved into the home but did not record the deed. Two days later, Mr. Able died, and his heirs up north sold the property without any knowledge of the previous sale. The heirs conveyed title to Mr. and Mrs. Charles, who did record the deed. Who owns the property? a) Mr. and Mrs. Baker | b) Mr. and Mrs. Charles | c) Mr. Able’s heirs | d) The Charles and the Bakers as joint tenants

Correct answer: a) Mr. and Mrs. Baker. Ch. 9, Deeds: The Bakers own the property because Able delivered a valid deed and they accepted it. Delivery and acceptance transfer title; recording is mainly used to give constructive notice and protect priority. Their possession also gave the later parties inquiry or actual notice of a possible prior interest.

In the case of eminent domain, what should the owner expect to receive? a) Payment of fair compensation | b) No compensation | c) Payment of 50% of market value | d) Payment of whatever they feel is appropriate

Correct answer: a) Payment of fair compensation. Ch. 9, Government Limitations on Private Property Ownership: Eminent domain is the government's power to take private property for a public use, but the owner must receive just or fair compensation, generally measured by fair market value. Memory device: PETE identifies the four governmental powers affecting real property: Police power, Eminent domain, Taxation, and Escheat.

Broker Bob has an exclusive listing. The owner calls and asks if Bob has any offers. Bob says no. Broker Charles submits an offer to the owner that is accepted. Which statement is correct? a) Bob can sue for unliquidated damages but not commission. | b) Bob and Charles must share the commission. | c) Bob receives no commission and can do nothing about it. | d) Bob is entitled to full commission.

Correct answer: a) Bob can sue for unliquidated damages but not commission. Ch. 11, Types of Damages; Types of Listing Contracts: Bob did not produce the accepted offer and therefore did not earn a commission. However, an exclusive listing gives one broker the exclusive employment right; if the owner breached that agreement by using Charles, Bob may sue for unliquidated damages, meaning an amount the court determines rather than a preset commission.

Broker Brown gets a listing from Mr. Jones. Broker Brown agrees to advertise, caravan, and print material intended to help in the sale of the house. Mr. Jones agrees to pay a commission to Broker Brown no matter who sells the house. Which type of listing is in place? a) An exclusive listing | b) An implied listing | c) A general agency agreement | d) An exclusive right of sale listing

Correct answer: d) An exclusive right of sale listing. Ch. 11, Types of Listing Contracts: An exclusive right-of-sale listing requires the owner to pay the listing broker if the property sells during the listing term, regardless of whether the broker, another broker, or the owner finds the buyer. Related terms: Exclusive agency employs one broker but lets the owner sell; an implied listing arises from conduct; general agency gives ongoing authority, as in property management.

What is the most likely consequence for a broker who negotiates a contract for the sale of a house between the owner and purchaser in violation of the statute off frauds? a) Have their registration suspended | b) Have their registration revoked | c) Lose their commission on the sale | d) Not be disciplined

Correct answer: d) Not be disciplined. Ch. 11, Statute of Frauds: A contract transferring an interest in land generally must be written to be enforceable, but an oral agreement is not automatically illegal or invalid. Therefore the broker is not disciplined merely for negotiating it. Memory device: COLIC lists the elements of an enforceable real estate sales contract: Competent parties, Offer and acceptance, Lawful subject, In writing, and Consideration.

Which of the following is a characteristic of a parol contract? a) In writing | b) Signed by two witnesses | c) Covered by statue of frauds | d) Oral

Correct answer: d) Oral. Ch. 11, Contracts: Parol means oral or by word of mouth. The course also treats a partially written agreement as informal or parol.

Which item creates a formal contract? a) An acknowledgment | b) Signatures | c) A written form | d) A notary’s statement

Correct answer: c) A written form. Ch. 11, Acknowledgment and Seal: A formal contract is wholly written, contains the elements of a valid contract, and may be recorded. Its written form is the defining feature tested here. Related terms: Acknowledgment or notarization verifies a signature for recording; neither one creates the parties' contract.

A broker accepts a listing that has an unmerchantable title. A sales contract is signed, and a deposit is obtained contingent upon the owner clearing title. At closing, the owner cannot give a clear title. The deposit is returned to the buyer. Which statement applies to this situation? a) The broker is entitled to a full commission. | b) The owner can sue the broker and the buyer. | c) The buyer can sue the owner. | d) The contingency was not met, so the contract is dead.

Correct answer: d) The contingency was not met, so the contract is dead. Ch. 11, Contract Termination: A contingency is a condition that must occur before performance becomes due. The owner could not provide merchantable title, so the condition failed and the contract terminated without closing. Memory device: BRRLAP lists the course's six methods of contract termination: Breach, Renunciation, Revocation, Lapse of time, Abandonment, and Performance. A failed contingency is an additional contract condition that prevents performance from becoming due.

Which statement is correct regarding a lease agreement for 12 months or less? a) Must be in writing to be valid (enforceable) | b) Must be in writing to benefit the lessee | c) Must be in writing to benefit the lessor | d) Should be in writing to avoid misunderstanding

Correct answer: d) Should be in writing to avoid misunderstanding. Ch. 11, Statute of Frauds: Even when a short lease may legally be oral, putting the terms in writing is prudent because it documents rent, duration, responsibilities, and other promises and reduces misunderstandings. Memory device: COLIC is a useful contract checklist: Competent parties, Offer and acceptance, Lawful subject, In writing when required, and Consideration.

Florida has established three authorized brokerage relationships. Unless otherwise established by agreement, what is the broker’s relationship with the public? a) Nonrepresentation | b) Single agency | c) Dual agency | d) Transaction brokerage

Correct answer: d) Transaction brokerage. Ch. 4, Authorized Real Estate Brokerage Relationships: Florida presumes transaction brokerage unless a single-agent or no-brokerage relationship is established in writing as required. A transaction broker provides limited, nonfiduciary representation. Related terms: Nonrepresentation means no representation; single agency gives full fiduciary duties to one principal; transaction brokerage gives limited nonfiduciary representation; dual agency is prohibited.

Which of the following is a unique characteristic of an option contract? a) Executed | b) Unilateral | c) Bilateral | d) Parol

Correct answer: b) Unilateral. Ch. 11, Option Contracts: An option is unilateral because only the optionor is presently bound to sell on the stated terms; the optionee has the right, but not the obligation, to buy. Related terms: Executed means fully performed; bilateral means promise for promise; parol means oral or informal.

