Real Estate Licensing Class Notes PDF

Unit 1 - Real Estate Licensing How to get a license: 1.​ Be at least 18 years old 2.​ Pass a minimum 75-hour Prelicensing course 3.​ Apply and pay the fee, including a background check 4.​ Pass the NC License Exam 5.​ Pass the character review of the NCREC Who needs a license? Anyone who...

Unit 1 - Real Estate Licensing How to get a license: 1.​ Be at least 18 years old 2.​ Pass a minimum 75-hour Prelicensing course 3.​ Apply and pay the fee, including a background check 4.​ Pass the NC License Exam 5.​ Pass the character review of the NCREC Who needs a license? Anyone who lists, leases, buys, exchanges, auctions, or sells property for another for compensation. This includes anyone who receives referral fees for sending a buyer to a broker. LLBEANS Exceptions for needing a license: 1.​ Crier of an auction 2.​ For Sale By Owner 3.​ Selling the property of another with NO fee 4.​ Power of attorney or lawyer acting in the regular course of business 5.​ Appraisers, mortgage brokers, trustees, executors, or administrators of an estate 6.​ A salaried employee of a property management company or housing authority Compensation is anything from a gift card to free/discounted rent to a free week at the beach. Brokers are independent contractors. They must pay/set their own: 1.​ Business expenses (cellular phone, REALTOR dues, MLS dues, marketing expenses, and other business costs) 2.​ Sets their own hours and schedule 3.​ Pay income and payroll taxes The independent contract agreement creates an agency relationship between the licensee and brokerage. Unlicensed Assistants: Receive and forward phone calls, texts and emails to the employing broker or other licensees in a firm; Submit listings and changes to a MLS provider, but only if the listing or change is based upon data supplied by a broker; Assist a broker in compiling documents for closing; Research and obtain copies of documents in the public domain, such as the Registers of Deeds, Clerks of Court, or tax offices; Obtain keys for listed properties; Record and deposit trust monies under the close supervision of the office broker-in-charge (BIC); Type in offer to purchase, contract and lease forms with information provided by brokers; Check license renewal records and other personnel information pertaining to brokers at the direction of the BIC; Prepare commission checks and otherwise act as bookkeeper for the firm’s operating account under the close supervision of the BIC; Place “For Sale” or “For Rent” signs on property at the direction of a broker; Order and supervise routine and minor repairs at the direction of a broker; Act as a courier at the direction of a broker; Coordinate or confirm appointments between brokers and other persons; Schedule appointments for showing properties listed for sale or rent; Show rental properties managed by the broker to prospective tenants; Complete and execute preprinted form leases for rental property managed by the firm. Answer basic questions from prospective buyers and others about listed properties if the broker has provided the information in promotional materials. The 3 licenses issued in NC: 1.​ Provisional/Non-Provisional/Broker in Charge 2.​ Firm (Partnership, LLC, Corporation) 3.​ Limited Non-Resident (Licensed in another state, affiliated with a NC Broker, declared with Commission) NOTE: A firm license is required for any business other than a sole proprietorship. A sole proprietorship may not advertise, solicit business, have more than one broker, or hold trust funds without a BIC. License Statuses: 1.​ Current- Paid the renewal fee by June 30th 2.​ Expired- Did not pay the renewal fee 3.​ Active- Current, affiliated with a BIC (if provisional), met postlicensing education requirements, and continuing education requirements (8 hours of continuing education that consists of a 4-hour GENUP or BICUP and a 4 hour elective). Provisional brokers  have 18 months from the date of licensure to complete their postlicensing courses to stay on active status. 4.​ Inactive- Current, is not affiliated with a BIC (if provisional) or has not completed their CE by June 10th or did not complete their postlicensing courses within 18 months of licensure. Inactive licensees don’t have to take postlicensing or continuing education until they are ready to activate. If inactive for more than 2 years, the broker has to take 8 hours of CE and 60 hours of postlicensing courses within 6 months of sending in a request to activate. BIC Requirements 1.​ Has removed provisional status 2.​ Has either 2 years of full time experience or the part time equivalent over the last 5 years 3.​ Declare BIC status with the NCREC 4.​ Complete the 12 hour BIC course within 120 days of election or the preceding year Duties of a BIC 1.​ Directly supervise all provisional brokers 2.​ Ensure all brokers are on active status 3.​ Ensure agency records are complete, accurate, and up to date 4.​ Approve all advertising 5.​ Directly supervise the trust account 6.​ Ensure transaction files are complete and retained for at least 3 years from the last date of activity NOTE: Remember the 3 A’s (agency, active status, and advertising) and the 2 T’s (trust accounts and transaction files. The BIC is responsible for the trust money and records even if others are tasked with maintaining the trust account. Exceptions for the BIC Requirement 1.​ Sole proprietorship 2.​ Cannot engage in a transaction that requires a trust account 3.​ Cannot have others affiliated with them 4.​ Cannot advertise (signs, advertising online or in print, advertise referral services, manage rental property for others) Unit 2 - Real Estate Basics The Bundle of Rights transfers with the title to the property, and includes land, anything attached to the land, water, and air rights. 1.​ Homes, building, and trees in the ground are all examples of real property  2.​ The Bundle of Rights includes DEEP C (Disposition, Exclusivity, Enjoyment, Possession, and Control) 3.​ Ownership transfers by deed 4.​ It may be called a tenement (land held by an owner) or hereditaments (corporeal and incorporeal rights) 5.​ Real property is comprised of land appurtenances (things that run with the land like easements) Personal Property- 1.​ A pile of bricks is personal property, but a brick patio is a fixture; plants in pots are personal property, but plants in the ground are a fixture 2.​ A buyer may ask for personal property to convey (go with) the sale of the land/home, and it is transferred through a bill of sale; make sure that it is in the contract to be sure, even if the listing says the washer and dryer are to stay 3.​ A fixture is anything permanently attached to the home or the land 4.