Key Concepts to Pass Your Real Estate Exam
KEY CONCEPTS TO PASS YOUR REAL ESTATE EXAM
INTRODUCTION
If you do not know what is in this book, there is no way you will pass your exam. These are the essentials to passing the exam. It is that simple. We cannot cover everything that may come up, but we want to make sure you know the essentials. That foundation should make you feel much more confident when sitting for your exam. We make no claims that reading this book will make you a better agent. However, we do believe that this book should be an integral part of you passing that pesky exam so you can become an agent. At this point, that is our sole focus — getting you past the exam.
DISCLAIMER
In your real estate practice and when sitting for the exam, some information in this book may conflict with other information you have been given: You need to also refer to information provided by your state licensing authority and any local pre-licensing courses you may be required to take. This book does not provide legal advice. Real estate sales and related issues are full of topics that many people, including attorneys, require an attorney’s advice or that are best left up to an attorney. We unequivocally advise you that in any issue involving a legal matter, first and foremost, consult an attorney. Information can be obtained from your state licensing board. This will include a copy of the state license law, an application or a license, information on the content of the exam (if available), plus additional information about obtaining your real estate license. You may be able to get this information online. If you’re new to the field, you should request the “package of information” your state sends out for people who want to become a licensed salesperson.
WHAT IS A LICENSE?
A “license” is a personal privilege to use the land of another. A license is not considered a true interest in the land because it can be taken away at any time and does not transfer with title. Examples of a license would include being able to park your car in a garage or having a ticket to the movie theater. A license can be created with a spoken (or oral) agreement like giving someone permission to fish in your lake. You are now getting your real estate license. Let's not forget why it is called a real estate license. Real refers to real property, and estate has to do with duration of ownership.
THE -OR AND -EE RULE
The suffix "-or" is used for the person who performs an action, while the suffix "-ee" is used for the recipient of that action. In real estate, you will hear words like:
Grantor – Grantee
Lessor – Lessee
Vendor – Vendee
Optionor – Optionee
Trustor – Trustee
Mortgagor – Mortgagee
Offeror – Offeree
The gist of it is, the -or gives and the -ee receives. Remembering can be enhanced with phrases such as: “GrantOR, lessOR, optionOR, vendOR makes me the givOR of the propetOR for your pleasOR.” Conversely, say: “GrantEE, lessEE, optionEE, vendEE, gives MEE propertEE, which makes me HapEE.” Practicing with these terms will prepare you for seeing questions on the exam involving these roles in property transfers.
PROPERTY OWNERSHIP BASICS
Bundle of Rights
The “bundle of rights” are the rights that come with property ownership. An interest is a privilege and/or legal share whereby something is owed to a person by claim or legal guarantee.
The bundle of rights includes the right to:
Use
Give away
Sell
Mortgage
Lease
Rent
Enter
Refuse to exercise any of these rights
This concept is essential for understanding that property ownership encompasses multiple rights that may be shared with others. In real estate education, it serves as a foundational principle. The analogy of a hockey team highlights that losing one right is like losing a player — until the right is restored.
Real vs. Personal Property
“Real property” incorporates all things attached to the land and all rights inherent with that land, which typically includes immovable items like homes and buildings. Conversely, “personal property” encompasses movable items like furniture, jewelry, or other household goods, often referred to as “chattels” or “personality.” A technique to memorize personal property is associating the term "chattels" with "cattle," as both denote mercurial aspects of belongings.
Severance and Annexation
“Severance” is the act of detaching an item from real property, making it personal property. “Annexation” is the opposite, where personal property is attached to real property, converting it into a fixture. Fixtures remain with the real estate upon sale unless agreed otherwise.
Fixtures
A “fixture” is personal property that becomes real property through attachment. Fixtures are best remembered through “MARIA”:
Method: How is it attached?
Adaptability: Is it integral to the property?
Relationship: Who has priority in claims?
Intention: Was there an intent to attach?
Agreement: What was agreed upon in contracts?
Trade Fixtures
A “trade fixture” is an item used in the course of a business and typically can be removed by the tenant at lease's end, unlike other fixtures attached to the property.
Appurtenance
“Appurtenance” refers to what belongs to and passes with something else in property sales.
