PA Real Estate Exam (Test Questions from Temple Course)

What type of insurance policy must always be purchased separately and not as part of a homeowners' policy?

A)Flood

B)Liability

C)Earthquake

D)Falling objects

A) The answer is FLOOD. Flood insurance is always a separate policy and only covers damage due to flooding. The Federal Emergency Management Agency (FEMA) administers the National Flood Insurance Program (NFIP).

A building that is remodeled into residential units and no longer used for the purpose for which it was originally built is

A)a modular home.

B)a converted-use property.

C)a planned unit development.

D)an example of urban homesteading.

A) The answer is A CONVERTED-USE PROPERTY. Factories, office buildings, hotels, schools, churches, and other structures that have been converted to residential use are classified as converted-use properties.

Each room of a house was preassembled at a factory, driven to the building site on a truck, and then lowered onto its foundation by a crane. Later, workers finished the structure and connected plumbing and wiring before the owners moved in. Which term BEST describes this type of home?

A)Converted

B)Mobile

C)Manufactured

D)Modular

C) The answer is MODULAR. Modular homes, often called prefabricated homes, are becoming popular choices because they cost less and can be built and assembled more quickly than traditional stick-built homes.

When a person buys a house using a mortgage loan, the difference between the amount owed on the property and what it is worth represents the homeowner's

A)capital gain.

B)tax basis.

C)equity.

D)replacement cost.

C) The answer is EQUITY. The difference between the amount owed on the property and the current market value of the property represents the equity in the property.

The most common homeowners' policy is the basic policy that covers

A)freezing of plumbing and heating systems.

B)falling objects.

C)theft and vandalism.

D)flooding.

C) The answer is THEFT AND VANDALISM. Basic homeowners' insurance policies cover damage as a result of fire or lightning, glass breakage, windstorm or hail, explosion, vandalism and malicious mischief, theft, and others. The policies never cover flooding, which is always a separate policy.

For the past two years, a couple has been renting the house they purchased 25 years for $75,000 ago to a tenant. They are now ready to sell that home for $250,000. When they sell their house, how much of the capital gain will be taxable?

A)40 percent

B)100 percent

C)0 percent

D)50 percent

C) The answer is 0 PERCENT. To encourage homeownership, some homesellers are exempt from the capital gains tax as follows: up to $250,000 gain is protected for single homeowners and up to $500,000 for married filing jointly. With only a few exceptions, homeowners/homesellers must have owned and occupied their home for two of the previous five years.

The object of planned unit developments is to

A)merge diverse land uses in one self-contained development.

B)encourage separation of housing and commercial units.

C)minimize open space by enlarging lot sizes and street areas.

D)avoid the use of community associations.

A) The answer is MERGE DIVERSE LAND USES IN ONE SELF-CONTAINED DEVELOPMENT. Planned unit developments (PUDs) are governed by special zoning ordinances and merge diverse land uses such as housing, recreation, and commercial into one self-contained development. This permits maximum use of open space by reducing lot sizes and street areas.

Real estate markets are local due to the physical characteristic of

A)government controls and fiscal policies.

B)labor force and construction costs.

C)immobility and uniqueness.

D)population.

C) The answer is IMMOBILITY AND UNIQUENESS. Two characteristics of real estate, uniqueness and immobility, require that real estate markets remain local: uniqueness means that that no two parcels of real estate are ever exactly alike, and immobility refers to the fact that property cannot be relocated to satisfy demand where supply is low. Buyers cannot relocate to areas with greater supply.

Historically, lenders require that housing costs cannot exceed

A)25 percent of net income.

B)36 percent of net income.

C)28 percent of gross income.

D)20 percent of gross income.

C) The answer is 28 PERCENT OF GROSS INCOME. Historically, lenders preferred that the monthly cost of buying and maintaining a home—mortgage payments, both principal and interest, plus taxes and insurance impounds—could not exceed 28 percent of gross income (i.e., pretax monthly income).

In the event that a homeowner's insurance policy provides coverage for at least 80 percent of the full replacement cost of the dwelling, the loss of the residence will be settled for

A)the total replacement cost.

B)either the actual cash value or the prorated repair cost.

C)the market value of the property less the land value.

D)the lowest repaid bid.

A) The answer is THE TOTAL REPLACEMENT COST. An owner who has maintained insurance equal to a specified percentage (usually 80 percent) of the replacement cost new (excluding the cost of land) may make a claim for the full cost of the repair or replacement of the damaged property without deduction for depreciation.

Pennsylvania's real estate licensee law considers the broker's affiliated licensees, whether associate broker or salesperson, as

A)an employee of the broker.

B)as independent contractors who are free from supervision.

C)supervised independent contractors.

D)nonagents.

A) The answer is AN EMPLOYEE OF THE BROKER. Pennsylvania's real estate license law treats the affiliated licensees (associate broker or salesperson) as employees of the broker, regardless of whether they are considered employees or independent contractors for income tax purposes because the broker is accountable for their licensed activities and, therefore, can control what they do to ensure that their conduct complies with the law.

As a general agent of the broker, a salesperson may

A)make contracts with other brokers.

B)carry out real estate activities in the name of the broker.

C)receive compensation from other brokers.

D)represent more than one broker.

B) The answer is CARRY OUT REAL ESTATE ACTIVITIES IN THE NAME OF THE BROKER. All of a salesperson's activities must be performed in the name of that broker. The salesperson can carry out only those responsibilities assigned by the employing broker and can receive compensation only from that broker. In Pennsylvania, salespersons may be licensed with only one broker.

A real estate salesperson treated an independent contractor receives

A)negotiated commissions on transactions.

B)a monthly salary or hourly wage.

C)company-provided health insurance.

D)a company-provided automobile.

A) The answer is NEGOTIATED COMMISSIONS ON TRANSACTIONS. Although Pennsylvania holds the employing broker responsible for the actions of affiliated licensees, the broker may treat the affiliated licensees as independent contractors for income tax purposes only, and is not required to withhold income, Social Security, and Medicare taxes.