​ A trailer/manufactured home is personal property and registered with the DMV, with taxes paid on it like a car. To make a trailer/manufactured home real estate, it must be attached to a permanent foundation on land owned and the hitch and wheels must be removed. When the DMV title is canceled, the trailer is real property. NOTE: The total circumstances test determines if something is real or personal property 1.​ The intention of the party 2.​ The relationship of the attacher (owner vs. renter) 3.​ The method of attachment 4.​ Adaptation or customization NOTE: A buyer and seller may negotiate for anything, but the transfer of the personal property might have to be conducted through a bill of sale rather than the real estate contract. An appurtenance is an improvement on the land, like a driveway or utilities. Items used in trade or business are trade fixtures and remain personal property that the tenant can remove when they leave the property. If the tenant leaves the items, they become the property of the landlord. Agricultural fixtures stay with the property when the lease ends unless there is an agreement in the lease granting an exclusion. The Uniform Commercial Code affects when an item of personal property becomes a fixture. 1.​ The contractor or lender retains a security interest 2.​ The item remains personal property until full and final payment  3.​ The creditor can repossess the property if there is a default Severance is the act of removing real property. Fructus naturales- Planted trees and flowers remain when the property sells. Cultivated crops planted each year are personal property. The crops transfer unless otherwise agreed to in a contract. Fructus industriales- Also called emblements or fruits of industry. These are personal property and the person who planted them has the right to re-enter ONCE to harvest the crops. Riparian Rights- Rights of a person who owns property bordering a river or stream. Non-navigable- Property owner owns to the middle of the body of water. Navigable- Property owner owns to the banks of the river. NOTE: The state owns and controls the river. The state may or may not allow an owner that borders a river to build a dock. Littoral Rights- Applies to property bordering water with a tide. The rights of a person who owns on a large lake or ocean.The property line is the average high watermark and the State controls the foreshore. NOTE: The current owner will not retain water rights when the property transfers. Accretion- Gradual addition of land through the accumulation of soil. The deposit is called alluvium or alluvion. Reliction- Gradual increase of land when the water recedes. The water is permanently diverted. Erosion- Gradual loss of land. Avulsion- Sudden loss of land through a hurricane or flooding event. Air Rights- The owner of a property has rights to the airspace over their land. The government can limit the owner’s rights. Subsurface Rights- Allows the owner to remove minerals, gas, or oil below the property surface. These rights may be separated or severed from the land by a mineral deed or lease. Subjacent/Lateral Support- Changes to property cannot cause the loss of support for a neighbor. An owner cannot excavate their property without supporting the neighbor’s land. ​Ownership and Estates Freehold estates are indeterminable length that lasts a lifetime or longer: 1.​ Fee simple absolute- Ownership without a time limit with the the right to keep, sell, lease, or encumber the property. The highest form of ownership in real property. 2.​ Fee simple defeasible- Deed contains the property and any use restrictions which might be called the habendum clause. a.​ Fee simple determinable- allows automatic termination of ownership upon the occurrence of some predetermined event. Ownership reverts to the original owner without the need for a lawsuit. b.​ Fee simple conditional- Does not automatically terminate and requires a suit to quiet title asking the court to establish which party has a superior claim to the property.  2. Estate pur autre vie- Grants rights to property for the lifespan of another person. Non-inheritable estates: 1.​ Conventional life estate- Ends on the person's death to whom it was granted and reverts to a previous owner or their heirs. 2.​ Marital life estate- Created by statute when a will excludes a widowed spouse from assets owned in severalty (one owner). 3.​ Estovers- Life tenants can use timber from the property for fuel and repairs. 4.​ Life tenants can use timber and other resources from the property, but cannot sell the timber or other resources from the property. 5.​ Life tenants must pay property taxes, make repairs, and not damage the property. Homestead Exemption: 1.​ General liens like judgments and unsecured debts cannot force the sale of the property up to a certain amount. 2.​ The owner must pay secured debts like property taxes, mortgages, or any other obligation secured by the property. 3.​ The exemption is limited to one owner-occupied property. 4.​ NC provides a limited exception of $35,000 ($60,000 for unmarried individuals 65 and over). Non-Freehold Estates 1.​ Leasehold- Temporary possession of property to a tenant. 2.​ Leased fee- The owner’s interest in the property. Tenant pays the landlord the fee, wile the owner has a leased fee and freehold estate. 3.​ Lease contracts transfer with property upon sale unless the lease says otherwise. Types of non-freehold or leasehold estates: 1.​ Estate or tenancy for years- Has a definite end date. Can be for any amount of time. 2.​ Estate or tenancy from year to year- Periodic and indefinite in duration; automatically renews unless either party gives proper notice. 3.​ Estate or tenancy at will- Indefinite period, may terminate at any point without notice. 4.​ Estate or tenancy at sufferance- The tenant won’t leave. The landlord must evict. ​Types of Ownership Severalty- One person or a single business owns 100% of the property. 1.​ Sole owner can decide to convey the property 2.​ Property passes to the owner’s heirs 3.​ If the owner is married, the spouse will have to sign any listing contracts, purchase contracts, and the deed. Tenant-In-Common- Two or more parties own a property; ownership does not have to be equal. 1.​ One tenant can encumber their interest in the property, but not the whole. 2.​ All owners have an equal right of possession and there is only one deed. 3.​ An owner can will their share to an heir through probate. 4.​ One owner can sell their interest without approval. 5.​ If one owner wants to sell and the others don’t, the owner must file a Suit for Partition to force a sale. 6.​ Right of Survivorship; property share passes to heirs. Joint Tenancy- National standard requires the property be purchased at the same time, from the same source, and each owner has the same level of ownership. Laws vary by state. 1.​ Joint tenants have the Right of Survivorship. When one dies, their shares go to the other co-owners. 