The buyer signs an offer with a deposit, but the seller changes the price. What should the sales associate do? a) Make the necessary changes, have the seller sign and initial the changes, and then have the buyer initial the changes | b) Make the changes, have the buyer sign, and then have the seller sign | c) Prepare a new offer reflecting the changes and then have all parties sign | d) Advise the seller that there can be no changes

Correct answer: a) Make the necessary changes, have the seller sign and initial the changes, and then have the buyer initial the changes. Ch. 11, Real Estate Sales Contracts: Changing the price rejects the buyer's original offer and creates a counteroffer. The seller should make and initial the change and sign the counteroffer; the buyer must then initial or otherwise sign acceptance of the changed term before a contract exists. Memory device: WILD CARD lists ways an offer ends: Withdrawal, Insanity, Lapse of time, Death, Counteroffer, Acceptance, Rejection, and Destruction of the property.

What type of listing is held by two or more licensed brokers? a) A multiple listing | b) An exclusive right of sale listing | c) An open listing | d) A net listing

Correct answer: c) An open listing. Ch. 11, Types of Listing Contracts: An open listing is nonexclusive and may be given to two or more brokers. Only the broker who is the procuring cause of the sale earns the commission, and the owner may also sell independently. Related terms: Open listing = multiple brokers and only the procuring cause is paid; multiple listing = MLS cooperation; exclusive right of sale = listing broker is paid regardless of who sells; net listing = broker may retain an agreed amount above the seller's net.

A broker has a 90-day listing with Mr. and Mrs. Jones and shows the property to Mr. and Mrs. Smith prior to expiration of the listing. The Smiths show an interest in the property but go back north without making an offer. Next season, the Smiths are back and happen to meet Mr. and Mrs. Jones while shopping. After several meetings, the Smiths make an offer and purchase the property. The broker: a) Is the procuring cause of the sale and is entitled to a commission | b) Is entitled to damages | c) Is entitled to nothing | d) May request FREC to interplead

Correct answer: c) Is entitled to nothing. Ch.11, Listing Contracts, Broker’s Right to Receive Compensation – Protection Period: The 90-day listing expired, the buyers returned the next season, and the parties later negotiated independently. With no stated protection period or continuing procuring cause, the broker earns nothing.

What is an option contract? a) A unilateral contract, binding on both parties | b) A bilateral contract, binding only on the optionee | c) A unilateral contract, binding only on the optionor | d) A bilateral contract, binding on both parties

Correct answer: c) A unilateral contract, binding only on the optionor. Ch. 11, Option Contracts: The optionor is bound to keep the offer open and to sell if the optionee properly exercises the option. The optionee may exercise or let it expire, making the option unilateral until exercise.

A broker lists a property for $25,000, which must be all cash. A buyer makes an offer for $30,000 but asks the broker to show the additional $5,000 in the contract as a down payment, which the buyer does not intend to provide. The buyer does this to show a higher purchase price to the lender so that they can get approved for a $25,000 loan. Under this arrangement, the seller would only receive the $25,000, thereby meeting the seller’s terms. What should the broker do? a) Charge a commission based on $30,000 | b) Charge a commission based on $25,000 | c) Find another buyer | d) Withdraw from the listing

Correct answer: c) Find another buyer. Ch. 6, Administrative Penalties, Fraudulent Activities – Conspiracy: The broker must refuse the fraudulent arrangement and continue seeking a legitimate all-cash buyer who can meet the seller's lawful terms.

Which statement best applies to a planned unit development (PUD)? a) It provides a higher number of dwellings and maximum utilization of open areas. | b) It typically includes only residential use. | c) It requires areas to be left open for future growth. | d) It is a less efficient use of land than other types of communities.

Correct answer: a) It provides a higher number of dwellings and maximum utilization of open areas. Ch. 19, Planned Unit Development: A planned unit development uses flexible, clustered design to increase efficient dwelling density while preserving and making coordinated use of common open areas.

What do zoning laws regulate? a) Type of use | b) Structures and building materials | c) Public right of way and easements | d) Color of exteriors, type of roof tile, etc.

Correct answer: a) Type of use. Ch. 19, Zoning: Zoning divides land into districts and regulates permissible uses, such as residential, commercial, industrial, agricultural, and special-purpose uses. Related terms: Building codes govern structures and materials; private restrictions often govern exterior colors and styles.

An owner wants to build a 15-foot deck on the side of a house. There is a 10-foot setback requirement. If they build the deck, there would be only five feet left over. What can the owner do? a) Ask for a variance | b) Request a special exception or special use | c) Build the deck under a nonconforming use | d) Send the plans to the building department for approval

Correct answer: a) Ask for a variance. Ch. 19, Zoning Board of Adjustment: A variance grants relief from a dimensional zoning requirement when strict enforcement creates a qualifying hardship. The owner needs relief from the 10-foot setback to place the deck five feet from the boundary. Related terms: Variance = relief from a zoning rule due to hardship; special exception = a conditionally permitted use; nonconforming use = a lawful preexisting use that no longer complies.

What is the term that is applied to the practice of keeping low-income people out of a particular neighborhood? a) Zoning | b) Exclusionary zoning | c) Nonconforming use | d) Subdivision exception

Correct answer: b) Exclusionary zoning. Ch. 19, Purpose of Zoning: Exclusionary zoning uses requirements such as large minimum lots or costly development standards to keep lower-income households out of an area. Related terms: Zoning is the general system of land-use control; a nonconforming use is a lawful existing use that no longer complies after a zoning change.

Which entity would an owner approach when seeking to subdivide their land? a) Florida Real Estate Commission | b) Division of Florida Land Sales | c) Department of Housing and Urban Development | d) Local planning board or the appropriate government agency

Correct answer: d) Local planning board or the appropriate government agency. Ch. 19, Zoning Board of Adjustment: Subdivision requires review of the plat, roads, utilities, drainage, concurrency, and local development standards by the local planning board or other designated government agency. Related terms: FREC regulates real estate licensees; HUD administers federal housing and fair-housing programs. Neither approves an ordinary local subdivision plat.

