Modern Real Estate Practice Workbook PDF

Modern Real Estate Practice Workbook Fourth Edition MREP_WB_4E_Student.indb 1 3/20/2019 6:39:01 AM  DREE This publication is designed to provide accurate and authoritative information in regard to the subject...

Modern Real Estate Practice Workbook Fourth Edition MREP_WB_4E_Student.indb 1 3/20/2019 6:39:01 AM  DREE This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought. President: Dr. Andrew Temte Executive Director, Real Estate Education: Toby Schifsky Development Editor: Jennifer Brandt MODERN REAL ESTATE PRACTICE WORKBOOK FOURTH EDITION ©2019 Kaplan, Inc. Published by DF Institute, Inc., d/b/a Dearborn Real Estate Education 332 Front St. S., Suite 501 La Crosse, WI 54601 All rights reserved. The text of this publication, or any part thereof, may not be reproduced in any manner whatsoever without written permission from the publisher. Printed in the United States of America ISBN: 978-1-4754-8273-7 MREP_WB_4E_Student.indb 2 3/20/2019 6:39:02 AM  CONTENTS UNIT 1 Introduction to the Real Estate Business 1 Learning Objectives 1 Study Plan 1 Key Points—Unit 1 2 Unit 1 Glossary Review 10 Unit 1 Quiz 11 Unit 1 Broker-Level Questions 13 Unit 1 Quiz Answers 14 UNIT 2 Real Property and the Law 17 Learning Objectives 17 Study Plan 17 Key Points—Unit 2 18 Unit 2 Glossary Review 22 Unit 2 Quiz 23 Unit 2 Broker-Level Questions 25 Unit 2 Quiz Answers 26 UNIT 3 Interests in Real Estate 27 Learning Objectives 27 Study Plan 27 Key Points—Unit 3 28 Unit 3 Glossary Review 36 Unit 3 Quiz 37 Unit 3 Broker-Level Questions 40 Unit 3 Quiz Answers 42 UNIT 4 Forms of Real Estate Ownership 45 Learning Objectives 45 Study Plan 45 Key Points—Unit 4 46 Unit 4 Glossary Review 51 Unit 4 Quiz 52 Unit 4 Broker-Level Questions 54 Unit 4 Quiz Answers 55 iii MREP_wkbk_Contents.indd 3 3/25/2019 12:52:59 PM  iv Contents UNIT 5 Land Description 57 Learning Objectives 57 Study Plan 57 Key Points—Unit 5 58 Unit 5 Glossary Review 65 Unit 5 Quiz 66 Unit 5 Broker-Level Questions 68 Unit 5 Quiz Answers 69 UNIT 6 Transfer of Title 71 Learning Objectives 71 Study Plan 71 Key Points—Unit 6 72 Unit 6 Glossary Review 77 Unit 6 Quiz 78 Unit 6 Broker-Level Questions 80 Unit 6 Quiz Answers 81 UNIT 7 Title Records 83 Learning Objectives 83 Study Plan 83 Key Points—Unit 7 84 Unit 7 Glossary Review 91 Unit 7 Quiz 92 Unit 7 Broker-Level Questions 94 Unit 7 Quiz Answers 95 UNIT 8 Real Estate Brokerage 97 Learning Objectives 97 Study Plan 97 Key Points—Unit 8 98 Unit 8 Glossary Review 104 Unit 8 Quiz 105 Unit 8 Broker-Level Questions 107 Unit 8 Quiz Answers 108 UNIT 9 Real Estate Agency 109 Learning Objective 109 Study Plan 109 Key Points—Unit 9 110 Unit 9 Glossary Review 119 Unit 9 Quiz 120 Unit 9 Broker-Level Questions 123 Unit 9 Quiz Answers 124 MREP_WB_4E_Student.indb 4 3/20/2019 6:39:03 AM  Contents v UNIT 10 Client Representation Agreements 127 Learning Objective 127 Study Plan 127 Key Points—Unit 10 128 Unit 10 Glossary Review 134 Unit 10 Quiz 135 Unit 10 Broker-Level Questions 137 Unit 10 Quiz Answers 138 UNIT 11 Real Estate Contracts 139 Learning Objectives 139 Study Plan 139 Key Points—Unit 11 140 Unit 11 Glossary Review 150 Unit 11 Quiz 151 Unit 11 Broker-Level Questions 154 Unit 11 Quiz Answers 156 UNIT 12 Real Estate Financing 159 Learning Objectives 159 Study Plan 159 Key Points—Unit 12 160 Unit 12 Glossary Review 175 Unit 12 Quiz 176 Unit 12 Broker-Level Questions 179 Unit 12 Quiz Answers 180 UNIT 13 Government Involvement in Real Estate Financing 183 Learning Objectives 183 Study Plan 183 Key Points—Unit 13 184 Unit 13 Glossary Review 191 Unit 13 Quiz 192 Unit 13 Broker-Level Questions 194 Unit 13 Quiz Answers 195 UNIT 14 Closing the Real Estate Transaction 197 Learning Objectives 197 Study Plan 197 Key Points—Unit 14 198 Unit 14 Glossary Review 203 Unit 14 Quiz 204 Unit 14 Quiz Answers 205 MREP_WB_4E_Student.indb 5 3/20/2019 6:39:04 AM  vi Contents UNIT 15 Real Estate Taxes and Other Liens 207 Learning Objectives 207 Study Plan 207 Key Points—Unit 15 208 Unit 15 Glossary Review 212 Unit 15 Quiz 213 Unit 15 Quiz Answers 214 UNIT 16 Real Estate Appraisal 215 Learning Objectives 215 Study Plan 215 Key Points—Unit 16 216 Math Refresher (Review Before Class) 217 Unit 16 Glossary Review 229 Unit 16 Quiz 230 Unit 16 Broker-Level Questions 233 Unit 16 Quiz Answers 234 UNIT 17 Leases 237 Learning Objective 237 Study Plan 237 Key Points—Unit 17 238 Unit 17 Glossary Review 241 Unit 17 Quiz 242 Unit 17 Quiz Answers 243 UNIT 18 Fair Housing 245 Learning Objective 245 Study Plan 245 Key Points—Unit 18 246 Unit 18 Glossary Review 251 Unit 18 Quiz 252 Unit 18 Broker-Level Questions 254 Unit 18 Quiz Answers 255 UNIT 19 Property Management 257 Learning Objectives 257 Study Plan 257 Key Points—Unit 19 258 Unit 19 Glossary Review 260 Unit 19 Quiz 261 Unit 19 Quiz Answers 262 MREP_WB_4E_Student.indb 6 3/20/2019 6:39:04 AM  Contents vii UNIT 20 Land-Use Controls and Property Development 263 Learning Objective 263 Study Plan 263 Key Points—Unit 20 264 Unit 20 Glossary Review 268 Unit 20 Quiz 269 Unit 20 Broker-Level Questions 270 Unit 20 Quiz Answers 271 UNIT 21 Environmental Issues and the Real Estate Transaction 273 Learning Objective 273 Study Plan 273 Key Points—Unit 21 274 Unit 21 Glossary Review 279 Unit 21 Quiz 280 Unit 21 Quiz Answers 281 Final Exam Study Guide 283 Appendix: Answers to Fill-Ins 286 Glossary 293 MREP_WB_4E_Student.indb 7 3/20/2019 6:39:04 AM MREP_WB_4E_Student.indb 8 3/20/2019 6:39:04 AM  UNIT 1 Introduction to the Real Estate Business LEARNING OBJECTIVES When you have completed this unit, you will be able to accomplish the following. ff Explain the various careers available in the real estate industry. ff Describe the different classifications and characteristics of real property and the types of housing available for purchase or rental. ff Identify the advantages and disadvantages of owning and investing in real estate. STUDY PLAN Before Class: Complete the reading assignment in Modern Real Estate Practice listed in the Course Syllabus. Read the Unit 1 Key Points. After Class: Complete the Glossary Review. Complete the Unit 1 Quiz. 1 MREP_WB_4E_Student.indb 1 3/20/2019 6:39:05 AM  2 Unit 1 Introduction to the Real Estate Business KEY POINTS—UNIT 1 „„ Real estate brokerage is the business of bringing people together in a real estate transaction. „„ A real estate broker is a person or company licensed to buy, sell, exchange, or lease real property on behalf of others for compensation. „„ A real estate salesperson (sales associate) is one who conducts brokerage activities on behalf of the broker. „„ An appraisal is the process of developing an opinion of value. „„ Appraisal licensing