2.​ You don’t pass a joint tenancy to your kids. 3.​ A will cannot defeat joint tenancy. A joint tenant may sell their share, and the new tenant will own the stake as a tenant-in-common. 4.​ Owner who wants to sell must file a Suit for Partition against the other owners to force a sale. NOTE: NC does not favor joint tenancy. An attorney must include specific language in the deed to create this. Tenancy by the Entirety- Limited to couples who were legally married at the time of purchase. Even if the couple marries after the purchase, the deed will not change until the couple has it changed. This is the default ownership for married couples unless otherwise requested. Property will pass to the surviving spouse without probate. 1.​ Wills do not defeat the Right of Survivorship. 2.​ Separated couples continue to own as Tenants by the Entirety. 3.​ Divorce terminates Tenancy by the Entirety; property is then owned asTenants-In-Common, or one spouse may quitclaim to the other to transfer ownership. 4.​ Both spouses own 100% of the property. NOTE: You might be asking yourself why someone would choose to not hold their deed this way if married. Think of an older couple who has kids from previous marriages, and who wants to leave their share of a property to their children rather than to their spouse, who has assets of their own and children of their own. Estate planning is touchy. Refer anyone who wants something different on their deed to an attorney. Hybrid Ownership- Condominiums- 1.​ Owners own wall to wall and their airspace, and co-ownership of common areas; garages and storage may be an extra purchase. 2.​ Owners must pay property taxes, with the common area being included in the unit’s tax value. 3.​ May be owned in severalty, tenants-in-common, or tenancy by the entirety. 4.​ In the event of foreclosure, only the unit is foreclosed upon. 5.​ Owners pay HOA dues to cover common area expenses. 6.​ Created by recording a declaration, buyer has 7 calendar days to rescind the contract without a penalty, the owner must provide a buyer with a resale certificate that outlines all the monthly common area expenses and fees. 7.​ May be residential, commercial, or industrial. Townhouse- 1.​ Party wall easement of 50%. 2.​ HOA owns common areas 3.​ Owner owns their unit and the land it sits on. 4.​ Lienholders foreclose against the unit, not the entire complex. Coops- 1.​ Corporation owns the property and a buyer buys a share of stock and a proprietary lease. 2.​ Buyer does not own their unit. 3.​ Shareholders pay fees to cover debt obligations, property taxes, and maintenance. Timeshare- 1.​ Must have the right to use the property for 5 non-consecutive periods over at least 5 years. 2.​ Buyer has the right to terminate within 5 days of the contract, and the developer must keep money in an escrow account for 10 days. 3.​ The Commission can fine $500 per occurrence for failure to follow the timeshare act. 4.​ A project broker supervises licensees like a BIC. 5.​ Nationally timeshares may be called vacation leases, interval ownership, prepaid hotel reservations, club memberships, limited partnerships, or vacation bonds. NOTE: Remember 5-5-5-10 Trust- Trusts hold property for a third party beneficiary. Trustees make buy/sell decisions and it is VITAL that a broker be careful when handling property owned by a trust to ensure that they are working with the trustee to transfer property. Beneficiaries have no say. Planned Unit Development- 1. Owner holds title to the property 2. HOA or neighborhood fees common 3. Owners are members of the association that owns the other areas of the development 4. Flexible zoning with more open space and rec areas Forms of Business Ownership Sole proprietorship- One owner, no limit to liability, does not require a firm license. General partnership- Two or more owners that may have employees or independent contractors. No limit to liability for general partners, liability is limited to the money in the business, income goes to the partner’s personal tax return, requires a separate firm license in NC. LLC- A pass-through entity that avoids double taxation while limiting liability like a corporation. 1.​ LLC owners will not lose personal assets to satisfy LLC liabilities. 2.​ Owners are members or managers. 3.​ Owners and managers can bind the entity to contracts. 4.​ Requires a separate firm license in NC. Corporation- Owned by shareholders that shield personal assets against corporate liabilities. 1.​ C-Corps pay taxes at the corporate level and shareholders pay taxes for dividends and distributions. 2.​ S-Corps avoid double taxation while maintaining liability protection of a corporation. 3.​ Corporations require a separate firm license in NC.  4.​ Directors of the corporation pass corporate resolutions to authorize the purchase or sale of real estate. ​Encumbrances to Real Property Encumbrances include liens, easements, encroachments, deed restrictions, and restrictive or protective covenants. Easements- Nonpossessory right in the land of another that should ideally be in writing. 1.​ Does not create an ownership interest. 2.​ May be express (agreed to) or implied (born out of action). 3.​ May form by adverse possession, operation of law through condemnation, or by the action of the parties out of necessity (think of a landlocked lot that requires traveling over a neighboring property). Appurtenant easements- Create a dominant and servient estate. Dominant estate gets the benefit, servient gets the burden. Think of sharing a driveway that passes through the property of your neighbor who has road access so you can get to your property. 1.​ Easement stays with the property. 2.​ A merger of the lots terminates the appurtenant easement. 3.​ An easement by necessity becomes an appurtenant easement. Easement in Gross- Grants the right to use the property of another without owning an adjoining lot and can be personal or commercial. 1.​ Personal easement in gross allows a person to hunt, fish, or cross the property of another and may terminate upon the death of the easement owner. 2.​ Is not revocable for the life of the easement owner. 3.​ Commercial easement in gross grants businesses or entities the right to install billboards, cellular towers, railroad tracks, or other utilities. 4.​ Can be assigned or conveyed. 5.​ Will not automatically terminate in a bankruptcy, sale, or non-use. Easement by Prescription- Acquires property through hostile action. 1.​ The taking party must meet HI OCEAN (hostile, intentional, open, continuous, exclusive, adverse, notorious). 2.​ Continuous possession must be for 7 years with the color of title– a mistaken belief someone owns that property– or 20 years without the color of title. 3.​ New owner can tack on to the previous owner’s time to establish continuous use. 4.​ Fails when not continuous. 