An associate broker finally concluded some extremely difficult negotiations that resulted in the sale of a listed parcel of property. For all of her extra efforts, the associate broker can legally demand a performance bonus from

A)the buyer.

B)her broker.

C)no one.

D)the seller.

B) The answer HER BROKER. Licensees affiliated with the employing broker, whether licensed as salespeople or associate brokers, may receive compensation only from their employing broker.

A licensed real estate salesperson entered a written contract with broker, specifying that the salesperson is not an employee. In the past year, just less than half of the salesperson's income from real estate transactions came from sales commissions. The remainder was based on an hourly wage paid by the broker. Using these facts, it is likely that the IRS would classify the salesperson as which of the following for federal income tax purposes?

A)Part-time real estate salesperson

B)Independent contractor

C)Employee

D)Self-employed

C) The answer is EMPLOYEE. The fact that the salesperson received income based on an hourly wage paid by the broker demonstrates that the salesperson does not meet one of the basic requirements under federal law to be considered an independent contractor. Notwithstanding the contract, the salesperson would be classified as an employee.

The amount of commission paid to a salesperson is determined by

A)mutual agreement with the client.

B)mutual agreement with the broker.

C)the local real estate board.

D)state law.

B) MUTUAL AGREEMENT WITH THE BROKER. The amount of compensation a salesperson receives is set by mutual agreement between the broker and the salesperson. A broker may agree to pay a fixed salary or a share of the commissions from transactions originated by a salesperson.

A salesperson took a listing on a house that sold for $329,985. The commission rate was 8 percent. Another salesperson employed by another broker found the buyer. The listing broker received 60 percent of the commission on the sale; the buyer's broker received 40 percent. If the listing broker kept 30 percent and paid the listing salesperson the remainder, how much did the listing salesperson earn on the sale?

A)$3,167.86

B)$11,087.50

C)$7,391.66

D)$15,839.28

B) The answer is $11,087.50. Total commission earned on the transaction was $26,398.80 ($329,985 × 8%). The listing broker received 60 percent of the total commission or $15,839.28 ($26,398.80 × 60%). The listing salesperson received 70 percent of the amount paid to the broker of $11,087.50 ($15,839.28 × 70%).

Licensees who are paid in a lump sum and who are personally responsible for paying their own taxes are probably

A)independent contractors.

B)transactional brokers.

C)employees.

D)buyer's agents.

A) The answer is INDEPENDENT CONTRACTORS. Independent contractors are responsible for paying their own income, Social Security, and Medicare taxes. The earnings are not subject to withholding by the employing broker.

In Pennsylvania, a salesperson may advertise a property for sale on the Internet only if the salesperson

A)personally listed the property.

B)is a member of the local real estate association.

C)personally pays for the advertisement.

D)uses the employing broker's name in the advertisement.

D) The answer is USES THE EMPLOYING BROKER'S NAME IN THE ADVERTISEMENT. As with all advertising, Internet advertising must be a true representation, not be misleading, and include the name of the employing broker.

An errors and omissions insurance policy would most likely offer protection against an allegation of

A)fraudulent activity.

B)forgetting to turn on the burglar alarm after showing the property.

C)not showing the property to Asians.

D)antitrust activity.

B) The answer is FORGETTING TO TURN ON THE BURGLAR ALARM AFTER SHOWING THE PROPERTY. No errors and omissions insurance policy will protect a licensee from a lawsuit or prosecution arising from criminal acts. Insurance companies normally exclude coverage for violation of civil rights and antitrust laws as well.

The term fiduciary refers to

A)those who authorize another to act on their behalf.

B)principles by which sellers must conduct their business affairs.

C)the principal-agent relationship.

D)the sale of real property.

C) The answer is THE PRINCIPAL-AGENT RELATIONSHIP. The term fiduciary refers to the nature of the relationship created when the agent is placed in the position of trust and confidence when representing the principal.

In an office, one affiliated licensee represents the seller, and another affiliated licensee represents the buyer. This is an example of

A)disclosed dual agency.

B)designated agency.

C)single agency.

D)transaction licensees.

B) The answer is DESIGNATED AGENCY. Although the broker remains a dual agent, in designated agency, the broker can designate one affiliated licensee to represent the seller and another to represent the buyer in the same transaction.

By law, the sellers who are required to complete a Seller Property Disclosure Statement are those selling

A)commercial property.

B)residential one- to four-family dwellings.

C)any real property.

D)agricultural property.

B) The answer RESIDENTIAL ONE- TO FOUR-FAMILY DWELLINGS. The requirement to complete a Seller Property Disclosure Statement applies only to sellers of one- to four-family dwellings, not commercial, industrial, or agricultural properties or even large apartment buildings.

A buyer and a seller approach a broker and explain that they have agreed on the sale of the seller's home. They ask the broker to assist them with the rest of the transaction. In Pennsylvania, the broker

A)must represent at least one party as a single agent.

B)is not permitted to do this.

C)must represent both parties as a dual agent.

D)is permitted to act as a transaction broker.

D) The answer is IS PERMITTED TO ACT AS A TRANSACTION BROKER. If both the buyer and seller negotiate the sale without representation, a nonagent (transaction broker) is not an agent of either party and solely helps with the necessary paperwork and formalities involved in transferring ownership of real property.

In real estate, the relationship between the principal/consumer and agent/broker must be

A)synchronized.

B)consensual.

C)in harmony.

D)in harmony.

B) The answer is CONSENSUAL. The relationship between the principal and agent must be consensual; that is, the principal delegates authority and the agent consents to act. The parties must agree to form the relationship.

A licensee is hired as a buyer's agent by a first-time buyer to help with the purchase of a home. The buyer confides that being approved for a mortgage loan may be complicated by buyer's bankruptcy filing two years ago. The buyer would like to find a seller who will accept an installment sale. In this situation, a correct statement about the licensee's responsibility regarding this information during the presentation of an offer to purchase a property is that the licensee is

A)not required to disclose it because the licensee has no agency relationship with the seller.

B)required to disclose it under the Fair Credit Registry Act.

C)not required to disclose it because the seller might reject the offer.