or certification is required for federally related transactions. „„ Property management services are provided by a property manager who must be a licensed real estate brokerage to maintain and manage property on behalf of the property owner. The property manager’s scope of work depends on a management agreement, and the basic responsibility of the property manager is to protect the owner’s investment while maximizing the owner’s financial return. „„ Financing is the business of providing the funds that make real estate transactions possible through loans secured by a mortgage or deed of trust on the property, with funding provided by commercial banks, thrifts (which include savings associations), credit unions, mortgage bankers, and mortgage brokerage companies. „„ Subdivision and development involve splitting a single property into smaller parcels (subdividing) and constructing improvements on the land (development). „„ Home inspection, used by both purchasers and homeowners, provides an inspection report that shows the results of a thorough survey of observable property conditions. Many states require home inspectors to be licensed. „„ Real estate counseling involves independent advice based on sound professional judgment regarding how to buy, sell, or invest in property. „„ Types of real property include residential, commercial, mixed use, industrial, agricultural, and special purpose, which can be privately or publicly held. „„ The real estate market reflects the principle of supply and demand, influenced by the uniqueness and immobility of parcels of real estate. When the supply increases relative to demand, prices go down, and when demand increases relative to supply, prices go up. „„ The factors affecting the supply of real estate include labor force availability, construction and material costs, government controls (environmental restrictions, land-use policies, building codes, zoning), and monetary policy that impacts interest rates and the money supply. „„ The factors affecting the demand for real estate include population, demographics, employment, and wage levels. „„ A homebuyer can benefit from tax deductions, exclusion of gain on the sale of the home, and tax credits, when available. „„ Advantages of investing in real estate include a typically high rate of return; greater control over the investment than other options; property appreciation over time that leads to equity buildup; leveraging of funds to provide greater purchasing power; and the tax benefits of depreciation, deductions, the use of a property exchange to avoid taxation, and treatment of income from a property sale as capital gain. „„ Disadvantages of real estate as an investment include its lack of liquidity (it generally takes a long time to convert real estate into cash) and that it requires active management to ensure it is being managed properly. MREP_WB_4E_Student.indb 2 3/20/2019 6:39:06 AM  Unit 1 Introduction to the Real Estate Business 3 „„ The federal income tax code offers homeowners numerous tax benefits, including the deduction of mortgage interest, property taxes and points, and the exclusion of a gain of up to $250,000 (single) or $500,000 (married) on the sale of a principal residence owned for at least two of the previous five years. „„ Investors may defer capital gains by using a 1031 tax-deferred exchange. I. REAL ESTATE SPECIALIZATIONS A. Brokerage 1. The business of bringing people together in a real estate transaction 2. Brokerage activities: help others buy, sell, or lease real property 3. A broker/brokerage/firm is a) a person or company, b) licensed to perform brokerage services for a client for a fee, and c) may employ real estate licensees. 4. A salesperson/broker-associate/provisional broker a) is a person employed by or associated with a broker, b) performs brokerage services for the broker, and c) may not provide brokerage services independently. 5. Clients hire the brokerage firm. 6. Terms such as real estate agents/licensees/professionals includes all firms, brokers, and salespersons. 7. Real estate agents must be licensed in each state where they practice. B. Appraisal 1. The process of developing an opinion of a property’s market value, based on established methods and the appraiser’s professional judgment 2. Appraisers must be licensed by the state. C. Property management 1. A property manager is a person or company hired to maintain and manage property on behalf of the property owner. 2. A property manager must be a licensed real estate broker. 3. Brokerage firms may provide property management services. MREP_WB_4E_Student.indb 3 3/20/2019 6:39:06 AM  4 Unit 1 Introduction to the Real Estate Business D. Financing 1. The business of providing funds for real estate sales transactions 2. Mortgage loan originators (MLOs) a) Registered with the Nationwide Multistate Licensing System (NMLS) b) Licensed by state E. Subdivision and development 1. Buy property, add value, sell, or rent 2. Subdivision: dividing a single property into smaller parcels 3. Development: site preparation, construction of structures, and other improvements F. Home inspection 1. Combines a practitioner’s interest in real estate with skills and training in the construction trades 2. Some states require licensing. G. Counseling 1. Provide clients with information needed to make informed decisions 2. Help clients choose among the various alternatives involved in purchasing, leasing, using, or investing in property H. Education 1. Provided by colleges and universities, private schools, and trade organizations 2. Available to licensees and consumers 3. State licensing laws establish minimum educational requirements. a) Prelicense education—to obtain a license b) Continuing education—to maintain and renew a license I. Other areas 1. Real estate law 2. Land-use planning 3. Real estate research MREP_WB_4E_Student.indb 4 3/20/2019 6:39:06 AM  Unit 1 Introduction to the Real Estate Business 5 II. TYPES OF REAL PROPERTY A. Six categories of real property 1. Residential a) Where people live b) Single-family and multifamily housing 2. Commercial a) Office, retail, entertainment, parking structures 3. Mixed use a) Commercial and residential uses in the same building or development 4. Industrial a) Warehouse, manufacturing, production facilities, power plants 5. Agricultural a) Farms, timberland, ranches, and orchards 6. Special purpose a) Places of worship, schools, museums, cemeteries, municipal service buildings, and parks b) Privately and publicly owned III. THE REAL ESTATE MARKET A. Supply and demand 1. Factors affecting supply a) Demand b) Construction costs (labor, materials, and fees) c) Interest rates 2. Factors affecting demand a) Demographics b) Economy c) Wages MREP_WB_4E_Student.indb 5 3/20/2019 6:39:07 AM  6 Unit 1 Introduction to the Real Estate Business IV. TAX ADVANTAGES FOR HOMEOWNERS AND INVESTORS Real estate brokers should not advise on tax advantages or disadvantages but should recommend that buyers and sellers seek the advice of a qualified tax consultant. A. Deductions allowed on a first and second residence 1. Property taxes (ad valorem taxes) 2. Mortgage interest 3. Points paid on loans used to improve or acquire a) Remember : Points, origination fees, interest, and property taxes are deductible. 