5.​ Also called a prescriptive easement or adverse possession. 6.​ The claimant must file suit to quiet title.  7.​ The Torrens System protects registered property from adverse possession. NOTE: The owner doesn’t need to know someone has taken their land, the property owner is to monitor and act against squatters to prevent a claim. License- Grants permission to use a property for something like hunting, fishing, or to cross into another property. 1.​ Not assignable or inheritable. 2.​ Can be revoked at any time. 3.​ Automatically terminates on the death of the property owner or the person granted the license or the sale of the property. How to terminate an easement- 1. The purpose no longer exists (roads were built, properties merged, etc.) 2. Non-use of prescriptive easement 3. Release by the dominant owner 4. Expiration (e.g., your neighbor is building a home and their own driveway, but asks permission to use your private road to get to their property for 6 months while that happens) 5. Abandonment by the dominant owner (intention matters) Encroachment- An improvement crosses the property boundary of another. Surveys discover encroachments, not title searches. Lis Pendens- A notice of pending litigation that prevents an owner from transferring property to another before the court decides the case. 1.​ Encumbrance is binding on future owners if the party wins against the current owner. 2.​ A new owner would be liable. Writ of Attachment- Court-ordered seizure of property to keep the owner from selling assets to pay a debt. ​ Writ of Execution- Instructs sheriff to sell the property. ​Land Use Restrictions Red flags- A broker should investigate further or recommend a principal client take action to find out about potential problems with a property. Deed restrictions- Private land-use restrictions against one property. They create defeasible estates (fee simple/fee simple conditional). The limits may require the property only be used in a certain way or not used in a certain way. Restrictive or protective covenants- Private land use restrictions placed on a property create conformity in a neighborhood outlined in a deed or a separately recorded declaration. Reminder Owner of Development (Builder of Subdivision) makes CCR. 1.​ Covenants are enforced by an HOA or an owner in the neighborhood. Best practice is to go through the HOA first so they can give notice seeking compliance. 2.​ The HOA or an owner can seek court action by suing for an injunction. 3.​ Restrictions run with the land. 4.​ Covenants can terminate with the agreement of 100% of the property owners or a lesser amount as outlined in the restrictions. 5.​ An HOA can lose the right to enforce covenants through laches if they fail to enforce beyond the statute of limitations. (No action for 3 years.) 6.​ Nationally may be called CC&Rs (covenants, conditions, and restrictions). NOTE: CC&Rs are often more restrictive than zoning or planning restrictions. When at odds, the more strict of the two will apply. Any restrictive covenants that would violate current law should not be enforced. ​Liens General liens- Against all property, real and personal, owned by a person. 1.​ Judgments are awarded by the court and become a lien once recorded. Judgment liens in NC are 10 years unless re-recorded. 2.​ Income tax liens may be state or federal. They do not receive special treatment and follow lien priority. 3.​ Personal property tax liens are usually for cars or other taxed property owned. Specific liens- Against one property. 1.​ Real property taxes, allowed by the Machinery Act: a.​ Attaches on Jan 1 of the current year b.​ City/county set tax rate by July 1 and mail the tax bill in August c.​ Taxes are payable September 1 and late after January 5 of the following year. d.​ Taxes are per $100 of assessed value (NC) e.​ May be changed every year, but MUST be changed every 8 years (octennial reappraisal) f.​ There may be a 4 year horizontal reappraisal g.​ The municipality’s tax base and budget requirements determine the tax rate h.​ All real property in NC is subject to taxation  i.​ National property tax rates are expressed per thousand and referred to as a mills rate NOTE: If you see mills rate, it’s National. Special assessments- May be public (water and sewer lines, paving, etc.) or private (roof replacement at the condo clubhouse. Financing documents like a mortgage or deed of trust create financial liens specific to the property. Why are liens recorded? 1. Constructive notice- Occurs when documents are recorded. 2. Actual notice- Party has actual knowledge of the lien because they looked up the property records. NOTE: NC is a pure race state, which means that the first to record a lien is the first to get paid. Lien Priority- 1. First to record is first in line. Mechanic's Liens can jump in priority. 1. If filed within 120 days of the last date of labor or materials are provided. 2. If a suit is filed to enforce the lien within 180 days from the last date of labor or materials. 3. When properly filed, the lien will jump back to the first day of labor or that materials were provided. 4. In NC, projects that exceed 30K AND are not the primary residence require the appointment of a lien agent and the contractor must file notice within 15 days of commencing work. Who gets paid first in a typical sale? 1. Real property taxes and public special assessments are paid first 2. Liens in order of recordation Who gets paid first in a foreclosure? 1. Costs of sale 2. Real property taxes and public special assessments 3. Liens in order of recordation except– a.​ Mechanics Lien (may jump in line) b.​ Voluntary subordination of a superior lien NOTE: Property taxes are superior to all other liens, assessments, charges, rights, and claims. ​Government Rights in Land Police Power in Real Estate: 1. Zoning- Rezoning is a complex process, a variance is a small change. 2. Building Codes- Sets standards for construction of buildings. 3. Eminent Domain- The right to condemn privately owned land for public use. Eminent Domain is the power and condemnation is the legal action. 