D)required to disclose it because it is a material fact—information important to the seller's evaluation of the offer.

D) The answer is REQUIRED TO DISCLOSE IT BECAUSE IT IS A MATERIAL FACT—INFORMATION IMPORTANT TO THE SELLER'S EVALUATION OF THE OFFER. Because the buyer is asking for the seller to finance the property, the fact that the buyer has negative financials is useful information for the seller and must be disclosed.

At what time should a Pennsylvania licensee present the Consumer Notice to a prospective homebuyer?

A)Prior to the buyer makes an offer

B)At the initial interview

C)Within three days of closing

D)After showing a couple of properties

B) The answer is AT THE INITIAL INTERVIEW. In Pennsylvania, licensees must discuss the Consumer Notice at the initial interview or the first substantive discussion between a licensee and a consumer about the consumer's needs before the licensee provides any services, and before they enter into an agency agreement or agreement of sale.

The relationship of a broker to a client is that of

A)an attorney-in-fact.

B)a trustee.

C)a fiduciary.

D)a subagent.

C) The answer is A FIDUCIARY. The relationship of a broker to a client is one of a fiduciary; brokers owe care, obedience of lawful instructions, and utmost loyalty to their client's interests.

A real estate licensee was representing a buyer. At their first meeting, the buyer explained that he planned to operate a dog-grooming business out of any house he bought. The licensee did not check the local zoning ordinances to determine in which parts of town such a business could be conducted. Which fiduciary duty did the licensee violate?

A)Loyalty

B)Care

C)Obedience

D)Accounting

B) The answer is CARE. A licensee who has been provided specific information by a client has a duty to exercise care while transacting business on behalf of that client. This duty would include determining suitability of the property for the client's intended use.

Guiding prospective buyers to a particular area because the agent feels they belong there is

A)steering.

B)redlining.

C)bird-dogging.

D)blockbusting.

A) The answer is STEERING. Homeseekers, not their agents, decide the areas they want to explore houses for sale. An agent who restricts the homeseeker's options is engaging in the illegal activity of steering.

Which of the following is NOT permitted under the federal Fair Housing Act?

A)The Harvard Club in New York will rent rooms only to graduates of Harvard who belong to the club.

B)The owner of a 20-unit apartment building rents to women only.

C)A Catholic convent refuses to furnish housing for a Jewish home.

D)An owner refuses to rent the duplex home in which she lives to families with children.

B) The answer is THE OWNER OF A 20-UNIT APARTMENT BUILDING RENTS TO WOMEN ONLY. A 20-unit apartment building does not qualify under the exclusions of the federal Fair Housing Act. An owner occupant of this property may not discriminate against a prospective tenant who is a member of a protected class. Limiting rental based on sex would be illegal.

Which is an example of the illegal practice of redlining?

A)Denying an applicant a loan due to lack of credit history

B)Refusing to make loans in minority neighborhoods

C)Obtaining listings by spreading word that a minority family has purchased in the neighborhood

D)Placing all families with children on the ground floor of the apartment building

B) The answer is REFUSING TO MAKE LOANS IN MINORITY NEIGHBORHOODS. The practice of refusing to make mortgage loans or issue insurance policies in specific areas for reasons other than the economic qualifications of the applicants is known as redlining. Lenders can only refuse a loan solely on sound economic grounds.

Under federal law, families with children may be refused rental or purchase in a building where occupancy is reserved exclusively for those who age is at LEAST

A)40.

B)62.

C)65.

D)60.

B) The answer is 62. Housing intended solely for persons age 62 or older is exempt from protections afforded to families with children; occupancy may be restricted to persons over the age of 62.

A single man with two small children has been told by a real estate licensee that homes for sale in a condominium complex are available only to married couples with no children. Which statement is TRUE?

A)The man may file a complaint alleging discrimination on the basis of familial status.

B)Restrictive covenants in a condominium take precedence over the fair housing laws.

C)Condominium complexes are exempt from the fair housing laws and can therefore restrict children.

D)Because a single-parent family can be disruptive if the parent provides little supervision of the children, the condominium is permitted to discriminate against the family under the principle of rational basis.

A) The answer is THE MAN MAY FILE A COMPLAINT ALLEGING DISCRIMINATION ON THE BASIS OF FAMILIAL STATUS. The salesperson and, by implication, the broker and the property owners-principals have violated the prohibition against familial-status discrimination. Anyone in charge of one or more children under age 18 who is denied access because of the children is the victim of discrimination based on familial status.

The following ad appeared in the newspaper: "For Sale: 4 BR brick home; Redwood School District; excellent Elm Street location; short walk to St. John's Church; and right on the bus line. Move-in condition; priced to sell." Which statement is TRUE?

A)The ad describes the property for sale and is very appropriate.

B)The ad should state that the property is available to families with children.

C)The ad should not mention St. John's Church.

D)The fair housing laws do not apply to newspaper advertising.

C) The answer is THE AD SHOULD NOT MENTION ST. JOHN'S CHURCH. No religious preference is preferred; referencing a specific church can be viewed as available to only that particular religion, hence a subtle form of steering.

After receiving a fair housing complaint, HUD initiates an investigation and attempts

A)reconciliation.

B)mediation.

C)arbitration.

D)conciliation.

D) The answer is CONCILIATION. Conciliation is the resolution of a complaint by obtaining assurance that the person against whom the complaint was filed (the respondent) will remedy any violation that may have occurred.

In Pennsylvania, what document must real estate licensees present to all prospective sellers?

A)Equal housing poster

B)Copy of the Pennsylvania Human Relations Act

C)Official Notice

D)Lead-based paint hazard disclosure

C) The answer is OFFICIAL NOTICE. All real estate licensees are required by the Pennsylvania Human Relations Commission to furnish an Official Notice to any person contemplating listing a property for sale; the purpose is to inform the property owner of both the owner's and the licensee's obligations under the fair housing laws. The lead-based paint hazard disclosure is required only for residential properties built before 1978.

After a broker takes a listing agreement for a residence, the owner specifies that he will not sell his home to any Asian family. Which action should the broker take?