4. Must to take the deduction on tax return B. Capital gains 1. Short-term gain: Property held 12 months or less is taxed at ratepayer’s ordinary income tax rate. 2. Long-term gain: Property held more than 12 months is taxed at a different rate than ordinary income. 3. Salespersons and brokers should recommend that buyers and sellers seek tax advice. C. Taxation of gain on sale of principal residence 1. Gain from the sale of a principal residence is excluded from tax. a) maximum if single taxpayer b) maximum if married and filing jointly 2. The taxpayer must own and occupy for at least years preceding the sale. a) The occupancy does not have to be sequential. MREP_WB_4E_Student.indb 6 3/20/2019 6:39:07 AM  Unit 1 Introduction to the Real Estate Business 7 3. Capital gain calculation a) Example Step 1: acquisition cost $140,000 + cost of improvements 30,000 = adjusted basis $170,000 Step 2: sales price $205,000 – selling expenses – 14,500 = adjusted sale price $190,500 Step 3: adjusted sale price $190,500 – adjusted basis – 170,000 realized capital gain $20,500 D. For investors, tax advantages help offset lack of liquidity. E. Depreciation 1. 2. A tax advantage of owning business property and investment real estate is depreciation. 3. Real estate investors and business property owners are allowed to take an annual depreciation deduction on real estate improvements (land is not depreciable). a) The residential rental property allowance is taken over years. b) The commercial property allowance is taken over years. 4. The amount is determined by the. 5. The annual deduction is calculated as follows: a) Cost of the improvements ÷ the depreciation allowance (1) Example 1: A commercial property has improvements that cost $390,000. The depreciation allowance is 39 years. What is the annual depreciation deduction? Solution: $390,000 ÷ 39 years = $10,000 per year (2) Example 2: The owner of the Example 1 building has owned the property 10 years. How much depreciation has the owner been allowed to take over that time? Solution: $10,000 per year × 10 years = $100,000 MREP_WB_4E_Student.indb 7 3/20/2019 6:39:07 AM  8 Unit 1 Introduction to the Real Estate Business F. 1031 tax-deferred exchanges (also called like-kind exchanges) 1. 1031 exchanges are used by investors and business property owners to of capital gains taxes on the sale of business or investment property. a) The taxes will have to be paid in the future; it is a deferral, not an exclusion. 2. This allows investors or business property owners to sell a property, acquire a new property, and defer paying capital gains tax on the sale. a) No capital gains taxes will be due after closing on the first property. Payment is deferred until the sale of the new property. b) There are many exacting rules for how the exchange must be carried out. c) Real estate licensees should recommend the owner seek professional tax advice. d) Personal and secondary residences are not eligible for a 1031 exchange. V. REAL ESTATE INVESTMENT A. Four benefits 1. Cash flow 2. Tax benefits 3. Potential appreciation 4. Principal reduction B. How real estate makes money Cash flow: Net worth: income (cash flow) assets (appreciation) – expenses (taxes benefits) – liabilities (principal reduction) = increased cash flow = increased net worth C. Advantages 1. Real estate investment typically produces an above-average return over time. 2. More control than other investment options, such as stocks, bonds, or other securities. 3. Appreciation: the value of real estate generally increases. 4. Equity buildup: principal and interest payments slowly pay down any debt used to purchase the property. 5. Leverage: investors can use borrowed money to finance an investment. 6. Tax benefits: depreciation deduction and 1031 exchange MREP_WB_4E_Student.indb 8 3/20/2019 6:39:07 AM  Unit 1 Introduction to the Real Estate Business 9 D. Disadvantages 1. Liquidity a) Refers to how quickly an asset may be converted into cash b) Real estate compared to investments such as stocks and mutual funds. c) Expensive and cumbersome to sell 2. Investment property requires property management. a) Investors may hire a real estate brokerage specializing in property management. 3. Risk a) Rents may decrease due to competition or economics. b) Property values may decrease. MREP_WB_4E_Student.indb 9 3/20/2019 6:39:08 AM  10 Unit 1 Introduction to the Real Estate Business UNIT 1 GLOSSARY REVIEW (Some words may be used twice, and some words may not be used at all.) 1031 tax-deferred exchange liquidity real estate broker $250,000 market value real estate brokerage firm 39 years mortgage interest real estate licensees $500,000 opinion renew a client for a fee person or company straight-line brokerage points tax benefits continuing education prelicensing two five property manager investors and business property taxes 1. The business of bringing people together in a real estate transaction is known as. 2. A broker/brokerage/firm is a licensed to perform brokerage services for. 3. Only a brokerage firm may employ to perform real estate services on behalf of the brokerage. 4. Buyers, sellers, landlords, and tenants hire the , not salespersons or broker-associates, for real estate services and agency representation. 5. A licensed appraiser’s job is to develop an of a property’s , based on established methods and the appraiser’s professional judgment. 6. The sale of a primary residence is exempt from capital gains tax until the gain exceeds for single taxpayers or for married taxpayers filing jointly, provided they occupied the residence for at least of the last years. 7. Depreciation is a tax advantage for estate investors and business property owners who are allowed to depreciate residential rental property over 27.5 years and commercial property over , using the method. 8. A real estate asset generally lacks , meaning it can take a long time to sell to convert equity into cash. 9. Prelicensing education is required to obtain a license and is required to renew a license. 10. A property manager must be a licensed. 