From which type of loss can zoning protect an owner? a) A loss in value due to decreased demand | b) A loss in value in a residential area with urban encroachment | c) A loss due to flooding | d) A loss due to a change in market conditions

Correct answer: b) A loss in value in a residential area with urban encroachment. Ch. 19, Purpose of Zoning: Separating incompatible uses can protect a residential area from urban or industrial encroachment that would impair neighborhood use and value.

Health ordinances are local laws and rules created to protect the general welfare of the citizens in the community. These could include all of the following areas of coverage, EXCEPT: a) Limitations on type and number of pets | b) Restrictions and rules for outside burning | c) Restrictions on the legal use of land | d) Restrictions on permissible noise levels

Correct answer: c) Restrictions on the legal use of land. Ch. 19, Zoning, Land Use Restrictions, and Building Codes: Restrictions on the legal use of land are the core function of zoning and land-use ordinances, not a health ordinance as classified by this question.

What is the role of the local planning agency in matters concerning site planning, subdivision plat approval, and sign acceptability? a) Makes recommendations that are subject to the local governing body | b) Is accountable to no other authority | c) Has no authority | d) Is not concerned

Correct answer: a) Makes recommendations that are subject to the local governing body. Ch. 19, Authority of the Local Planning Agency: The local planning agency studies proposals and makes recommendations on site plans, subdivision plats, signs, and comprehensive planning. Final action remains subject to the local governing body under the applicable procedure.

The owner of an apartment building would be required to provide all of the following, EXCEPT: a) Heat and hot water | b) Garbage pickup | c) Laundry service | d) Pest control services

Correct answer: c) Laundry service. Ch. 7, Landlord’s Obligation to Maintain the Premises: A landlord is not generally required to furnish tenants with laundry machines or laundry service unless the lease promises that amenity.

Under specific circumstances, real estate law allows a broker to appoint one sales associate to represent the seller and another to represent the buyer. What term is used for a sales associate who meets all the qualifications of these circumstances? a) Dual agent | b) Transaction broker | c) Designated sales associate | d) Special agent

Correct answer: c) Designated sales associate. Ch. 4, Authorized Real Estate Brokerage Relationships: A designated sales associate is appointed by the broker to act as a single agent for one side while another designated associate in the same brokerage represents the other side, but only in a qualifying nonresidential transaction. Related terms: Dual agency is prohibited; a transaction broker gives limited representation; a special agent has limited authority for one transaction.

In order for a broker to appoint designated sales associates to represent the buyer and seller, all of the following conditions must be met, EXCEPT: a) It is a residential transaction. | b) It is a nonresidential transaction. | c) The buyer and seller must sign statements. | d) The buyer and seller must have assets of at least one million dollars.

Correct answer: a) It is a residential transaction. Ch. 4, Designated Sales Associate: Designated sales associates are not permitted for a residential transaction, so residential status is the condition that does not belong.

All REALTORS are licensees, but not all licensees are REALTORS. What must a licensee do to become a REALTOR? a) File with FREC | b) Become a member of a local Association of REALTORS | c) Complete a FREC educational program | d) Complete 45 hours of post-license education

Correct answer: b) Become a member of a local Association of REALTORS. Ch. 1, Professional Organizations: REALTOR is a membership designation. A licensee becomes a REALTOR by joining a local Association of REALTORS and thereby affiliating with the state and national REALTOR organizations.

What does the term “follow-up” refer to in the real estate industry? a) A broker following up on their sales associates | b) Staying in touch with a customer after the sale | c) FREC following up on legally sufficient complaints | d) Sales associates keeping up with “for sale by owners”

Correct answer: b) Staying in touch with a customer after the sale. Ch. 1, Introduction to the Real Estate Business: Follow-up means maintaining contact with customers after closing to support service, referrals, repeat business, and the ongoing professional relationship.

All of the following activities would be considered fraudulent, EXCEPT: a) A selling agent and a buying agent agree to split a commission with permission by all parties to the transaction. | b) An agent for the buyer develops a scheme with the selling agent to obtain a contract with a higher purchase price. | c) A buyer’s agent chose not to inform the buyer about a planned airport extension adjacent to a prospective property. | d) A broker arranges to collect commission from both parties in a transaction without informing the seller.

Correct answer: a) A selling agent and a buying agent agree to split a commission with permission by all parties to the transaction. Ch. 5, Broker’s Commissions; Ch. 6, Administrative Penalties, Fraudulent Activities: A disclosed and authorized commission-sharing arrangement between the cooperating brokers is lawful. Permission and disclosure remove the secret compensation or conflict that would make it fraudulent.

What is the primary reason for the increased need for property managers over recent years? a) Farming | b) Absentee ownership | c) Stricter license law | d) Channeling

Correct answer: b) Absentee ownership. Ch. 1, Specialization within the Real Estate Profession, Property Management: Absentee owners live away from their investment property and need a local professional to lease, collect rent, maintain records, supervise repairs, and protect the asset. Related terms: Farming is systematic prospecting; channeling or steering is the discriminatory direction of buyers toward or away from areas.

The purchase price of a business, less the value of the tangible assets of that business, equals the intangible assets of the business. Which item would be an intangible asset of the business? a) Real property | b) Office furniture | c) Goodwill | d) Personal property

Correct answer: c) Goodwill. Ch. 17, Business Enterprise and Opportunity Brokerage, Accounting Terms: Goodwill is the intangible value of a business's reputation, customer relationships, location advantage, and expectation of continued patronage. It is often the portion of a business price not explained by identifiable tangible assets. Related terms: Real property and office furniture are tangible; goodwill is intangible. Personal property is a broad category that may be tangible or intangible.

In the process of mortgage underwriting (qualifying), which is of most concern to the lender? a) Assets | b) Credit history | c) Deductions | d) Income

Correct answer: d) Income. Ch. 13, Qualifying for a Loan: Stable, verifiable income is the lender's primary evidence that the borrower can meet the proposed monthly debt obligation. Underwriting evaluates both ability and willingness, with income central to ability. Related terms: Income shows ability to repay; credit history shows willingness to repay; assets support the down payment and reserves.

What title does a buyer have when they sign a sales contract (or have purchased under contract for a deed)? a) Ostensible title | b) Real title | c) Actual title | d) Equitable title

Correct answer: d) Equitable title. Ch. 12, Methods of Purchasing Mortgaged Property, Contract for Deed: A buyer under an enforceable sales contract holds equitable title: the beneficial ownership interest and right to receive legal title after performing the contract. Related terms: Equitable title is the buyer's beneficial interest; legal or actual title remains with the seller until deed delivery or final contract-for-deed performance.