A)Require that the owner sign a separate legal document stating the additional instruction as an amendment to the listing agreement.

B)Abide by the principal's directions, despite the fact that they conflict with the fair housing laws.

C)Advertise the property exclusively in Asian-language newspapers.

D)Explain to the owner that the instruction violates federal law and that the broker cannot comply with it.

D) The answer is EXPLAIN TO THE OWNER THAT THE INSTRUCTION VIOLATES FEDERAL LAW AND THAT THE BROKER CANNOT COMPLY WITH IT. A broker who accepts a listing with the understanding that illegal discrimination will be practiced is in violation of the federal Fair Housing Act. Both the broker and the owner could be prosecuted. The broker must explain that the instruction violates the law and that the broker cannot accept the listing under that condition.

A listing agreement continues to be enforceable upon the

A)

destruction of the premises.

B)

agreement of the parties.

C)

death of the salesperson.

D)

sale of the property.

C) The answer is DEATH OF THE SALESPERSON. Only a broker can act as agent to list, sell, rent, or purchase another person's real estate and provide other services to a principal. If either the broker or the seller dies or becomes incapacitated, the listing is terminated but not if the salesperson dies or becomes incapacitated. A salesperson who performs these acts does so only in the name and under the supervision of the broker.

What is the first step when taking a listing?

A)

Gain agreement for dual agency

B)

Explain the Seller Property Disclosure Statement

C)

Present the comparative market analysis (CMA)

D)

Present the Consumer Notice

D) The answer is PRESENT THE CONSUMER NOTICE. In Pennsylvania, the broker must first present the Consumer Notice, which provides the broker with the opportunity to explain the various types of listing agreements, the ramifications of different agency relationships, and the marketing services the broker provides.

All of the following provisions are usually found in a listing agreement EXCEPT

A)

contract expiration rights.

B)

the price the seller wants.

C)

the broker's compensation.

D)

monthly utility bills.

D) The answer is MONTHLY UTILITY BILLS. Listing agreements include provisions for the listing price, the compensation due to the broker, and the terms of the contract. Monthly utility bills are not part of the agreement between the broker and the property owner.

A property was listed with a broker who belonged to a multiple listing service and was sold by another member broker for $153,500. The total commission was 6 percent of the sale price. The selling broker received 60 percent of the commission, and the listing broker received the balance. What was the listing broker's commission?

A)

$1,842

B)

$3,684

C)

$5,526

D)

$9,210

B) The answer is $3,684. Total commission on the transaction is $9,210 ($153,500 × 6% = $9,210). If the selling broker received 60 percent of the $9,210, the listing broker received the balance of $3,684 ($9,210 × 40% = $3,684)

Who are the parties to the listing contract?

A)

The seller and the salesperson

B)

The seller and the broker

C)

The seller and the buyer

D)

The broker and the salesperson

B) The answer is THE SELLER AND THE BROKER. A listing contract is a contractual agreement between the broker and the owner. Salespersons and associate brokers secure listings on behalf of their employing broker.

A property owner signed a 90-day listing agreement with a broker. The owner was killed in an accident before the listing expired. At this point, the listing is

A)

binding on the owner's spouse for the remainder of the 90 days.

B)

still in effect as the owner's intention was clearly defined.

C)

binding only if the broker can produce offers to purchase the property.

D)

terminated automatically upon the death of the seller

D) The answer is TERMINATED AUTOMATICALLY UPON THE DEATH OF THE SELLER. Some of the ways that a listing is terminated include when the agreement's purpose has been fulfilled, when the term expires, upon the death of either the broker or seller, and if the property has been destroyed.

Under the Real Estate Seller Disclosure Act, the real estate licensee is responsible for

A)

completing the disclosure form.

B)

advising the seller of the duty to disclose defects.

C)

all of these.

D)

verifying the accuracy of the information on the disclosure form.

B) The answer is ADVISING THE SELLER OF THE DUTY TO DISCLOSE DEFECTS. The seller must complete a disclosure statement; the licensee is responsible for advising the seller of this duty and providing an appropriate form for the seller's use. Agents should caution sellers to make truthful disclosures to avoid litigation arising from fraudulent or careless misrepresentations.

Who is responsible for completing the Seller Property Disclosure Statement?

A)

Licensed engineer

B)

Listing agent

C)

Seller

D)

Licensed home inspector

C) The answer is SELLER. Pennsylvania's Real Estate Seller Disclosure Act requires sellers of residential real properties (an individual, partnership, corporation, trustee, or combination) who intend to transfer an interest in a one- to four-family residential property to disclose to the buyer all material defects.

A listing taken by a real estate salesperson belongs to the

A)

broker.

B)

salesperson and the broker equally.

C)

salesperson.

D)

seller.

A) The answer is BROKER. A licensed real estate salesperson performs services for or on behalf of the employing broker. Listings secured by the salesperson are the property of the employing broker.

After signing an agency agreement with a broker, the buyers also sign other agency agreements with other brokers. Despite all these agency relationships, the buyers find a house on their own. Under the terms of these agency agreements, the buyers do not owe any broker a commission. What kind of an agency agreements were these?

A)

Exclusive buyer agency agreements

B)

Exclusive agency buyer agency agreements

C)

Exclusive agency agreements

D)

Nonexclusive buyer agency agreements

D) The answer is NONEXCLUSIVE BUYER AGENCY AGREEMENTS. A buyer agency agreement is an employment contract between the buyers and the broker. Similar to an open listing, a buyer agency contract is a nonexclusive agreement under which buyers can have contracts with several brokers and still retain the right to purchase a property on their own without obligation to any of the brokers.

The purchaser of real estate under an installment contract

A)

generally pays no interest charge.

B)

receives legal title immediately.

C)

acquires equitable title.

D)

is not required to pay property taxes for the duration of the contract.

C) The answer is ACQUIRES EQUITABLE TITLE. The seller is the vendor in an installment contract; the purchaser is known as the vendee.

Under a typical installment contract, the seller retains

A)

legal title.

B)

executor title.