11. Many real estate investors feel that help offset real estate’s lack of liquidity. 12. A rental property owner can hire a brokerage firm as to maintain and manage property on behalf of the property owner. 13. Investors and business property owners can use a to defer payment of capital gains tax. MREP_WB_4E_Student.indb 10 3/20/2019 6:39:08 AM  UNIT 1 QUIZ 1. The business of bringing people together in a real 7. To deduct items on personal income tax, the estate transaction is known as taxpayer A. real estate brokerage. A. should have the form prepared by an B. appraisal. accountant. C. real estate counseling. B. must use an itemized form. D. property management. C. may deduct only those items that apply to the taxpayer’s primary residence. 2. The process of developing an opinion of a D. must determine if a gain was made before property’s value (typically, market value) based on filing. established methods and a professional judgment is 8. An investor who does not want to pay capital A. appraisal. gains tax on the sale of an investment property B. home inspection. should consider C. appreciation. A. claiming the investment property as a D. property certification. primary residence. B. moving into the property for a year to get a 3. Selling real estate can take a long time when primary residence exclusion. compared to other types of investments. This C. not filing an itemized return. disadvantage of owning real estate is called D. using a 1031 tax-deferred exchange. A. appreciation. B. equity buildup. 9. Who do clients hire for representation in real C. lack of liquidity. estate transactions? D. permanence. A. Brokerage firm B. Salesperson 4. A disadvantage to owning real estate is C. Broker-associate A. it requires a loan to buy. D. Provisional broker B. the lack of liquidity. C. the cost to sell is high compared to the value. 10. The terms real estate agent, licensee, and real estate D. it appreciates. professional generally refer to A. real estate brokerage firms. 5. Fran sold her house that she owned in severalty B. licensed brokers. and had a capital gain of $175,000. To exclude C. real estate salespersons. that gain from her income for tax purposes, she D. all of these. must A. be at least 55 years old. 11. Which of the following statements is TRUE B. have lived in the house for 3 years. regarding real estate professionals? C. have lived in the house for 2 of the last A. Real estate professionals must be licensed in 5 years. each state where they practice. D. have lived in the house for 2 of the last B. Real estate professionals must be residents of 3 years. the state where they are licensed. C. Once licensed in their home state, real estate 6. What can be deducted from income taxes? professionals may practice anywhere in the A. Points, interest, and HOA dues United States. B. Taxes, points, and insurance D. Real estate professionals may practice real C. Origination fees, points, interest, and taxes estate only in reciprocal states. D. Points, insurance, taxes, and interest 11 MREP_WB_4E_Student.indb 11 3/20/2019 6:39:08 AM  12 Unit 1 Introduction to the Real Estate Business 12. Real estate brokerage activities include charging a 19. Commercial real estate includes all of the following fee for helping others land uses EXCEPT A. buy property. A. single- and multifamily housing. B. sell property. B. office buildings. C. manage property. C. retail facilities. D. do all of these. D. parking structures. 13. A real estate broker/brokerage/firm 20. Commercial and residential uses in the same A. is a person or a company. building or development is known as which type B. is licensed to charge clients a fee for brokerage real estate? services. A. Mixed use C. may employ real estate licensees. B. Special purpose D. is all of these. C. Commercial D. Residential 14. To act as an appraiser, a real estate professional must obtain a license issued by which entity? 21. A commercial property has improvements that cost A. The federal government $390,000. The depreciation allowance is 39 years. B. A local municipality What is the annual depreciation deduction? C. The state A. $1,000 per year D. The county B. $3,900 per year C. $10,000 per year 15. Which phrase BEST describes an appraisal? D. $39,000 per year A. An opinion of value B. A home inspection 22. A commercial property has improvements that cost C. A purchase contract $390,000. The depreciation allowance is 39 years. D. A mortgage How much depreciation would the owner be allowed to claim over an eight-year period? 16. A real estate brokerage hired to maintain and A. $8,000 manage property on behalf of the property owner B. $31,200 is C. $80,000 A. a property manager. D. $312,000 B. a salesperson. C. an appraiser. 23. Tax advantages for real estate investors such as D. an associate broker. depreciation and 1031 exchanges help A. offset real estate’s lack of liquidity. 17. Which type of license is required to manage a B. improve the longevity of improvements. property for another and for a fee? C. reduce equity buildup. A. Real estate broker D. improve the location of the property. B. Real estate salesperson C. Associate broker D. Appraiser 18. Which licensee works with borrowers seeking a mortgage loan to buy a home? A. Mortgage loan originator (MLO) B. Real estate salesperson C. Appraiser D. Broker-associate MREP_WB_4E_Student.indb 12 3/20/2019 6:39:09 AM  UNIT 1 BROKER-LEVEL QUESTIONS 1. A married couple has lived in their primary home 2. The main purpose of a 1031 tax-deferred for 10 years. One spouse was recently transferred exchange is to to another state, and the couple would like to A. eliminate the obligation to pay capital gains. rent their home because they hope to return to B. allow the investor to not pay any tax after the the area in the future. If the couple decide to sell third exchange. their home later, how many years may they rent C. give primary homeowners another option for the house and still qualify for the capital gain not paying capital gains. exclusion on the sale? D. allow an investor to defer taxes owed on a A. Zero years sale. B. Two years C. Five years D. Six years 13 MREP_WB_4E_Student.indb 13 3/20/2019 6:39:09 AM  UNIT 1 QUIZ ANSWERS 1. A The answer is real estate brokerage. Brokerage 11. A The answer is real estate professionals must be is conducted by a real estate broker (a person or licensed in each state where they practice. A company licensed to buy, sell, exchange, or lease licensee may obtain a license in any state by real property for others and for compensation) or meeting the licensing requirements of that state. by a real estate salesperson (sales associate) who conducts brokerage activities on behalf of the 12. D The answer is do all of these. Anyone who, for a broker. fee, assists another to buy, sell, or lease property must be a real estate licensee associated with a real 2. A The answer is appraisal. Licensed appraisers use estate firm. established and regulated methods of valuation to estimate a property’s value. 