In a lien-theory state, what instrument would be conveyed by the mortgagee to the mortgagor when the mortgage has been paid in full? a) A reconveyance deed | b) A notice of redemption | c) A quitclaim deed | d) A letter of satisfaction

Correct answer: d) A letter of satisfaction. Ch. 12, Mortgage Theories and Documents Related to Loans, Satisfaction of Mortgage: After full payment, the mortgagee issues a satisfaction of mortgage, also described in the course as a letter of satisfaction, so the lien can be released from the public record. Related terms: A reconveyance deed releases title under a deed of trust; a quitclaim deed conveys any interest held without title warranties.

All of the following are required for a valid mortgage, EXCEPT: a) The legal description of the property | b) Signature of the mortgagee | c) Signature of the mortgagor | d) It be in writing

Correct answer: b) Signature of the mortgagee. Ch. 12, Mortgage Requirements: The mortgagee is the lender receiving the security instrument and does not have to sign the borrower's mortgage for it to be valid.

What part of an amortized mortgage payment reduces the principal balance? a) Debt service | b) Amortization | c) Interest | d) Principal and interest

Correct answer: b) Amortization. Ch. 13, Amortized Mortgage: Amortization is the gradual reduction of principal through scheduled payments. The amortization portion is the amount applied to outstanding principal. Related terms: Debt service is the total principal-and-interest payment; interest is the cost of using money; amortization is principal reduction. Memory device: PITI is the common total housing-payment checklist: Principal, Interest, Taxes, and Insurance. Within the P&I portion, only principal amortizes the loan.

Under what circumstance is personal property included in the purchase of a home as additional security for the loan? a) As an optional extra feature | b) As an additional down payment | c) As part of a package mortgage | d) Never

Correct answer: c) As part of a package mortgage. Ch. 13, Types of Mortgages: A package mortgage secures one debt with both real estate and personal property, such as a furnished home together with its furniture or equipment.

A buyer purchases a property with an existing mortgage and assumes personal responsibility for the note. Which term describes this situation? a) An assignment of mortgage | b) Novation | c) Purchasing subject to a mortgage | d) An assumption of mortgage

Correct answer: d) An assumption of mortgage. Ch. 12, Methods of Purchasing Mortgaged Property: In an assumption, the buyer takes title and agrees to become personally liable for the existing mortgage debt, while the seller generally remains secondarily liable unless a novation releases the seller. Related terms: Assignment transfers the lender's mortgage rights; subject to means the buyer has no personal liability; assumption makes the buyer liable; novation also releases the seller.

Complete the sentence. The maximum loan permissible for a VA loan is: a) $104,250 | b) Determined by location | c) Determined by the VA | d) Determined by individual lenders

Correct answer: d) Determined by individual lenders. Ch. 13, VA Guaranteed Loans: The individual lender determines the maximum loan it will make based on the veteran's qualification, entitlement, property value, and the lender's underwriting standards.

A buyer takes over the seller’s mortgage payments but does not assume liability. Which statement best describes this situation? a) The buyer is purchasing subject to the mortgage. | b) The buyer is assuming the loan with novation. | c) This is legal only when the mortgage contains a due-on-sale clause. | d) This is an example of an assumption.

Correct answer: a) The buyer is purchasing subject to the mortgage. Ch. 12, Methods of Purchasing Mortgaged Property: When the buyer takes title and agrees to make the existing payments without accepting personal liability, the purchase is subject to the mortgage. The seller remains personally liable on the note. Related terms: Subject to = no buyer liability; assumption = buyer liability; novation = buyer substituted and seller released; due-on-sale = lender may accelerate after transfer.

Which clause in a mortgage requires the lender to look to the mortgaged property only for satisfaction? a) Defeasance clause | b) Exculpatory clause | c) Cognovit clause | d) Subordination clause

Correct answer: b) Exculpatory clause. Ch. 12, Essential Elements of a Mortgage: An exculpatory clause limits the lender to the mortgaged property for satisfaction and protects the borrower from personal liability or a deficiency judgment. Related terms: Defeasance releases the lien after payoff; cognovit permits confession of judgment; subordination changes lien priority.

Which loan does NOT require a down payment? a) VA guaranteed | b) Conventional | c) FHA insured | d) Adjustable-rate mortgage

Correct answer: a) VA guaranteed. Ch. 13, Types of Mortgages: A qualified VA-guaranteed loan can provide 100% financing, so no down payment is required when the price does not exceed the supported value and program conditions are met. Related terms: Conventional and FHA loans generally require down payments; adjustable-rate mortgage describes rate changes, not the down-payment requirement.

The buyer receives all of the following items at closing, EXCEPT: a) Deed | b) Mortgage | c) Opinion of title | d) Closing statement

Correct answer: b) Mortgage. Ch. 12, Parties to a Mortgage: The buyer or mortgagor signs and delivers the mortgage to the lender as security; the mortgagee receives and holds that instrument, so it is not an item delivered to the buyer.

Who are the three parties in a trust deed? a) Benefactor, trustee, and trustor | b) Beneficiary, mortgagor, and trustee | c) Beneficiary, trustor, and trustee | d) Beneficiary, mortgagee, and trustor

Correct answer: c) Beneficiary, trustor, and trustee. Ch. 12, Title Theory of Mortgages: The trustor is the borrower who conveys bare legal title to the trustee; the trustee holds it for security; and the beneficiary is the lender protected by the deed of trust.

Which entity regulates a life insurance company in the primary mortgage market? a) RESPA | b) The federal government | c) The state in which it operates | d) None, they are not regulated

Correct answer: c) The state in which it operates. Ch. 13, The Primary Mortgage Market: Life insurance companies are regulated by the state in which they operate while investing premium funds in long-term mortgages and other assets.

All of the following loans can be first liens, EXCEPT: a) First mortgage | b) Home equity loan | c) Second mortgage | d) Purchase money mortgage

Correct answer: c) Second mortgage. Ch. 12, First Mortgages vs. Junior Mortgages: A second mortgage is defined by its junior priority behind an existing first mortgage, so it cannot itself be the first lien. Related terms: First mortgage = senior lien; second mortgage = junior lien; a home-equity or purchase-money loan may be first depending on existing liens and recording priority.