4. Taxation 5. Escheats- Government right to seize abandoned property when the owner dies intestate without heirs and a will. NOTE: Escheats will not apply when heirs can be found after someone has died intestate. (e.g., Scrooge dies intestate. His nephew Bob is given his property after it is determined that Bob is the sole living family member. However, if no living family members remain, NC would claim Scrooge's property through escheats. The important part is that there must be no living family members who can be located before escheats occur.) THIS IS REALLY REALLY REALLY REALLY REALLY REALLY REALLY REALLY testable. Do not kill the whole family. Unless the question says “and no heirs can be found”, the property will transfer according to state laws. Legal non-conforming use- Zoning is changed after a change has already occurred in the use of a property. (Matt buys a large home and converts it to a duplex. A year later, the town changed the zoning to only allow single family homes. Matt is not obligated to change his property back to a single family as the use of his property as a duplex pre-dates the zoning change. However, if the next owner changes the house back to a single family, it can never be changed back to a duplex again.) Illegal Use- A property violates zoning restrictions after the restrictions are in place. Specific use permit- Development that will benefit the community, for instance putting a daycare or hospital in an area where the zoning might not otherwise allow it. Overlay District- Adds an additional layer of rules to a particular area. Building restrictions, flood zones, aesthetic rules, historic zones. Subdivision regulations- 1. Requires approval by city planning and zoning or city council 2. Preliminary approval of the plat map must be determined before lots can be offered for sale 3. Sale cannot close until final approval occurs and the final plat is recorded 4. The buyer cannot close on the sale for 5 days after final approval 5. The buyer may terminate the contract without breaching within 15 days if the lot has materially changed from the preliminary plat. Are the roads public or private? Ask the DOT: https://connect.ncdot.gov/resources/gis/Pages/Database-Map-HB620.aspx Perc test- Also called a soil suitability test. Unit 2 Module 4 1. Metes and Bounds 2. Government Rectangular 3. Recorded Documents Metes and bounds are clockwise. You finish where you began or it is considered to be imperfect. 1. Mete- Distance from point to point in a description. 2. Bounds- Direction from one point to another. 3. POB- Point of Beginning, sometimes called Point of Commencement. Monuments are fixed reference points. If a monument is lost, a good effort is made to have a permanent reference marker- latitude and longitude. Government Rectangular System (NATIONAL)- 1. 36 Sections in a Township 2. 640 Acres in a Section 3. 43,560 square feet in an acre 4. 16 – The School is typically located in this section. 5. Base Lines - East to West 6. Principal Meridians - North to South Plat book and page, reference to the recorded deed book and page, reference to the property tax id, reference to the lot and block are the most common methods used to identify property. Property surveys will show buildings, setbacks, easements, and encroachments. Strongly encourage your buyers to have a survey done and get it in writing if they opt not to. Unit 3 - Agency Customer- Parties to the transaction who have not hired the broker or the broker’s firm. They are owed HFD (honesty, fairness, and disclosure of material facts). Client- Signed agreement with the broker’s firm. They are owed OLD CAR. OLD CAR- Obedience of lawful instructions, loyalty, disclosure, confidentiality, accounting, and reasonable skill/care/diligence. Licensees owe customers (third parties who they do not represent) honesty, fairness, and disclosure of material facts. The principal (client) owes the firm cooperation, truthfulness, and compensation. The principal can be held liable for civil damages for the actions of their agent. Obedience means to follow the client’s lawful instructions. Best practice for a broker is to be clear with clients that what the broker knows about material facts must be disclosed to all parties and that the broker will not violate fair housing laws..​ ​ Lawful instructions- Limits on when to show the property, requesting no one smoke in the property, limiting the number of photos of the home on the internet, etc.​ ​ Unlawful instructions- Telling the broker not to show the home to anyone from a protected class, refusing to be shown offers less than $XXX,XXX, ordering the broker to not tell potential buyers that the roof leaks, etc. TYPES OF AGENCY Universal- POA, authorized to stand in on behalf of the party and may sign as them. Sometimes called attorney-in-fact. General- Broad range of authority, can sign agency agreements on behalf of the brokerage, can bind property owners to lease agreements. Special- Buyer or seller makes all decisions, licensee has no decision making authority. WWREA- Disclosure given to all residential and commercial sales parties at first substantial contact. Not used in property management or leasing. The WWREA outlines the types of agency a brokerage may offer and informs the customer that until they hire the licensee, anything they say may be used against them in negotiations. Initial contact- Telling the seller or seller’s agent who you work for. “Hi, I’m Joanna Smith from Keller Williams, and I have a client who would like to take a look at your property listed at 123 Main street. Can you tell me a little about it?” ​ First substantial contact- When conversation shifts from facts about a property to facts about people (e.g., Joanna is hosting an open house and a potential buyer asks about the school district, but then mentions that they are pre-approved for up to $450K and they have $100K to put down; Joanna should present the WWREA and warn them to not share anything they don’t want used against them in negotiations). Subagency- In the state of NC, a licensee must work for someone in the transaction. If the buyer will not hire you, you automatically work for the seller. Why would someone do this? Maybe they think they are really good at negotiations. Maybe they don’t trust brokers and want to go it alone. It doesn’t matter. A buyer who will not hire an agent, but wants an agent to fill out the paperwork for them is a customer (owed honesty, fairness, and disclosure of material facts), but does not get OLDCAR as a client would. Agency agreements belong to the firm, not the broker. Multi-agent firms- If the broker leaves the firm, the client stays with the firm and another agent is assigned to sell their home or help them buy a home. Literally any other agent in the firm can stand in for the original agent in a multi-agent firm. ​ Sole proprietorship firm- If a client has hired a sole proprietor and the sole proprietor dies or is declared insane, the agreement dies. There is no one to stand in for the Co-brokered transaction- Two firms cooperate on a single sale, with one party representing the buyer and the other representing the seller. What kind of agent are you? 1. Buyer's Agent 2. Seller's Agent 3. Dual Agent 4. Designated Dual Agent 5. Subagent Types of Agency Relationships Single Agency- The firm represents only one party to the transaction, either buyer or seller. (Broker is a coach to their side.) Dual Agency- One broker represents both buyer and seller. (Broker is the ref, just making sure the ball is inflated and the rules of the game are followed.) Designated Dual Agency- The BIC appoints brokers to represent buyer and seller. (You are assigned a team and you are back to being a coach.) Rule for dual agency- Brokers may not advise, guide, or counsel. To help one side hurts the other, so the broker does not do anything but fill out forms and organize inspections. Rules for designated dual agency- No BIC and PB in designated dual transactions. No personal and confidential information about the other side of the transaction may be known by the broker appointed to represent a party. NOTE: Listing agreements are in writing from inception. Both buyer and seller must agree to dual agency. If a seller has initially refused to allow dual agency, no broker from the listing firm may show their property to a buyer client or buyer customer. If the seller changes their mind about dual agency, it must be in writing.