13. D The answer is is all of these. A brokerage firm may be a sole proprietorship up to a large corporation. 3. C The answer is lack of liquidity. Liquid assets can be sold quickly. Real estate lacks liquidity—so selling 14. C The answer is the state. Appraisal licenses are issued it is complex, and can take a long time. by the state. Like real estate agents, appraisers can be licensed in more than one state. 4. B The answer is the lack of liquidity. The lack of liquidity is a disadvantage of owning real estate 15. A The answer is an opinion of value. An appraisal is instead of something liquid, like stocks. the process of developing an opinion of a property’s market value, based on established methods and 5. C The answer is have lived in the house for 2 of the the appraiser’s professional judgment. last 5 years. Homeowners may exclude gain from the sale of a principal residence they have lived in 16. A The answer is a property manager. Only licensed for 2 of the last 5 years. The maximum exclusion is real estate brokers may manage a property for $250,000 for a single person. another and for a fee. 6. C The answer is origination fees, points, interest, and 17. A The answer is real estate broker. A property taxes. Remember POIT: points, origination fees, manager must be a licensed real estate broker in the interest, and taxes can be deducted. HOA dues and state where the property is located. principal payments are not deductible from income taxes. 18. A The answer is mortgage loan originator (MLO). MLOs are registered with the Nationwide 7. B The answer is must use an itemized form. Itemized Multistate Licensing System (NMLS), and licensed tax forms must be used to obtain deductions, such in the state in which they practice. as depreciation. 19. A The answer is single- and multifamily housing. 8. D The answer is using a 1031 tax-deferred exchange. Residential real estate generally includes any real A 1031 tax-deferred exchange would allow the estate where people live for a long term. Hotels are investor to defer paying capital gains until a later considered commercial real estate. date. 20. A The answer is mixed use. Mixed-use property 9. A The answer is brokerage firm. Only brokerage firms includes various property types in a single building are allowed to enter into agency agreements with or development. Mixed-use developments often clients. Licensees act on behalf of the brokerage include office, retail, entertainment, and residential firm that employs them. buildings. 10. D The answer is all of these. Terms such as real estate 21. C The answer is $10,000 per year. $390,000 ÷ agent, licensee, and professional generally refer to 39 years = $10,000 per year. anyone or any entity holding a real estate license, such as licensed real estate firms, brokers, and 22. C The answer is $80,000. $10,000 per year × 8 years salespersons. = $80,000. 14 MREP_WB_4E_Student.indb 14 3/20/2019 6:39:09 AM  Unit 1 Quiz Answers 15 23. A The answer is offset real estate’s lack of liquidity. Real 2. D The answer is allow an investor to defer taxes owed estate investors believe the advantages of owning on a sale. The purpose of a 1031 tax-deferred income-producing property (such as tax benefits) exchange is to defer taxes owed on the sale of an offset the disadvantages inherent to real property investment property. The deferral does not apply to (such as lack of liquidity). primary residences, and the investor will have to pay the taxes in the future. Broker-Level Questions 1. B The answer is two years. The couple must occupy the home two out of the last five years, so they may rent it for two years and then sell without paying gains. If they rent it for longer, then they would have to return to living in the home as a primary residence to meet the occupancy requirement. MREP_WB_4E_Student.indb 15 3/20/2019 6:39:10 AM MREP_WB_4E_Student.indb 16 3/20/2019 6:39:10 AM  UNIT 2 Real Property and the Law LEARNING OBJECTIVES When you have completed this unit, you will be able to accomplish the following. ff Discuss the concepts of real estate and ownership rights in real property. ff Explain the characteristics of personal property, fixtures, and trade fixtures. STUDY PLAN Before Class: Complete the reading assignment in Modern Real Estate Practice listed in the Course Syllabus. Read the Unit 2 Key Points. After Class: Complete the Glossary Review. Complete the Unit 2 Quiz. 17 MREP_WB_4E_Student.indb 17 3/20/2019 6:39:10 AM  18 Unit 2 Real Property and the Law KEY POINTS—UNIT 2 „„ There are two types of property: real property and personal property. „„ Real property is the land plus everything attached to the land (appurtenances), including improvements, rights, interests, and fixtures. Real property is conveyed by a deed. „„ Personal property (chattel) is everything that is not attached to the land, and may or may not be conveyed when the property is sold. Each item of personal property to be sold must be listed in and conveyed by a bill of sale. „„ Rights and interests in the land include air rights, water rights, mineral rights, oil and gas rights, and support rights. Improvements may be natural (growing) or man-made (fixtures). Personal property attached to the improvements becomes a fixture. Land is not classified as a fixture. „„ The tests for distinguishing fixtures from personal property are based on determining the intent of the parties. The tests include the method of attachment, adaptation of the item to the property, the relationship of the parties, and any provisions in a written contract. Fixtures are considered real property and are conveyed in the deed. I. REAL ESTATE/REAL PROPERTY A. Key points 1. Real estate is defined as the land plus appurtenances that are attached to the land. a) Appurtenances include improvements, rights, interest, fixtures, and privileges. (1) Appurtenances are attached to and transfer or. 2. Real estate is immovable. a) When a property is sold, the land and all appurtenances automatically transfer to the new owner, via a deed. B. Land 1. rights 2. rights 3. rights C. Improvements 1. Items with the intent of a) Examples: , , road, landscaping (such as roses, grapes, or other perennials) MREP_WB_4E_Student.indb 18 3/20/2019 6:39:10 AM  Unit 2 Real Property and the Law 19 D. Rights 1. Three forms of rights a) Land rights, such as surface, air, water, and mineral rights b) Ownership rights, such