What is the effect of positive leverage? a) Increases the lender’s yield | b) Increases the lender’s loan to value yield | c) Increases the borrower’s yield | d) Allows an individual to lift a heavy weight

Correct answer: c) Increases the borrower’s yield. Ch. 17, Real Estate Investment Terminology, Leverage: Positive leverage occurs when the investment return exceeds the cost of borrowed funds, magnifying the rate of return on the borrower's invested equity.

Which clause in a mortgage calls for the principal balance to be paid in full? a) Satisfaction clause | b) Defeasance clause | c) Due on sale clause | d) Cognovit clause

Correct answer: c) Due on sale clause. Ch. 12, Essential Elements of a Mortgage: A due-on-sale, or alienation, clause permits the lender to call the entire unpaid principal balance due when the property or a substantial ownership interest is transferred without lender approval. Related terms: Defeasance or satisfaction releases the lien after payoff; cognovit permits confession of judgment.

What is included in the annual percentage rate (APR)? a) Annual interest | b) Finance charge | c) Simple annual interest | d) Simple annual interest plus finance charges

Correct answer: d) Simple annual interest plus finance charges. Ch. 13, Truth-in-Lending Act: APR expresses the yearly cost of credit by combining the simple annual interest rate with qualifying finance charges, such as certain points and loan fees, into one comparative rate.

What type of loan covers several parcels of land? a) Package mortgage | b) Blanket mortgage | c) Balloon mortgage | d) Purchase money mortgage

Correct answer: b) Blanket mortgage. Ch. 12, Methods of Purchasing Mortgaged Property, Land Development Loans: A blanket mortgage places one lien over two or more parcels. It commonly includes a partial-release clause so individual lots can be released and sold. Related terms: Package mortgage = real plus personal property; balloon mortgage = large final payment; purchase-money mortgage = seller financing; blanket mortgage = multiple parcels.

Which mortgage provides an interest-only loan? a) Term mortgage | b) Amortized mortgage | c) Reverse mortgage | d) Home equity loan

Correct answer: a) Term mortgage. Ch. 13, Types of Mortgages: A term mortgage, also called a straight mortgage, requires periodic interest payments while the principal remains outstanding and is due in a lump sum at the end of the term. Related terms: Amortized mortgage pays principal and interest; reverse mortgage advances against equity; home-equity loan borrows against existing equity.

Which mortgage clause calls for the entire balance to be paid? a) Cognovit clause | b) Special-purpose and circumstance clause | c) Defeasance clause | d) Acceleration clause

Correct answer: d) Acceleration clause. Ch. 12, Essential Elements of a Mortgage: An acceleration clause allows the lender to declare the entire outstanding balance immediately due and payable after the borrower defaults. Related terms: Cognovit permits confession of judgment; defeasance requires release after payoff; acceleration makes the full balance due after default.

Which clause in a mortgage allows the borrower to borrow back up to the original loan amount? a) Open end clause | b) Prepayment clause | c) Reborrowing clause | d) Escalation clause

Correct answer: a) Open end clause. Ch. 12, Essential Elements of a Mortgage: An open-end clause lets a borrower obtain additional advances under the same mortgage after paying the balance down, usually only up to the original loan amount. Related terms: Prepayment permits early payoff; escalation permits a rate increase after a stated event; open-end permits additional borrowing under the same mortgage.

All of the following entities make loans, EXCEPT: a) Life insurance companies | b) Mortgage lenders | c) Mortgage loan originators | d) Commercial banks

Correct answer: c) Mortgage loan originators. Ch. 13, The Primary Mortgage Market: A mortgage loan originator takes applications and offers or negotiates loan terms for compensation, but the MLO arranges financing and does not make the loan.

Which mortgage clause permits the mortgagee to have a third party appointed to collect income and manage the property until foreclosure proceedings have been accomplished? a) Personal representative clause | b) Administrator’s clause | c) Redemption clause | d) Receivership clause

Correct answer: d) Receivership clause. Ch. 12, Essential Elements of a Mortgage: A receivership clause permits the lender to ask a court to appoint a receiver to collect rents, manage, and preserve income-producing property during foreclosure. Related terms: Redemption is the borrower's right to satisfy the debt before foreclosure ends; receivership places a third party in charge of income property during foreclosure.

Which type of mortgage allows a homeowner, age 62 or older, to receive a lump sum or monthly advance based on the equity in their home? a) HELOC | b) Home equity loan | c) Purchase money mortgage | d) Reverse mortgage

Correct answer: d) Reverse mortgage. Ch. 13, Loan Repayment Methods: A reverse mortgage converts part of an owner-occupant's equity into a lump sum, line of credit, or monthly advances. The common HECM program is designed for homeowners age 62 or older, with repayment generally deferred until a terminating event. Related terms: HELOC = revolving equity credit; home-equity loan = lump sum; purchase-money mortgage = seller financing; reverse mortgage = advances against an eligible older owner's equity.

What happens when the Federal Reserve orders financial institutions to increase their reserves? a) The supply of loans increases. | b) The supply of loanable funds is reduced. | c) Interest rates go down. | d) The money supply increases.

Correct answer: b) The supply of loanable funds is reduced. Ch. 13, Federal Reserve System: A higher reserve requirement forces financial institutions to hold a larger portion of deposits rather than lend it, reducing loanable funds.

Which entity controls the U.S. monetary policy? a) President of the United States | b) Federal Reserve System | c) Federal Trade Commission | d) Federal Housing Finance Board

Correct answer: b) Federal Reserve System. Ch. 13, Federal Reserve System: The Federal Reserve System is the U.S. central bank and administers monetary policy through tools such as the discount rate, reserve requirements, and open-market operations.

What is the function of a secondary lender as opposed to a primary lender? a) Provides money for purchase money mortgages | b) Lends money directly to borrowers | c) Provides second mortgage financing | d) Buys existing mortgages

Correct answer: d) Buys existing mortgages. Ch. 13, The Secondary Mortgage Market: A secondary-market participant buys mortgages that primary lenders have already originated, returning funds and liquidity to those lenders so they can make more loans.