​ ​ 1. If a buyer orally agrees to dual agency, the oral authorization must be reduced to writing before making an offer (communicating the offer to the other side). 2. Buyers and sellers may change their minds about dual agency. 3. Brokers MUST have consent of both parties to engage in dual agency. 4. The brokerage may not offer dual or designated dual agency. Some firms are buyer only or seller only, or will not allow dual agency. Agency agreements that are in writing from inception- 1.​ Listing agreements 2.​ Property management agreements 3.​ Any agreement that is exclusive Written agency agreements must: 1. In writing 2. Have non-discrimination language 3. License number 4. List price 5. Rule A.0104 NOTE: The Commission does not create the forms; forms are prepared by the NC Association of Realtors and the NC Bar Association. Agreements that may be oral at inception- 1.​ Buyer agency agreements 2.​ Tenant representation agreements Buyer agency agreements- 1.​ Must be in writing if broker and buyer seek exclusivity (NC) 2.​ Must be reduced to writing before making an offer 3.​ The firm seeks compensation from the seller before seeking payment from a buyer client NOTE: If the seller is not paying enough to compensate the buyer’s agent, the buyer is responsible for making up the difference. Listing agreements- 1.​ Brokers should ask potential sellers to gather information about the property (permits, HOA docs, deed, survey, current mortgage statements, etc.) before the presentation, but SHOULD NOT look at these until the seller hires them. 2.​ Listing agreements must be in writing from inception, have a definite end date, and contain the fair housing language. All owners must sign the listing agreement to avoid any potential issues. 3.​ Agreements should state the price, legal description of the property, commission rate, and how the commission will be calculated. 4.​ Listing price BEFORE the seller signs the listing contract. Buyer commission typically comes from the seller; if there is a shortfall the buyer is expected to make up the difference. Disclose this to buyers to ensure they understand 1. Retainer fee- Paid upfront, may or may not be credited at closing. (Buyer agency.) 2. Success fee- Payable upon acceptance of an offer, paid at closing. Commission is earned when the listing broker has found a ready, willing, and able buyer on terms acceptable to the seller. Commission is earned by a broker agent when the buyer’s offer is accepted by the seller. When is a commission earned? 1. License in good standing 2. Valid contract 3. Procure a ready, willing, and able buyer 4. Acceptance of offer To be paid- 1. License in good standing 2. Valid agreement 3. May be exclusive or non-exclusive 4. Find property 5. Acceptance NOTE: If a client will not pay, your firm must be the one to decide to sue for compensation. Disclose additional compensation orally before the buyer considers making an offer and in writing before presentation of an offer. FSBO Protection Agreement- In writing, a FSBO agrees to pay your commission. Commission payment- 1. Firm is paid the whole commission 2. Compensation is split through terms of employment contract with brokerage firm 3. Broker is paid by their firm after the brokerage/firm share is deducted, not at the closing table IMPORTANT NOTES ABOUT COMPENSATION 1.​ Payment of compensation does not mean there is an agency relationship 2.​ Agency agreements determine brokerage compensation 3.​ The seller or landlord typically compensates the listing broker/property manager. It may be shared with the buyer/tenant representative 4.​ Compensation is negotiable 5.​ The Sherman Antitrust Act forbids price fixing or boycotting 6.​ Brokerage firms set the amount of commission and may not collude with other firms to set the rates 7.​ The right of a broker to receive compensation is determined by the employment contract between broker and brokerage Types of listing agreements- 1. Open listing- Agent vs. Other Agents and the seller. Whoever brings the buyer is paid unless the seller finds the buyer. 2. Exclusive agency listing- Agent vs. Seller. If the seller finds the buyer, they don't have to pay any compensation to the agent. 3. Exclusive right to sell (most assurance of a broker getting paid)- No matter who brings the buyer, the firm and agent are guaranteed to be paid the commission, and the listing broker gets paid no matter how the property is sold, exchanged, or transferred. 4. Net Listing- The seller and the broker decide what the required sales price to get a certain amount will be and the broker gets paid only whatever is above that price. 5. Limited Service Agreements- Also called a' la carte. Sellers can decide what services the broker will help them with and pay for those services only at either a flat or reduced fee. NOTE: It does not limit the duties of a broker though. Agency relationships terminate: 1.​ Full performance (closing) 2.​ Death of the seller or buyer 3.​ Destruction of the property 4.​ Operation of law (bankruptcy, eminent domain, sole practitioner dies, etc.) 5.​ Mutual agreement Protection period- A set period of time after a listing expires where, if someone who viewed the home during the time it was listed purchases or has the home transferred to them, the broker can still collect their fee. This might also be called an extender clause, override clause, or tail clause. SPECIAL TERMS- Licensee is the same as broker or agent Responsible broker is a Broker-In-Charge Affiliated or Associate Broker is a broker who is affiliated with a firm Provisional broker is also called a salesperson RPOADS- Property sales in NC require the seller to provide the buyer with the Residential Property and Owners Association Disclosure Statement (RPOADS) unless exempt: 1.​ Exemptions are new construction, foreclosure, transfer between co-owners, or when the buyer already has possession of the property. 2.