as the right of an owner to possess, transfer, and control the property c) Government rights, such as land-use controls, taxation, eminent domain, and escheat (Unit 3) 2. Land rights a) Surface rights—the entire surface of the land b) Air rights (1) Rights extend as high as can be legally used (2) Government controls air space above c) Water rights—right of water use (1) Riparian—land abutting (2) Littoral—land abutting (a) Note: Both are tied to navigation rights. (b) Ownership rights generally extend to the average high-water mark. (c) Water use rights do not automatically include the right of waterfront access to the water source. (Irrigation channels and ditches distribute water from the source.) (d) An off-waterfront owner of a water right i) does not have the right to cross another’s property to access the water source, but ii) could obtain the right of access from the waterfront owner via an easement. (3) Accretion—gradual addition to land through natural causes (4) Erosion—gradual wearing away of the land by natural forces (5) Avulsion—sudden loss of land by an act of nature (6) The property line is generally maintained even if the land is no longer there. (7) In states where water is scarce, ownership and use of water are often determined by the doctrine of. (a) The right to use water is controlled by the state rather than by the landowner adjacent to the water. MREP_WB_4E_Student.indb 19 3/20/2019 6:39:11 AM  20 Unit 2 Real Property and the Law (b) A landowner must demonstrate to a state agency that the owner’s plans are for beneficial use, such as crop irrigation. (c) The priority of water rights is usually determined by the oldest recorded permit date. d) Mineral rights (subsurface rights) (1) Transferred when property is sold unless reserved by the seller (2) May be leased or sold separately from the land (3) May be held by a 3. Real estate—transferred by a II. PERSONAL PROPERTY (CHATTEL) AND LAW OF FIXTURES A. Personal property key points 1. All property that is not real property a) is movable, b) permanently , and c) must be in the purchase contract to transfer with the property. 2. Personal property is transferred by a. B. Fixture 1. An object that was once personal property that has been an improvement so as to become real property. 2. Land is never a. 3. Once the fixture (personal property) is attached, it becomes an and is automatically transferred by the deed. C. Test for intent 1. Was the object affixed or installed with the apparent of improving the land? 2. Intent is evidenced by the following: a) ttachment (1) Permanence of method (2) = fixture (3) = personal property MREP_WB_4E_Student.indb 20 3/20/2019 6:39:11 AM  Unit 2 Real Property and the Law 21 b) daptation (1) Specific to individual property (2) Examples: c) greement (1) The is the final decision on what will be conveyed. (2) Fixtures must be from the purchase contract if the seller is not going to convey. D. Exceptions—personal property 1. Emblements are annually cultivated crops. a) Belong to the party who planted them, unless otherwise agreed 2. Trade fixtures are owner or tenant-installed additions that are a necessary part of their trade or business. a) Tenant may remove trade fixtures before lease termination. (1) If not removed by lease termination, the trade fixtures belong to the landlord. b) Sale of a business property does not automatically include trade fixtures. 3. If trade fixtures or emblements are transferred, they will be transferred by a bill of sale. MREP_WB_4E_Student.indb 21 3/20/2019 6:39:11 AM  22 Unit 2 Real Property and the Law UNIT 2 GLOSSARY REVIEW (Some words may be used twice, and some words may not be used at all.) appurtenances emblements littoral bill of sale excluded personal property built in fixtures prior appropriation deed freestanding rights do included riparian do not land trade fixtures 1. All property other than real estate is known as. 2. Real estate consists of land, improvements, , interests, and fixtures. 3. If a seller is taking a fixture, it must have been from the purchase contract. 4. Ownership of creekside rights is known as rights. 5. When articles of personal property, including landscaping, are permanently attached to the improvements, they become. 6. Real estate and fixtures are transferred with a. 7. Personal property is transferred with a. 8. are annually cultivated crops that belong to the party who planted them, unless otherwise agreed. 9. Owner or tenant-installed additions that are a necessary part of their trade or business are known as. 10. Emblements and trade fixtures automatically transfer with the deed. 11. In arid states, the right to use water for beneficial use is often determined by the doctrine of. 12. Fixtures such as a fireplace mantle are , while personal property is. 13. A deed transfers ownership of the land and. MREP_WB_4E_Student.indb 22 3/20/2019 6:39:11 AM  UNIT 2 QUIZ 1. The definition of real estate includes 7. All of the following apply to water rights A. land. EXCEPT B. improvements. A. riparian rights. C. rights. B. littoral rights. D. all of these. C. avulsion. D. appurtenant. 2. Which of the following would ordinarily be considered personal property? 8. Which of the following is TRUE about mineral A. Drapery rods rights? B. Freestanding refrigerator A. They represent an interest in personal C. Built-in bookcase property. D. Ceiling fan B. They often are held by a third party. C. They always belong to the state. 3. All of the following are true about fixtures D. Liquid minerals are considered personal EXCEPT property. A. fixtures typically start as personal property. B. if the seller is going to keep a fixture, it must 9. A fixture is defined as be excluded in the purchase contract. A. personal property attached to real property. C. trade fixtures are treated the same as all other B. a lien of record. fixtures. C. chattel. D. the intention, attachment, adaptation, and D. an encumbrance. agreement are all used to define a fixture. 10. A seller and buyer have negotiated an offer back 4. A tenant installed shelving as a part of her and forth. In the original offer, the buyer asked business. At the conclusion of the lease, the for the seller’s installed hot tub, which the seller tenant had excluded from all marketing, the MLS listing, A. may remove the shelving only if she and the listing contract. In the final accepted reimburses the landlord. offer, the hot tub is not mentioned. Who will B. must leave the shelving because it is the own the hot tub at closing? landlord’s property. A. The seller, because the seller gave notice C. may remove the shelving and is not required in the marketing and MLS listing and the to reimburse the landlord. listing broker was aware of the exclusion D. must leave the shelving but may demand that B. The buyer, because the hot tub is the landlord reimburse her. automatically transferred with the property because it is personal property 5. All of the following are considered fixtures C. The buyer; the seller would be in breach if EXCEPT the hot tub were to be removed A. plumbing. D. The seller, because it was excluded in the B. wiring. listing C. grapevines. D. draperies. 