Savings associations look to what agency to sell their mortgages? a) FDIC | b) Freddie Mac | c) RTC | d) FHA

Correct answer: b) Freddie Mac. Ch. 13, The Secondary Mortgage Market: Freddie Mac was originally created to buy conventional residential mortgages from savings associations, giving those institutions a replenished source of funds. Related terms: FDIC insures deposits; RTC disposed of failed-thrift assets; FHA insures loans; Freddie Mac buys mortgages in the secondary market.

All of the following are tools used by the Federal Reserve to control the money supply, EXCEPT: a) Changing the discount rate | b) Setting fiscal policy | c) Opening market operations | d) Changing the reserve requirement

Correct answer: b) Setting fiscal policy. Ch. 13, Federal Reserve System: Fiscal policy consists of government taxing and spending decisions and is set through the legislative and executive branches, not by the Federal Reserve. Related terms: Monetary policy is handled by the Federal Reserve; fiscal policy concerns government taxing and spending.

For which of the following are Fannie Mae and Freddie Mac responsible? a) Offering nonconforming loans | b) Finding new sources in the primary mortgage market | c) Insuring loans made by approved lenders | d) Standardizing lending practices and forms

Correct answer: d) Standardizing lending practices and forms. Ch. 13, The Secondary Mortgage Market: By requiring loans they purchase to meet consistent underwriting, documentation, and form standards, Fannie Mae and Freddie Mac helped standardize lending practices nationwide. Related terms: FHA insures and VA guarantees qualifying loans; Fannie Mae and Freddie Mac buy and securitize conforming mortgages.

Which condition would decrease the supply of loanable funds for real estate loans? a) The government bonds this year are 9% compared to 8% last year. | b) There is a 3% increase in family income nationwide. | c) People take money from their savings accounts to put into retirement accounts. | d) There is an overall increase in consumer spending.

Correct answer: a) The government bonds this year are 9% compared to 8% last year. Ch. 13, The Federal Reserve System: When government bonds offer 9% instead of 8%, investors have a more attractive competing investment and may move funds away from mortgages. That disintermediation reduces loanable funds for real estate.

All of the following entities are secondary mortgage market participants, EXCEPT: a) Fannie Mae | b) Freddie Mac | c) Federal Reserve | d) Ginnie Mae

Correct answer: c) Federal Reserve. Ch. 13, The Secondary Mortgage Market: The Federal Reserve conducts monetary policy and regulates parts of the banking system; it is not classified as a regular secondary mortgage-market participant. Related terms: Fannie Mae and Freddie Mac buy and securitize mortgages; Ginnie Mae guarantees qualifying mortgage-backed securities; the Federal Reserve conducts monetary policy.

Who could be the seller? a) Mortgagor | b) Vendee | c) Grantor | d) Grantee

Correct answer: c) Grantor. Ch. 9, Deeds; Ch. 11, Real Estate Sales Contracts; Ch. 12, Parties to a Mortgage: A grantor is the party who conveys title by deed and therefore may be the seller. Related terms: Grantor = seller or conveyor; grantee = buyer or recipient; vendee = buyer under a sales contract; mortgagor = borrower giving the mortgage.

All of the following entities may assign a mortgage, EXCEPT: a) Freddie Mac | b) A mortgagee | c) Fannie Mae | d) A mortgagor

Correct answer: d) A mortgagor. Ch. 12, Parties to a Mortgage, Selling the Mortgage Contract; Ch. 13, The Secondary Mortgage Market: The mortgagor is the borrower who granted the mortgage lien and does not own the lender's mortgage interest to assign. The borrower may convey the real estate subject to the debt, which is a different act. Related terms: The mortgagee is the lender and may assign the mortgage; the mortgagor is the borrower and does not own the lender's mortgage interest to assign.

All of the following are primary lenders, EXCEPT: a) Mortgage loan originators | b) Commercial banks | c) Life insurance companies | d) Savings associations

Correct answer: a) Mortgage loan originators. Ch. 13, The Primary Mortgage Market: A mortgage loan originator takes applications and arranges or negotiates residential mortgage financing but does not make the loan with the originator's own funds.

Which type of lending institution is formed by private investment groups to purchase real estate for investment and to make short-term construction and long-term mortgage loans? a) Credit union | b) Savings association | c) REIT | d) Commercial bank

Correct answer: c) REIT. Ch. 17, Types of Investment Properties: A real estate investment trust pools private investor funds to acquire income-producing real estate and, depending on type, to make or purchase construction and mortgage loans. Related terms: REIT pools real estate investments; credit union is a member cooperative; savings association is a residential depository lender; commercial bank is a general depository lender.

All of the following statements apply to an estoppel certificate, EXCEPT: a) It may also be called a letter of estoppel. | b) It is used to confirm that a lien or obligation exists. | c) It is used to confirm the outstanding loan balance as of a given date. | d) It forms a lien against the property.

Correct answer: d) It forms a lien against the property. Ch. 12, Methods of Purchasing Mortgaged Property, Verification of a Loan Balance: The mortgage or other underlying security instrument creates the lien. An estoppel certificate merely verifies facts about an existing obligation and creates no new lien.

Which combination of appraisal approach and property type would be agreeable to an experienced appraiser? a) Income approach: special-purpose properties | b) Income approach: owner-occupied home | c) Comparable sales approach: vacant land | d) Cost-depreciation approach: residential land

Correct answer: c) Comparable sales approach: vacant land. Ch. 16, Three Approaches to Value: Vacant land is commonly valued with the sales comparison approach because recent sales of similar sites can be adjusted for location, size, zoning, utilities, and other differences. Related terms: Sales comparison fits homes and vacant land; cost fits new or special-purpose improvements; income fits income-producing property.

Which appraisal method values the land separately from the improvements? a) Gross multiplier | b) Income | c) Comparable sales | d) Cost-depreciation

Correct answer: d) Cost-depreciation. Ch. 16, Three Approaches to Value: The cost-depreciation approach estimates land value separately, then adds the current reproduction or replacement cost of improvements less accrued depreciation. Related terms: Sales comparison adjusts comparable sales; income capitalizes NOI; gross multiplier applies a market multiplier to gross rent or income; cost values land separately from improvements.

Which of the following could be an example of external obsolescence? a) The architectural design of a building | b) A zoning change in the area | c) Peeling paint on the exterior of the building | d) An outdated oil-burning range in the kitchen

Correct answer: b) A zoning change in the area. Ch. 16, Cost-Depreciation Approach: A zoning change is outside the property boundaries and can reduce the property's usefulness or value, making it external or economic obsolescence. Related terms: Physical deterioration = wear or damage; functional obsolescence = an internal design or utility problem; external obsolescence = an outside influence.