C)

equitable title.

D)

qualified title.

A) The answer is LEGAL TITLE. Although the buyer acquires equitable title and obtains possession under the contract, the seller is not obligated to execute and deliver a deed until all the terms of the contract have been satisfied. The seller retains legal title.

Which of the following is an example of a material defect?

A)

The house was built over a ditch filled with decaying timber.

B)

The listing agent declares that the floor plan is the best in the neighborhood.

C)

The listing agent notes that the subject property is within three blocks of an elementary school.

D)

The seller instructs the listing agent not to disclose that her grandmother died in her sleep in the house.

A) The answer is THE HOUSE WAS BUILT OVER A DITCH FILLED WITH DECAYING TIMBER. Sellers must disclose a material defect, one that affects that structure and/or the health and safety of the occupants and that negatively would influence the buyers. A stigmatized property is one that is psychologically affected (someone died in the home), but this fact, while important to some, does not affect health and safety.

A licensee tells a prospective buyer, "This property has the most beautiful river view." In fact, the view includes the river and the back of a shopping center. The licensee

A)

is guilty of negligent misrepresentation.

B)

is merely puffing.

C)

has committed fraud.

D)

is guilty of intentional misrepresentation.

B) The answer is IS MERELY PUFFING. Puffing is the legal exaggeration of the benefits of a property. Licensees walk a fine line between opinion and fact.

A buyer wants to make an offer to purchase a house that she suspects has a wet basement. The buyer is afraid that the house may be sold to someone else before she has a chance to get information about the structure. How should she proceed?

A)

Ask the real estate salesperson to guarantee that the basement is dry.

B)

Hire a contractor to give an estimate for repair before making an offer.

C)

Make an offer to purchase that is contingent on a structural inspection.

D)

Ask the seller to repair the basement before she makes an offer.

C) The answer is MAKE AN OFFER TO PURCHASE THAT IS CONTINGENT ON A STRUCTURAL INSPECTION. A buyer can make an offer that is subject to a structural inspection to address concerns such as a wet basement. The contract would then be subject to an inspection contingency.

A real estate sales contract becomes valid and in effect when signed by

A)

the broker and the buyer.

B)

only the buyer.

C)

the buyer and the seller.

D)

only the seller.

C) The answer is THE BUYER AND THE SELLER. The parties to a real estate contract are the seller and the buyer, both of whom must sign to make a contract. A document signed by only one party is considered an offer; the broker is not party to a purchase agreement.

After a buyer makes an offer to purchase, the broker cannot locate the seller to present the offer. In the meantime, the broker receives an offer for a higher price from another buyer. How should the broker proceed?

A)

Decide which offer is best to present to the seller

B)

Present both offers to the seller

C)

Present the offer for the higher price

D)

Inform the first buyer that the broker cannot present the offer because it is too low

B) The answer is PRESENT BOTH OFFERS TO THE SELLER. Licensees are required to present all offers in a timely manner. In the case of multiple offers, the broker should present all offers to the sellers for their consideration.

The broker receives an earnest money deposit with a written offer to purchase that includes a ten-day acceptance clause. On the fifth day, before the offer is accepted, the buyer notifies the broker that she is withdrawing the offer and demands the return of the earnest money deposit. In this situation, the

A)

buyer cannot withdraw the offer because it must be held open for the full ten days.

B)

seller and the broker have the right to each retain half of the deposit.

C)

buyer has the right to revoke the offer at any time until it is accepted and recover the earnest money.

D)

broker declares the deposit forfeited and retains it for his services.

C) The answer is BUYER HAS THE RIGHT TO REVOKE THE OFFER AT ANY TIME UNTIL IT IS ACCEPTED AND RECOVER THE EARNEST MONEY. An offer or counteroffer may be withdrawn (revoked) at any time before it has been accepted, even if the person making the offer or counteroffer agreed to keep the offer open for a set period.

A complicated commercial transaction involves several different contingencies and options. What may be used to indicate an agreement between the parties?

A)

A binder prepared by legal counsel

B)

A letter of intent drafted by the licensees representing each party

C)

A standard, preprinted form used by most residential licensees

D)

A custom agreement form drafted by the licensees representing each party

A) The answer is A BINDER PREPARED BY LEGAL COUNSEL. A binder is often used in place of a preprinted agreement of sale when the transaction is complicated. The binder is evidence of a meeting of minds, but the details must be worked out.

A sales contract says a man will purchase only if his wife flies up and approves the sale by the following Saturday. Her approval is a

A)

warranty.

B)

reservation.

C)

consideration.

D)

contingency.

D) The answer is CONTINGENCY. When a buyer and a seller enter into a contract that is subject to a condition, such as the wife's approval of the sale, the condition is referred to as a contingency.

Under the provisions of the Truth in Lending Act (Regulation Z), the annual percentage rate (APR) of a finance charge includes all of the following components EXCEPT

A)

the loan origination fee.

B)

the broker's commission.

C)

the loan interest rate.

D)

discount points.

B) The answer is THE BROKER'S COMMISSION. The Truth in Lending Act requires certain disclosures so that the consumer knows the true cost of obtaining a loan. Disclosures include loan fees, finance charges, and discount points in addition to the stated interest rate. This information is used to calculate the annual percentage rate (APR). Broker compensation is not a component of APR.

In an adjustable-rate mortgage loan, the interest rate is tied to an objective economic indicator called

A)

an index.

B)

a mortgage factor.

C)

a reserve requirement.

D)

a discount rate.

A) The answer is AN INDEX. An adjustable-rate loan (ARM) is originated at one rate of interest, with provisions for the rate to fluctuate in the future based on some identified, objective economic indicator. This indicator is called an index.

The type of mortgage loan that uses both real and personal property as security is a

A)

wraparound mortgage.

B)

purchase-money mortgage.

C)

blanket mortgage.

D)

package mortgage.

D) The answer is PACKAGE MORTGAGE. A package loan includes real and personal property. In recent years, these kinds of loans have been very popular with developers and purchasers of unfurnished condominiums.

Which of the following is an example of a conventional loan?