6. The principle of the doctrine of prior appropriation determines A. which user’s water rights have priority. B. who owns the fixtures. C. how personal property is distributed. D. who has access to water rights. 23 MREP_WB_4E_Student.indb 23 3/20/2019 6:39:12 AM  24 Unit 2 Real Property and the Law 11. The sellers wish to keep their prized rose bushes for 13. Waterfront property ownership rights generally transplant to their new property. Which statement extend to is the MOST accurate? A. the center of the lake or river. A. The rose bushes are fixtures that the sellers B. the line of prior appropriation. must exclude from the purchase contract. C. the opposite shoreline. B. Landscaping is considered personal property D. the average high-water mark. and is not included with the sale. C. Sellers are not allowed to exclude any fixtures 14. Real estate is defined as the land plus from the sale. appurtenances. Appurtenances include all of the D. Ownership of fixtures is determined by prior following EXCEPT appropriation. A. improvements. B. personal property. 12. The opposite of erosion is BEST described as C. rights. A. avulsion. D. fixtures. B. irrigation. C. accretion. D. mitigation. MREP_WB_4E_Student.indb 24 3/20/2019 6:39:12 AM  UNIT 2 BROKER-LEVEL QUESTIONS 1. All of the following are fixtures that may not be 2. Which of the following would have to be removed from a property without exclusion in the included in a purchase contract if the owner real estate contract EXCEPT wanted to convey them to a buyer? A. fireplace tools. A. Drapery rods and built-in shelving B. rose bushes. B. Dishwasher and garbage disposal in the C. an installed spa. kitchen D. storm doors. C. Rose bushes and grapevines D. Custom-built freestanding bookcase 25 MREP_WB_4E_Student.indb 25 3/20/2019 6:39:12 AM  UNIT 2 QUIZ ANSWERS 1. D The answer is all of these. Real estate includes the 11. A The answer is the rose bushes are fixtures that the land and appurtenances, such as improvements, sellers must exclude from the purchase contract. rights, interests, and fixtures. Fixtures are appurtenances and will transfer to the new owner unless specifically excluded in the sale 2. B The answer is freestanding refrigerator. Personal contract. property is not permanently attached to real estate. 12. C The answer is accretion. Erosion is the gradual 3. C The answer is trade fixtures are treated the same wearing away of land by water or wind. Accretion as all other fixtures. Trade fixtures are considered is the gradual accumulation of land by action of personal property and transferred by a bill of sale. water depositing sediment along a shoreline. 4. C The answer is may remove the shelving and is not 13. D The answer is the average high-water mark. While required to reimburse the landlord. Shelving is an dependent upon state laws, property ownership example of a trade fixture. Trade fixtures are the rights generally end at the average high-water tenant’s personal property and may be removed by mark. the tenant at the conclusion of the lease. 14. B The answer is personal property. Appurtenances 5. D The answer is draperies. Draperies are considered are everything that is attached to the land: personal property because they are not attached. improvements, rights, interests, and fixtures. By definition, personal property is movable and not 6. A The answer is which user’s water rights have attached to the land or improvements. priority. The doctrine of prior appropriation determines which user’s water rights have priority. Broker-Level Questions 7. D The answer is appurtenant. Appurtenances may or may not apply to water rights, depending on state 1. A The answer is fireplace tools. Fireplace tools are laws. personal property and would need to be included in the contract to convey. All other items are 8. B The answer is they often are held by a third party. fixtures and will convey without being mentioned In a sale, if the seller retains the mineral rights and in the deed. sells them separately from the surface rights, the new buyer who now holds the subsurface mineral 2. D The answer is custom-built freestanding bookcase. rights is called the third party. A freestanding, not attached, bookcase is personal property and would need to be included in the 9. A The answer is personal property attached to real sales contract to convey to a buyer. property. Fixtures are personal property that are attached to improvements. 10. C The answer is the buyer; the seller would be in breach if the hot tub were to be removed. The hot tub is a fixture and cannot be removed without the seller being in breach because the seller did not specifically exclude it in the purchase contract. 26 MREP_WB_4E_Student.indb 26 3/20/2019 6:39:13 AM  UNIT 3 Interests in Real Estate LEARNING OBJECTIVES When you have completed this unit, you will be able to accomplish the following. ff List the four government rights in land. ff Differentiate between freehold and leasehold estates and how they affect the transfer of title. ff Explain how the different types of encumbrances affect the use of property. STUDY PLAN Before Class: Complete the reading assignment in Modern Real Estate Practice listed in the Course Syllabus. Read the Unit 3 Key Points. After Class: Complete the Glossary Review. Complete the Unit 3 Quiz. 27 MREP_WB_4E_Student.indb 27 3/20/2019 6:39:13 AM  28 Unit 3 Interests in Real Estate KEY POINTS—UNIT 3 „„ An individual’s property rights are subordinate to government rights. The government has the power to determine land use, assess property taxes, regulate private property, and take private property for public use. „„ Police power is the power that implements public controls for land use. It allows state and local governments to regulate how a property owner uses the property (e.g., through zoning laws or other land-use restrictions such as environmental limitations), for the protection of the public’s health, safety, and general welfare. „„ The power of eminent domain is the government’s power to take private property for public use. Condemnation is the process that exercises this right. When private property is taken, the government must pay just compensation to the owner. „„ General