What is the term used to refer to the process of arriving at a final estimate of value in appraising? a) Highest and best use | b) Averaging | c) Reconciliation | d) Computation

Correct answer: c) Reconciliation. Ch. 16, The Appraisal Process: Reconciliation is the appraiser's analysis of the indications produced by applicable approaches to arrive at one final opinion of value. It may weight the most reliable approach rather than average all results. Related terms: Reconciliation weighs the applicable value indications; highest and best use is the legally permissible, physically possible, financially feasible use producing the greatest value.

What are the main steps in direct capitalization when using the income approach to valuation of real estate? a) Estimate the gross income, add in the operating expenses, and capitalize the net operation income | b) Estimate the capitalization rate, adjust the gross income for vacancies and divide | c) Estimate gross income, deduct the vacancies and operating expenses, and capitalize the net operating income into value by dividing by an overall rate | d) Identify the gross income, plan the appraisal, and collect the expenses

Correct answer: c) Estimate gross income, deduct the vacancies and operating expenses, and capitalize the net operating income into value by dividing by an overall rate. Ch. 16, Direct Capitalization Technique: Direct capitalization estimates potential gross income, subtracts vacancy and collection loss, adds other income to reach effective gross income, subtracts operating expenses to obtain NOI, and divides NOI by the overall capitalization rate to estimate value. Memory device: Use the IRV relationship: Income = Rate x Value, so Value = NOI ÷ capitalization Rate. For the income build-up, remember PGI - vacancy and collection loss + other income = EGI; EGI - operating expenses = NOI.

Which principle of value indicates that the value of a property is sustained when the property is harmoniously used with surrounding properties in the same area? a) Contribution | b) Conformity | c) Balance | d) Highest and best use

Correct answer: b) Conformity. Ch. 16, Appraisal Concepts and Definitions, Principles of Value: Conformity says value is supported when a property's use, size, quality, and style are reasonably harmonious with surrounding properties. Related terms: Contribution measures a component's added value; balance means production factors are in proper proportion; highest and best use is the use that produces the greatest value.

With the income approach to appraising, the value of the property today is: a) More than the future value | b) Measured in future benefits | c) Not considered in an appraisal | d) To be paid to the appraiser

Correct answer: b) Measured in future benefits. Ch. 16, Principles of Value – Principle of Anticipation; Income Approach: Under the principle of anticipation, present value reflects the expected future benefits of ownership, especially the income stream and eventual resale or reversion.

A house valued comparably to all houses in the neighborhood was assessed at a tax base $5,000 less than the others. Excluding any special tax exemptions, what should the property sell for? a) Less than the others | b) More than the others | c) Same as the others | d) The property will not sell at all

Correct answer: a) Less than the others. Ch. 16, Comparable Sales Approach; Ch. 18, Property Tax Assessments: Under the course rule tested here, comparable properties without special exemptions should have reasonably comparable assessments. A $5,000 lower tax assessment is evidence of a lower assessed value and supports a lower expected sale price than the others.

The steps in the cost-depreciation approach to estimating market value include all of the following, EXCEPT: a) Finding the current cost to reproduce the building as new | b) Finding the land value using comparables | c) Subtracting the accrued depreciation from the reproduction cost | d) Calculating the net operating income

Correct answer: d) Calculating the net operating income. Ch. 16, Cost-Depreciation Approach: Net operating income is calculated and capitalized in the income approach, not in the cost-depreciation approach.

An appraiser is appraising an apartment building in a college town and finds that the students’ leases are below the market. What type of rental income would the appraiser use to value the property? a) Gross rent | b) Economic rent | c) Contract rent | d) Base rent

Correct answer: b) Economic rent. Ch. 16, Income Approach: Economic rent is the rent the property should command in the current open market. An appraiser uses it when existing contract rents are below or above market. Related terms: Economic rent = current market rent; contract rent = rent in the lease; base rent = minimum fixed rent; gross rent = rent before vacancy and expenses.

Which type of depreciation is usually incurable? a) Physical deterioration | b) Physical obsolescence | c) Functional obsolescence | d) External obsolescence

Correct answer: d) External obsolescence. Ch. 16, Cost-Depreciation Approach: External obsolescence results from negative influences outside the property, such as adverse zoning, traffic, or neighborhood decline. Because the owner usually cannot remove the external cause, it is normally incurable. Related terms: Physical deterioration is wear or damage; functional obsolescence is an internal design problem; external obsolescence comes from outside and is usually incurable.

A man lives in a neighborhood of $50,000 homes. He decides to install expensive imported marble tile throughout his home. Of which type of depreciation is this an example? a) Incurable physical depreciation | b) Incurable functional depreciation | c) Curable functional depreciation | d) Curable physical depreciation

Correct answer: b) Incurable functional depreciation. Ch. 16, Cost-Depreciation Approach: The expensive marble is a superadequacy: an overimprovement that buyers in a $50,000-home neighborhood are unlikely to pay for. Because removing it would not economically restore the cost, the loss is incurable functional depreciation.

What is “price?” a) Amount actually paid in a real estate transaction | b) Assessed value of a property | c) Market value | d) Actual or estimated amount to obtain, create, or reproduce a property

Correct answer: a) Amount actually paid in a real estate transaction. Ch. 16, Cost, Price, and Value: Price is the actual amount paid or agreed to be paid in a specific transaction. It is a historical fact once the transaction occurs. Related terms: Price = amount paid; cost = amount to create or reproduce; market value = most probable price; assessed value = value used for property taxes.

Amenities, or features, used to compare properties in an appraisal could include all of the following, EXCEPT: a) Intangible amenities | b) Tangible amenities | c) Location | d) Ethnic makeup

Correct answer: d) Ethnic makeup. Ch. 16, Sales Comparison Approach: Ethnic makeup is not a lawful appraisal amenity or adjustment factor. Using race or ethnicity in valuation promotes discrimination and violates fair-housing and appraisal standards.