​ Sellers are not obligated to disclose property conditions, but agents/brokers are. 3.​ Agents/brokers should explain the property disclosure form to their principals/clients, but should not fill it out for them. 4.​ A buyer may terminate the contract and get a full refund of earnest money and due diligence fees if not provided with a copy of the RPOADS no later than the time the buyer makes an offer to purchase your property. If you do not, the buyer can, under certain conditions, cancel any resulting contract. 5.​ If the buyer opts to cancel the contract it must be the earlier of 3 calendar days following receipt, three calendar days from the effective date of the contract, or taking possession of the property. Puffing is exaggeration or subjective statements that are not easily verifiable. (The best house in Durham, the nicest neighborhood in town, etc.) Mineral, Oil, and Gas Disclosure (MOG)- Sale of residential property requires the MOG disclosure even in the sale of new construction. Failure to disclose or providing false information is:​ ​ Willful- Deliberately Negligent- Careless Misrepresentation- Said something incorrect Omission- Said nothing (and should have) Willful Misrepresentation would be a listing agent agreeing with a buyer or their agent that the HOA dues are set for the next 3 years when the listing agent knows that the dues are going up in the next year, which is why the sellers are selling. Willful Omission would be an agent not telling a buyer that there is standing water in the crawl space under the house on rainy days and just hoping it doesn’t rain before the inspection. Negligent Misrepresentation would be telling the buyer that they can put a shed in the backyard when you are just going by what the seller told you and not checking with the HOA to make sure. Negligent Omission would be failing to mention that the roof leaks because you forgot the seller told you.​ ​ Caveat Emptor- NC is a caveat emptor state. Buyers are responsible for doing their own due diligence. The seller cannot lie or conceal, but the buyer is ultimately expected to make sure they can have chickens in that neighborhood or that there are no encroachments (again, suggest they have a survey). Latent defects- Hidden and not easy to find, like a cracked beam behind a wall. Patent defects- Visible and easy to see, like a crack in a foundation. Material facts are anything that would have an effect on a seller’s decision to sell or a buyer’s decision to buy. MATERIAL FACTS: 1.​ Property conditions (e.g., leaking roof, foundation crack, etc.) 2.​ Zoning changes 3.​ HOA fees 4.​ Area ordinances (e.g., your buyer wants chickens, but zoning forbids chicken) 5.​ School zone 6.​ Bus stop in front of the house/train tracks behind the house 7.​ Meth lab 8.​ Pending foreclosure 9.​ Short sale 10.​Environmental conditions (e.g., well is contaminated) NOT MATERIAL FACTS: 1.​ Death, suicide, or violent crime in property (stigmatized property) 2.​ Illness of prior owner  3.​ Mold-like substance that is not toxic 4.​ Sex offenders in the neighborhood 5.​ Ghosts Stigmatized property- A psychologically impacted property Pro Tip- Stick to facts about the property, not about the people Environmental hazards- 1.​ Lead 2.​ Asbestos 3.​ Radon 4.​ Formaldehyde 5.​ Toxic mold 6.​ Underground tanks that are leaking 7.​ Chemical waste 8.​ Leaking polybutylene pipes 9.​ EIFS (even if removed) NOTE: The best person to evaluate a property for environmental hazards is an environmental engineer. Recommend to your buyers that they have thorough inspections and evaluations of the property before purchase. CERCLA/Superfund- Comprehensive Environmental Response, Compensation, and Liability Act; established a fund to clean up hazardous waste. Retroactive liability- Previous owners of a property may be liable. Strict liability- Current owners are responsible for the polluted property. Lead-based paint- Causes damage to brain, kidneys, and nervous system. 1.​ Paint, dust, soil, and pipes may contain lead 2.​ Buyers have 10 days to test for presence of lead 3.​ Landlords do not have to grant a tenant opportunity to test for lead, but must give a lead-based paint disclosure and pamphlet 4.​ No federal law requires lead paint be removed by sellers or landlords Remediation removes lead from property. Encapsulation seals the lead paint. Radon- An odorless, colorless, tasteless radioactive gas that causes lung cancer. Concentrations of 4.0 picocuries or higher exceed safety standards and would be considered a material fact. Installation of a ventilation system can dissipate the gas. Asbestos- Found in insulation, siding, or floor and ceiling tiles installed before 1978. It is a danger when it becomes friable and can cause mesothelioma. Encapsulation is the best way to reduce exposure risk. Mold- Some mold is toxic and requires remediation. Testing must be performed to determine if the mold is toxic. French drains, pumps, fans, and dehumidifiers will reduce or eliminate the moisture that allows the mold to grow. OTHER CONTAMINANTS- Carbon monoxide, urea-formaldehyde, meth labs. NC Environmental Laws- NC Leaking Petroleum Underground Storage Tank Cleanup Act. Unit 4- Lead Generation and Advertising Do Not Call law prohibits calls to anyone on the do not call list unless: 1.​ There is a prior business relationship in the last 18 months 2.​ Permission is granted to call (3 months exemption) 3.​ The licensee is calling friends or family Licensees may not call FSBO or expired listings to solicit the business if the owner is on the Do Not Call list unless an exception exists (e.g., there is a client who wants to see the FSBO property). Do Not Fax/Junk Fax- Prohibits unsolicited faxes, must contain a prominent opt-out, no time limit based on prior business relationships. CAN-Spam Act- Requires prominent opt-out on emails. The Realtor Code of Ethics prohibits realtors from soliciting another member’s clients. Tortious interference with a contract could result in a lawsuit. All ads must be approved by your BIC. This includes print, business cards, online ads, yellowpages, etc. All ads must include the full brokerage name. Acceptable advertising- 3 bedroom, 2.5 bath home in the heart of Graham, steps from downtown. New roof, fresh paint, and an updated kitchen are just a few of the amenities. Call 555-555-1212 Joanna Carter, Keller Williams Platinum Properties. Unacceptable advertising- 3 bedroom, 2.5 bath home in the heart of Graham, steps from downtown. New roof, fresh paint, and an updated kitchen are just a few of the amenities. Call 555-555-1212 Joanna FAIR HOUSING Federal Civil Rights Act of 1866 prohibits sellers from discriminating based on race when selling or renting all property and is enforced by private lawsuit. A buyer can discriminate, but cannot ask a licensee to participate. Anyone who feels they were discriminated