real property taxes are called ad valorem taxes because the amount of the tax is based on the value of the property. General real property taxes are levied to support the general operation and services of government and create a priority lien. Special assessments are levied for the cost of specific local improvements, and only those pieces of property that benefit from the improvement are taxed. A property owner may appeal a tax assessment to the assessment appeals board. „„ If property is abandoned, or if a person dies intestate and without heirs, the property will escheat to the state. „„ An estate is an interest in property. There are two types of estates: freehold estates, which are estates of ownership, and leasehold estates, which are estates of possession. Freehold estates have an indefinite duration, which lasts until the property is transferred. A leasehold estate may be terminated per the terms of the lease contract or according to state law. The three freehold estates are fee simple absolute, fee simple defeasible (also called a qualified fee because there are deed conditions), and a life estate. „„ A fee simple absolute estate is the greatest and maximum form of ownership. „„ Fee simple defeasible ownership (also called determinable) is a qualified fee because this type of estate always has a condition that must be met. If the deed condition is broken, the estate may revert to the grantor or the grantor’s heirs. „„ A life estate is an estate measured by someone’s lifetime. The person who will receive the property when the life estate ends holds a reversionary or remainder interest. If no remainderman is named, the estate reverts to the grantor or grantor’s heirs. „„ A leasehold is an estate of possession and is a nonownership interest in property. The lessor (landlord) accepts rent from the lessee (tenant) in exchange for possession. There are four types of leasehold estates: estate for years, estate from period to period, estate at will, and estate at sufferance. „„ An encumbrance is any right, claim, or interest in property held by someone other than the property owner or the one who has a legal right of possession. „„ An easement is a right of use. Easements may be appurtenant or in gross. Easements may be created by express contract, necessity, or prescription. Once given, easements are not revocable. „„ Deed restrictions are privately created limitations on land use. They apply to present and future owners. The most common examples are restrictive covenants imposed on all lots within a subdivision by the original developer. MREP_WB_4E_Student.indb 28 3/20/2019 6:39:13 AM  Unit 3 Interests in Real Estate 29 „„ A lien is a financial encumbrance (attachment) against property. Liens may be specific or general. Specific liens are liens against a specific property. The most common specific liens are government real property tax liens, mechanics’ liens (construction liens), and mortgages. Judgment liens and IRS liens are general liens against all of a person’s assets. „„ An encroachment is an unauthorized use of someone else’s property, typically a physical object intruding onto neighboring property. Most encroachments are unintentional. A survey or ILC (improvement location certificate) would reveal an encroachment. „„ A license is similar to an easement; it grants permission to enter another’s property for a specific purpose. However, unlike an easement, a license does not create an interest in the property and is not an encumbrance against the title. Unlike an easement, a license can be revoked at any time. I. GOVERNMENT RIGHTS IN LAND A. Police power— of land 1. Right to enact and enforce laws governing 2. Planning, , building codes, permits, inspections, certificates of occupancy 3. Determines how land can be B. Eminent domain 1. Right to take for public use 2. Process used is called 3. Example of involuntary alienation—a compulsory transfer of title 4. Compensation = value plus damages C. Taxation—real property taxes and special assessments (Unit 15) 1. Property taxes: paid to the county where the property is located a) Enforced by a tax forfeiture lien 2. Special assessments: charges against specific properties that benefit from a public improvement a) Examples: paving, curb and gutter, street lights D. Escheat 1. Government’s reversionary right to that has been abandoned 2. Exercised when owner dies with no will (intestate) and without heirs MREP_WB_4E_Student.indb 29 3/20/2019 6:39:13 AM  30 Unit 3 Interests in Real Estate E. Remember the mnemonic device PETE 1. Police power 2. Eminent domain 3. Taxation 4. Escheat II. ESTATES IN LAND A. Estates 1. An interest or right in real property that allows or will allow possession 2. Two types a) Freehold estates: duration b) Leasehold (nonfreehold): Figure 3.1: Types of Estates Estates Freehold Leasehold (Ownership) (Possession) Fee Simple Fee Simple Life Estate Periodic Estate Estate at Absolute Defeasible/ Estate For Years Tenancy At Will Sufferance Qualified Fee B. Right of ownership: freehold estates 1. Fee simple absolute—most complete bundle of rights (also known as fee estate or fee simple) a) ownership estate in real property b) Lasts c) Transferable (alienation) and inheritable 2. Fee simple defeasible or a) Created by a deed condition, b) MREP_WB_4E_Student.indb 30 3/20/2019 6:39:15 AM  Unit 3 Interests in Real Estate 31 c) If a is violated, may revert to grantor (or heirs) d) Transferable and inheritable 3. Life estate a) Life tenant (grantee) is the property owner. b) Upon death of the life tenant, the estate returns to and reverts to either (1) the grantor— , or (2) a third party—. c) Life tenant may lease or even sell the property, but upon the life tenant’s death, the buyers/ tenants lose their interest. d) A life estate is transferable but not inheritable. C. Right of possession: leasehold estates 1. Key points of leasehold estates a) The tenant/lessee holds a leasehold estate. b) The landlord/lessor holds a leased fee estate with a reversionary interest. c) The purchaser of leased property obtains ownership the lease. d) Amount of notice to terminate, if required, is determined by the lease or state law. e) Upon termination, the right of possession reverts to the landlord. 2. Estate (tenancy) for years a) required b) Death of landlord or tenant terminate c) Sale of property does not terminate 3. Periodic estate (tenancy) a) upon landlord accepting rent for the period (1) Example: month to month (2) Terminated by advance notice of either party MREP_WB_4E_Student.indb 31 3/20/2019 6:39:15 AM  32 Unit 3 Interests in Real Estate 4. Estate (tenancy) at will a) Indefinite duration—tenant occupies at landlord’s discretion