A house has a bathroom built onto the side of the kitchen. The bathroom has a laundry tub but no room for a bathtub. What is this an example of? a) Physical deterioration | b) Functional obsolescence | c) External obsolescence | d) Economic obsolescence

Correct answer: b) Functional obsolescence. Ch. 16, Cost-Depreciation Approach: A bathroom awkwardly attached to a kitchen and lacking space for a bathtub is an internal layout and utility defect, which is functional obsolescence. Related terms: Physical deterioration = wear or damage; functional obsolescence = an internal design problem; external or economic obsolescence = an outside influence.

All of the following are examples of physical depreciation, EXCEPT: a) Peeling paint | b) Termites in the woodwork | c) Dry rot in the walls | d) A garage detached from a single- family home

Correct answer: d) A garage detached from a single- family home. Ch. 16, Cost-Depreciation Approach: A detached garage is a design or property characteristic, not evidence that a building component has physically worn out. Depending on market expectations it may affect functional utility, but it is not physical depreciation merely because it is detached.

Which appraisal approach would usually be requested by insurance companies? a) Cost-depreciation approach | b) Sales comparison approach | c) Income capitalization approach | d) Land residual approach

Correct answer: a) Cost-depreciation approach. Ch. 16, Three Approaches to Value: Insurance companies need the current cost to reproduce or replace insurable improvements, generally excluding land. The cost-depreciation approach directly develops that information. Related terms: Sales comparison uses comparable sales; income capitalization uses NOI; cost estimates insurable replacement or reproduction; land residual isolates land value.

Who must pay any points that are due on a VA guaranteed loan? a) Seller | b) Buyer | c) Lender | d) Party specified in the contract

Correct answer: d) Party specified in the contract. Ch. 13, VA Guaranteed Loans: Responsibility for allowable points is determined by the purchase and loan contract, subject to VA limits on charges to the veteran. The agreement may allocate them to the buyer or seller.

Which characteristic is NOT normally taken into account when determining the value of a good? a) Homogeneity of the product | b) Transferability of the product | c) Scarcity of the product | d) Utility of the product

Correct answer: a) Homogeneity of the product. Ch. 15, Characteristics of the Real Estate Market: Homogeneity means products are identical or interchangeable. Real estate is heterogeneous: every parcel differs by location and physical or legal characteristics, so homogeneity is not one of the value characteristics. Memory device: DUST identifies the four characteristics required for value: Demand, Utility, Scarcity, and Transferability.

All of the following are types of depreciation, EXCEPT: a) Physical deterioration | b) External obsolescence | c) Commercial depreciation | d) Functional obsolescence

Correct answer: c) Commercial depreciation. Ch. 16, Cost-Depreciation Approach: Commercial depreciation is not one of the three recognized appraisal categories of accrued depreciation. Related terms: The three recognized types are physical deterioration, functional obsolescence, and external obsolescence.

Which condition would NOT indicate functional obsolescence? a) Too few electrical outlets | b) A house with one bathroom | c) A poor floor plan | d) Damaged carpet

Correct answer: d) Damaged carpet. Ch. 16, Cost-Depreciation Approach: Damaged carpet is physical wear or deferred maintenance, making it physical deterioration rather than functional obsolescence. Related terms: The other three conditions are internal inadequacies and are examples of functional obsolescence.

What would be an investor’s motivation for deducting depreciation? a) Maximizing cash flow | b) Minimizing cash flow | c) Maximizing liability | d) Minimizing income

Correct answer: a) Maximizing cash flow. Ch. 17, Depreciation: Tax depreciation is a noncash deduction. It can reduce taxable income and the resulting income-tax payment without requiring a current cash outlay, thereby increasing after-tax cash flow.

Under Truth in Lending, “triggering terms” include information regarding all of the following, EXCEPT: a) Amount of down payment required in a credit sale transaction | b) Amount of finance charge | c) Number of loan payments | d) Easy monthly payments

Correct answer: d) Easy monthly payments. Ch. 13, Laws Regarding Fair Credit and Lending Procedures, Triggering Terms: Easy monthly payments is only a vague promotional phrase and gives no specific payment amount, number, period, down payment, or finance charge, so it is not a triggering term.

Which definition best describes the equity a homeowner has in their home? a) The difference between the market value and the mortgage balance | b) The amount of upfront cash paid upon purchase of the home | c) The amount still owed on the home | d) The value determined by an appraiser

Correct answer: a) The difference between the market value and the mortgage balance. Ch. 12, Common Mortgage Features, Equity: Owner equity is the property's current market value minus the outstanding mortgage balance and other liens: Equity = Value - Debt.

Depreciation can be taken on all of the following, EXCEPT: a) An office building | b) A warehouse building | c) A garage | d) Land

Correct answer: d) Land. Ch. 17, Depreciation: Land is not depreciable because it is considered to have an unlimited useful life. Only the qualifying improvements and certain property components are depreciated.

To which type of transaction does Regulation Z apply? a) Single-family home used for rental income | b) Building used for a gas station | c) Vacant land used for a parking lot | d) Single-family home used as residence

Correct answer: d) Single-family home used as residence. Ch. 13, Laws Regarding Fair Credit and Lending Procedures, Truth-in-Lending Act: Regulation Z implements the Truth-in-Lending Act and applies to covered consumer credit for personal, family, or household purposes, including financing a single-family home used as the borrower's residence. Related terms: The rental home, gas station, and parking-lot choices are business-purpose transactions rather than covered consumer-purpose credit.

Residential investment property is depreciated over a useful life of how many years? a) 27.5 years | b) 31.5 years | c) 39 years | d) 17.5 years

Correct answer: a) 27.5 years. Ch. 17, Impact of Federal Taxation, Depreciation: Federal tax rules use a 27.5-year straight-line recovery period for residential rental real estate. Related terms: Nonresidential investment real estate uses a 39-year recovery period.

When determining the net operating income (NOI) for direct capitalization, all of the following items are subtracted from the potential gross income (PGI), EXCEPT: a) Vacancies and collection losses | b) Reserves for replacements | c) Mortgage payments | d) Property taxes

Correct answer: c) Mortgage payments. Ch. 16, Income Approach - Direct Capitalization Technique: Mortgage payments are debt service and a financing expense, not a property operating expense. NOI is calculated before debt service so properties can be compared independently of their financing. Memory device: Income build-up: PGI - vacancy and collection loss + other income = EGI; EGI - operating expenses = NOI. Then use IRV: Value = NOI ÷ capitalization Rate. Mortgage payments come after NOI.