A)

A 60 percent loan-to-value ratio first mortgage loan secured through a credit union

B)

An installment sale

C)

A loan obtained through a private lender with a VA guarantee

D)

A mortgage loan insured by the Federal Housing Administration

A) The answer is A 60 PERCENT LOAN-TO-VALUE RATIO FIRST MORTGAGE LOAN SECURED THROUGH A CREDIT UNION. A conventional loan relies solely on the ability of the borrower to repay the debt and the security provided by the mortgage. This is generally considered the most secure loan because it has the lowest loan-to-value ratio. A 60 percent LTV would be an example of a conventional loan.

The federal Equal Credit Opportunity Act allows lenders to deny loans to potential borrowers on the basis of

A)

amount of income.

B)

dependence on public assistance.

C)

sex.

D)

race.

A) The answer is AMOUNT OF INCOME. The Equal Credit Opportunity Act (ECOA) prohibits lenders from discriminating against a borrower on the basis of race, color, religion, national origin, sex, marital status, age, and dependence on public assistance. The amount of income needed to qualify for a loan is a legitimate business reason for denying a loan.

A couple purchased a residence for $195,000. They made a down payment of $25,000 and agreed to assume the seller's existing mortgage, which had a current balance of $123,000. The buyers financed the remaining $47,000 of the purchase price by executing a mortgage and note to the seller. This type of loan, by which the seller becomes the mortgagee, is called a

A)

wraparound mortgage.

B)

package mortgage.

C)

purchase-money mortgage.

D)

balloon note.

C) The answer is PURCHASE-MONEY MORTGAGE. When the seller finances all or part of the purchase price by accepting a note and mortgage from the buyer, the document that creates the seller's (mortgagee's) interest is a purchase-money mortgage. Title passes to the buyer, and the seller essentially becomes the lender.

In a loan that requires periodic payments that do not fully amortize the loan balance by the final payment, what term BEST describes the final payment?

A)

Variable payment

B)

Balloon payment

C)

Acceleration payment

D)

Adjustment payment

B) The answer is BALLOON PAYMENT. When periodic payments do not fully satisfy the debt by the time the last payment is due, the final payment needed to satisfy the debt is known as a balloon payment.

A home is purchased using a fixed-rate, fully amortized mortgage loan. Which of the following is TRUE regarding this mortgage?

A)

Each payment reduces the principal by the same amount.

B)

The principal amount in each payment is greater than the interest amount.

C)

A balloon payment will be made at the end of the loan.

D)

Each payment amount is the same.

D) The answer is EACH PAYMENT AMOUNT IS THE SAME. Each loan payment is the same for a fixed-rate, fully amortized loan. However, the amount attributed to principal and interest changes with each payment. This is because the amount of money owed after each payment is less, while the interest rate remains the same. More money is attributed to interest rather than principal in the early stages of the loan.

Which characteristic is TRUE of a fixed-rate home loan that is amortized according to the original payment schedule?

A)

The loan cannot be sold in the secondary market.

B)

The amount of interest to be paid is predetermined.

C)

The monthly payment amount will fluctuate each month.

D)

The interest rate change may be based on an index

B) The answer is THE AMOUNT OF INTEREST TO BE PAID IS PREDETERMINED. A fixed-rate, fully amortized loan has a predetermined amount of interest that is due from the point of origination to the time the loan is fully paid. Mortgage loan factors are used to make this determination.

A borrower obtains a mortgage loan to make repairs on her home. The mortgage document secures the amount of the loan as well as any future funds advanced to the borrower by the lender. This borrower has obtained

A)

a growing equity mortgage.

B)

a blanket loan.

C)

a wraparound mortgage.

D)

an open-end loan.

D) The answer is AN OPEN-END LOAN. An open-end mortgage loan secures not only the original amount borrowed but also future advances made to the borrower. This allows the borrower to "open" the mortgage and increase the amount of debt to the lender.

The term reconciliation refers to which of the following?

A)

Loss of value due to any cause

B)

The process by which an appraiser determines the highest and best use for a parcel of land

C)

Separating the value of the land from the total value of the property to compute depreciation

D)

Analyzing the results obtained by the three approaches to value to determine a final estimate of value

D) The answer is ANALYZING THE RESULTS OBTAINED BY THE THREE APPROACHES TO VALUE TO DETERMINE A FINAL ESTIMATE OF VALUE. Reconciliation is the art of analyzing and effectively weighing the findings from the three approaches to value to derive a single estimate of market value. Reconciliation is not an average of the findings.

Which of the following is NOT used by an appraiser in applying the income approach to value?

A)

Annual gross income

B)

Capitalization rate

C)

Accrued depreciation

D)

Annual net operating income

C) The answer is ACCRUED DEPRECIATION. Accrued depreciation is a function of the cost approach. The income approach to value considers the annual gross income, the annual net operating income, and the capitalization rate.

The easiest but LEAST precise way to determine depreciation is the

A)

fixed asset depreciation.

B)

general depreciation system.

C)

straight-line method.

D)

accelerated depreciation

D) The answer is STRAIGHT-LINE METHOD. The easiest but least precise way to determine depreciation is the straight-line method (also called the economic age-life method). Depreciation is assumed to occur at an even rate over a structure's economic life. The property's cost is divided by the number of years of its expected economic life to derive the amount of annual depreciation.

The market value of a parcel of real estate is

A)

an estimate of its future benefits.

B)

the amount of money paid for the property.

C)

an estimate of the most probable price it should bring.

D)

its value without improvements.

C) The answer is AN ESTIMATE OF THE MOST PROBABLE PRICE IT SHOULD BRING. Market value is an estimate of the most probable price a property will bring in a fair sale. Price is the actual money paid. Neither cost nor price necessarily equals value.

A building was purchased five years ago for $240,000. It currently has an estimated remaining useful life of 60 years. What is the current value of the building?

A)

$192,000

B)

$186,000

C)

$235,636

D)

$220,000

D) The answer is $220,000. In the preceding problem, the property has depreciated by $20,000. $240,000 - $20,000 = $220,000.