Encroachment
An encroachment refers to a physical intrusion on another's property, such as a fence or tree extending onto adjacent land, sometimes verified through survey.
Emblements
“Emblements” are annual crops that belong to the tenant and can be harvested despite the lease's termination until the current season completes.
Water Rights
No one has title to water; property owners next to water bodies have reasonable rights of use subject to restrictions.
“Riparian rights” pertain to water from flowing sources like rivers.
“Littoral rights” pertain to stationary bodies like lakes.
Definitions include “accretion” (land gained) and “erosion” (land lost).
ESTATES
Freehold Estates
A “freehold estate” refers to ownership for an indefinite duration, encompassing:
Fee simple absolute
Fee simple defeasible
Life estate
Fee Simple Absolute
“Fee simple absolute” is the highest interest in real estate, unrestricted barring legal government powers.
Fee Simple Defeasible
“Defeasible estate” imposes conditions on ownership with potential loss upon occurrence of a specified event.
Life Estate
A “life estate” lasts for the duration of a person’s life, requiring maintenance and succession rules upon death.
LESS THAN FREEHOLD ESTATES
“Less than freehold estates” are inherently limited in time and include:
Estate for years
Periodic tenancy
Estate at sufferance
Estate at will
Leases
A lease denotes an agreement where the landlord is the lessor and the tenant the lessee, typically in written form outlining exclusive possession rights. Tenant and landlord obligations must be clear and leases do not universally end upon death.
PROPERTY MANAGEMENT
A “property manager” acts on behalf of the owner, tasked with duties including budgeting and tenant relations. Knowledge of market conditions, risk management, and capital expenditures are essential for effective property management.
TYPES OF LEASES
Leases vary, including:
Gross Lease: Tenant pays a fixed rate; landlord covers property expenses.
Percentage Lease: Rent based on gross sales of the business.
Net Lease: Tenant pays for property expenses in addition to rent.
Lease Option: Tenant can purchase property within a specified period.
EASEMENTS
An “easement” grants a right to use another's land.
Types include:
Appurtenant Easement: Involves dominant and servient estates.
Express Easement: Created with clear agreement.
Easement by Necessity: Court-mandated due to lack of access.
Easement in Gross: Personal easements without dominant properties.
Prescriptive Easement: Earned through adverse use without permission.
GOVERNMENT POWER
“Government powers” include Police Power, Eminent Domain, Taxation, and Escheat, known collectively by the acronym PETE, affecting property owners' rights and interests.
AGENCY
Agency relationships govern real estate transactions, differentiating between agents, principals, and clients.
Agency Relationships
A “dual agency” occurs when agents represent both parties. Agents must adhere to fiduciary duties: accountability, care, obedience, loyalty, and disclosure.
Principal & Client
Principals are entities in contracts with agents who become their clients, while customers interact with agents but do not form fiduciary relationships.
COMMUNICATION AND TYPES OF FRAUD
Various forms of fraud, including actual, negative, constructive, and negligence, all threaten transactions and require transparent dealings from real estate professionals.
CONTRACTS
Basics
A contract legally requires capable parties, a lawful object, consideration, and mutual agreement.
Essentials of a Valid Contract
Parties must possess the legal capacity and operate free of duress, ensuring clear understanding and clarity in obligations.
Types of Contracts
Contracts range from bilateral (sales contracts) to unilateral (option contracts), impacting the responsibilities of involved parties and their legal standings.
VALUATION & MARKET ANALYSIS
Understanding property appraisal methods like the cost approach, market data approach, and income capitalization method are essential for real estate valuation and investment.
Depreciation Types
Depreciation encompasses physical deterioration, economic obsolescence, and functional obsolescence, underscoring value losses over time.
FINANCING
Grasping mortgage fundamentals such as amortization, loan types, and clauses is vital in property financing. Understanding “assumption” vs “subject to” mortgage commitments outlines financial responsibilities in property transactions.
INDIVIDUAL LENDING STRUCTURES
Understanding different lending frameworks and practices comparing primary and secondary mortgage markets, including distinct features of FHA and VA loans, enhances knowledge on accessible financing options.
PRACTICE
Fair Housing and Ethics
Upholding fair housing laws and ethical interactions based on the Fair Housing Act of 1968 and avoiding discriminatory practices ensure compliance and integrity in real estate dealings.