What is market value?

A)

Most probable price that the property will bring at a fair sale

B)

What the seller wants

C)

What the real estate licensees suggests

D)

What the buyer wants to pay

A) The answer is MOST PROBABLE PRICE THAT THE PROPERTY WILL BRING AT A FAIR SALE. The market value of real estate is the most probable price that a property should bring in a fair sale assuming a competitive and open market, a buyer and seller who are both assumed to be acting prudently and knowledgeably, and a price not affected by unusual circumstances.

It is necessary to calculate a dollar value for depreciation when using the

A)

gross rent multipliers.

B)

cost approach to value.

C)

sales comparison approach to value.

D)

income approach to value.

B) The answer is COST APPROACH TO VALUE. In the cost approach, after estimating the current cost of constructing buildings and site improvements, the appraiser must estimate the amount of accrued depreciation (loss in value) resulting from physical deterioration, functional obsolescence, and external depreciation.

Using which of the following would require the value of the land to be calculated separately from the value of the improvements?

A)

The income approach

B)

The gross rent multiplier

C)

The sales comparison approach

D)

The cost approach

D) The answer is THE COST APPROACH. The first step in the cost approach is to determine the value of the land as if it were vacant and available for its highest and best use.

A building was purchased five years ago for $240,000. It currently has an estimated remaining useful life of 60 years. What is the property's total depreciation to date?

A)

$54,000

B)

$20,000

C)

$48,000

D)

$14,364

B) The answer is $20,000. Depreciation is assumed to occur at an even rate over a structure's economic life; the property's cost is divided by the number of years of its expected economic life to arrive at the amount of annual depreciation. $240,000 ÷ 60 years = $4,000 × 5 years = $20,000.

In the appraisal of an office building, which of the following would be classified as external depreciation?

A)

Antiquated restroom facilities

B)

Next door to a closed factory

C)

A poor architectural design resulting in a cluttered floor plan

D)

Termite damage to the structural components of the building

B) The answer is NEXT DOOR TO A CLOSED FACTORY. Depreciation is always incurable if caused by negative factors not on the subject property, such as environmental, social, or economic forces; including close proximity to a polluting or closed factory.

If a seller collected rent of $900, payable in advance, on August 1, which statement is TRUE at the closing on August 15, if the closing date is an expense to the seller?

A)

The seller owes the buyer $900.

B)

The buyer owes the seller $450.

C)

The seller owes the buyer $450.

D)

The buyer owes the seller $900.

C) The answer is THE SELLER OWES THE BUYER $450. The seller received the August rent of $900 on August 1 for the entire month of August. However, the buyer owns the house from August 15; therefore, the seller must pay $450 to the buyer, who is then responsible for any expenses after August 15.

Security deposits should be listed on a closing statement as a credit to the

A)

broker.

B)

seller.

C)

buyer.

D)

lender.

C) The answer is BUYER. A credit is an amount entered in a person's favor on the settlement statement. The amount is due to be paid to the party. Tenant security deposits are entered as a credit to the buyer.

At the closing, the seller's attorney informed him that he would be giving credit to the buyer, for certain accrued items. These items represent

A)

all the buyer's outstanding bills.

B)

bills related to the real estate that have not been paid as of the time of the closing.

C)

bills related to the real estate that have already been paid by the seller.

D)

all the seller's outstanding bills.

B) The answer is BILLS RELATED TO THE REAL ESTATE THAT HAVE NOT BEEN PAID AS OF THE TIME OF THE CLOSING. Accrued items are expenses to be prorated that are owed by the seller (such as water bills and interest on an assumed mortgage) but will be paid later by the buyer. The seller, therefore, pays for these items by giving the buyer a credit at closing.

At the closing, the seller's attorney gave credit to the buyer for certain accrued items. These items were

A)

bills relating to the property that have already been paid by the seller.

B)

all the buyer's real estate bills.

C)

bills relating to the property that will have to be paid by the buyer.

D)

all the seller's real estate bills.

C) The answer is BILLS RELATING TO THE PROPERTY THAT WILL HAVE TO BE PAID BY THE BUYER. A credit given by the seller to the buyer for certain accrued items (those items owed but not yet paid) would be entered on the settlement statement to account for bills relating to the property that will be paid by the buyer after closing.

An example of a kickback that is prohibited by RESPA is a

A)

flower arrangement that a salesperson sends to the buyer as a housewarming gift.

B)

fee paid by a closing agent to a broker for suggesting the agent.

C)

fee paid by broker A to broker B for referring a buyer to broker A.

D)

share of the commission paid by broker A to her salesperson.

B) The answer is FEE PAID BY A CLOSING AGENT TO A BROKER FOR SUGGESTING THE AGENT. RESPA's Section 8 prohibits kickbacks and fee-splitting for referrals of settlement services, and unearned fees for services not actually performed.

The annual real estate taxes amount to $1,800 and have been paid in advance for the calendar year. If closing is set for June 15 with taxes prorated as of the date of settlement, which of the following is TRUE?

A)

Credit buyer $975; debit seller $975

B)

Credit seller $825; debit buyer $975

C)

Credit seller $975; debit buyer $975

D)

Credit seller $1,800; debit buyer $825

C) The answer is CREDIT SELLER $975; DEBIT BUYER $975. If real estate taxes amount to $1,800 per year ($150 per month) and have been paid in advance for the year, the seller is entitled to be reimbursed for the period from June 15 to the end of the year. The buyer is responsible for this time period. Therefore, the seller receives a credit for $975 ($150 per month times 6.5 months). This amount is debited to the buyer.

In a closing statement, an accrued item is

A)

an item that is unpaid but is due.

B)

a proration.

C)

an item paid in advance.

D)

a prepaid expense.

A) The answer is AN ITEM THAT IS UNPAID BUT IS DUE. Accrued items are expenses to be prorated that are owed by the seller (such as water bills and interest on an assumed mortgage) but will be paid later by the buyer.

Which of the following would a lender generally require to be produced at the closing?

A)

Application

B)

Market value appraisal

C)

Title insurance policy

D)

Credit report

C) The answer is TITLE INSURANCE POLICY. The application, credit report, and appraisal are required by a lender before committing funds for the loan. The lender will require a title insurance policy at closing in order to protect their interest in the property.

The Real Estate Settlement Procedures Act (RESPA) applies to the activities of

A)

Fannie Mae and Freddie Mac when purchasing residential mortgages.

B)

licensed securities salespeople when selling limited partnership interests.

C)

licensed real estate brokers when selling commercial and office buildings.

D)

lenders financing the purchase of a borrower's residence.

D) The answer is LENDERS FINANCING THE PURCHASE OF A BORROWER'S RESIDENCE. RESPA applies to lenders who make federally related residential loans that will be sold to Fannie Mae or Freddie Mac.

Under the Mortgage Disclosure Improvement Act (MDIA), if the annual percentage rate (APR) has increased prior to closing, for how many days, if any, is settlement delayed?

A)

Five business days

B)

Three business days

C)

No delay

D)

Two days

B) The answer is THREE BUSINESS DAYS. Under the Mortgage Disclosure Improvement Act (MDIA), settlement must be delayed three business days if the APR has changed more than 0.125 percent from the original or most recent truth-in-lending (TIL) statement and GFE.

What law requires removing existing barriers in public buildings, such as adding Braille markings to elevator buttons, when these options are readily achievable?

A)

Fair Housing Act

B)

Equal Credit Opportunity Act

C)

Regulation Z

D)

Americans with Disabilities Act

D) The answer is AMERICANS WITH DISABILITIES ACT. Title VIII of the Americans with Disabilities Act (ADA) requires that managers of commercial properties ensure that people with disabilities have full and equal access to facilities and services.

In evaluating rental applications, it is important for the property manager to establish consistent criteria for acceptable debt and income ratios to be in compliance with

A)

federal antitrust laws.

B)

the Equal Credit Opportunity Act.

C)

the Americans with Disabilities Act.

D)

Regulation Z.

B) The answer is THE EQUAL CREDIT OPPORTUNITY ACT. The Equal Credit Opportunity Act prohibits a lender from denying a loan based on race, color, religion, national origin, sex, marital status, age, and receipt of public assistance. The manager should be consistent in evaluating the income and debt of applicants and in determining whether to rent to an applicant.

Removing a diving board is an example of

A)

controlling risk.

B)

retaining risk.

C)

avoiding risk.

D)

transferring risk.

C) The answer is AVOIDING RISK. Avoiding risk involves removing the danger, such as the diving board or even the swimming pool.

Which of the following might indicate that rents are too low?

A)

Many For Lease signs in the area

B)

High building occupancy

C)

High vacancy level

D)

A poorly maintained building

B) The answer is HIGH BUILDING OCCUPANCY. High occupancy might indicate that rents are too low. Poorly maintained properties, many For Lease signs, and high vacancy rates are not typical indicators that rents are too low.

What is one of the primary responsibilities of a property manager?

A)

Achieve the objectives of the property owners

B)

Cut expenses to increase income

C)

100 percent occupancy

D)

Generate income for the manager

A) The answer is ACHIEVE THE OBJECTIVES OF THE PROPERTY OWNERS. The three principal responsibilities of the property manager are to achieve the objectives of the property owners, generate income for the owners, and preserve and/or increase the value of the investment property.

All of the following should be included in a management agreement EXCEPT

A)

restrictions regarding ages of children.

B)

compensation.

C)

a description of the property.

D)

the extent of the manager's authority.

A) The answer is RESTRICTIONS REGARDING AGES OF CHILDREN. The management agreement between the owner and the property manager should include a description of the property, extent of manager's authority, compensation, time period, and antitrust provisions. It should never include restrictions based on any of the fair housing-protected classes.

What is the first step to consistently collecting rents?

A)

Accept tenants who can be expected to meet their financial obligations

B)

Begin legal action when the rent is late

C)

Institute severe penalties for late payments

D)

Put a lawyer on retainer

A) The answer is ACCEPT TENANTS WHO CAN BE EXPECTED TO MEET THEIR FINANCIAL OBLIGATIONS. The first step to timely rental payments is accepting only those tenants who can be expected to meet their financial obligations. Then, the time and place for payment should be carefully spelled out. Every attempt must be made to collect rent without resorting to legal action.

What is an operating budget?

A)

Statement that compares the actual results with the original budget

B)

Projection of income and expense for the operation of the property for one year

C)

Financial picture of the revenues and expenses to determine if the property is profitable

D)

Monthly statement that details the financial status of the property

B) The answer is PROJECTION OF INCOME AND EXPENSE FOR THE OPERATION OF THE PROPERTY FOR ONE YEAR. An operating budget is the projection of income and expense for the operation of a property over a one-year period and is based on anticipated revenues and expenses and provides the owner the amount of anticipated profit.

Rents should be determined on the basis of

A)

prevailing rental rates in the area.

B)

a tenants' union.

C)

the local apartment owners' association.

D)

the Department of Housing and Urban Development (HUD).

A) The answer is PREVAILING RENTAL RATES IN THE AREA. Rental rates are derived from the marketplace, based on supply and demand of competitive space in the area.

A property manager's primary obligation is to

A)

the tenants.

B)

the owner.

C)

the banker.

D)

government authorities.

B) The answer is THE OWNER. As a general agent, the property manager is charged with the fiduciary responsibilities of care, obedience, accounting, loyalty, and disclosure to the owner who hired the agent.

When supply and demand are forecast accurately, market trends cannot be disrupted by outside forces.

True

False

The statement is FALSE. Even when supply and demand can be forecast with some accuracy, natural disasters such as hurricanes and earthquakes can disrupt market trends. Similarly, sudden changes in financial markets or local events such as plant relocations or environmental factors can dramatically disrupt a seemingly stable market.

Factors that tend to affect the supply side of the real estate market's supply and demand balance include demographics and employment levels.

True

False

The statement is FALSE. Factors that tend to affect the demand side of the real estate market's supply and demand balance include population, demographics, and employment and wage levels.