against must file a private party lawsuit if discriminated against. It doesn't have to be intentional to be damaging. Federal Fair Housing Act of 1968 established protected classes in housing- Familial status (pregnant women, children under the age of 18), Race, Sex, Handicap, Color, Religion, National Origin (FRESH CORN) HUD hears Federal Fair Housing complaints, assigning fines of $16,000 for the first offense and $65,000 for continued offenses. Fines can be increased to $100,000 per offense if the Justice Department finds a pattern of discrimination. And if you don't show up, fines of up to $100,000. EXEMPTIONS- Retirement communities (55+ or 62+), family size that is too large for the space for rent, owners who own no more than 3 homes and sell no more than every 2 years and who sell their own property without a broker as long as they don't use discriminatory ads. Other exemptions are renting of 1-4 units that are owner occupied (man will not rent a bedroom in his home to a female undergrad from a local university), religious organizations renting or selling for members, private clubs (as long as they don't discriminate based on race). Discrimination-proof your ads- Talk about the property, not the ideal renter, give truthful information, don't exclude protected classes or preferences. North Carolina Fair Housing Laws- No exemption for sale of property (even FSBO) based upon race, but an owner can discriminate if they are renting a 1-4 unit property if they themselves live there or they have a relative living there. Single-sex dorms are also allowed. Complaints must be filed with the North Carolina Human Relations Commission within a year of the discrimination and the determination has to be made within 100 days of receiving the complaint. Americans with Disabilities Act- Businesses must be accessible to people with physical or mental disabilities. A company can be fined for not being ADA compliant. Apartment complexes with more than 4 units must be accessible, and public areas of rental offices and real estate offices must be fully accessible. Landlords must let disabled tenants make reasonable changes to a property at the tenant's expense. Installing a ramp, widening a doorway, lowering a countertop, putting in grab bars, assigning a parking space, etc. The tenant might have to put it back the way it was before they moved in or pay the landlord to change it back. Some landlords instead embrace that their property is handicap friendly and leave it as-is. Accommodation: Change or variance in rules and practice. Modification: Altering the building. NOTE: RTFQ and make sure you're not missing something in the question. 1. A family with 3 children may not rent a small 2 bedroom home. If a family with 2 children becomes a family with 3 children while they are tenants in a 2 bedroom home though, they may not be evicted or forced to sell. 2. If a member of a protected class does not meet the standards for leasing or lending, it is not discrimination if that same standard is applied to all applicants. When there is a conflict between laws, the more restrictive law or rule applies. IMPORTANT TERMS- Blockbusting- Inciting a panic that demographics in an area are changing and neighborhood values may drop because of it. Redlining- Lenders refusing to lend in an entire area rather than on the qualifications of buyers in that area. Disparate impact- Policies and procedures disproportionately affect a protected class. Unit 5- Measurement Formulas to remember- Length x Width = Square Footage Square feet ÷ 43,560 = Acreage (4 tourists going 35 in a 60) Acreage x Amount Per Acre = Sales Price Sales Price ÷ Front Footage = Sales Price Per Front Foot Linear feet in a mile = 5,280 Acreage in a Section = 640' Square feet in an acre = 43,560\ Licensees are not required to publish square footage in NC. Do NOT rely on anything but an accurate measurement for square footage (e.g., disregard previous listings, owner’s beliefs, or tax records… have it measured or measure it yourself if you are confident). NCREC Residential Square Footage Guidelines recommend that licensees use exterior measurements whenever possible. When not possible, add 6” to interior measurements. Living area ceiling height must be at least 7’ and 6’4” under a duct or beam. For a space to be considered to be a living area, it must be HFD (heated, finished, directly accessible to other living areas). If you have, for instance, space over a garage that is heated and finished but not directly accessible from living area, you would call that Other Living Space. If you can’t walk on it, don’t count it. Rooms with a sloped ceiling may be included when at least 50% of the space is at least 7’ tall. Licensees may include square footage with up to 5’. Deduct unfinished spaces, do not deduct utility closets. Bay windows and dormers may be included in living area if they meet the standards. Stairs count on both levels The area of a triangle is ½ base x height PRO TIP- If you are unsure of your skills in measuring living areas, hire a professional. Unit 6- Real Estate Finance Hypothecaion- Pledging an asset as security for a debt. Buyer is mortgagor, obligor, trustor. A buyer gives a note to the lender. A lender is a mortgagee, obligee, promissee. Lien theory states- Bank hold the mortgage Title theory states- Third party trustee holds the deed of trust Acceleration Clause- Grants the lender the right to call the entire balance owed as due upon default by borrower. Due on sale- Sometimes called Alienation Clause, requires borrower to pay off the entire balance when the property transfers from the borrower to another party. Prepayment penalty- Requires the borrower top pay a penalty when they pay the loan off early. NC law prohibits prepayment penalties on residential mortgage loans of 150K or less. Penalties are forbidden on FHA and VA loans. Security instruments- 1.​ Mortgage 2.​ Deed of Trust Mortgages are a two-party instrument between a borrower (mortgator) and a bank (mortgagee).. Mortgages are used in lien theory states. Bond-in-lieu- Used in some states instead of a promissory note. Deed of Trust- Three party instrument between borrower, lenders, and trustee. Used in a title theory state. Defeasance Clause- Triggers trustee to reconvey title to the borrower. Novation- New party for old. Releases a seller from liability. Lender-financed purchases- REquires the payoff of a seller’s existing mortgage loan. LTV- Loan / Value= Loan to Value LTV is calculated using the least of the purchase price or appraisal value of the property. Most lenders require an appraisal before making a loan, and appraisals are a requirement for federally related mortgages. NOTE: If a buyer makes a 10% down payment, the LTV is 90%. Borrowers who have lower down payments may have to pay PMI (private mortgage insurance) on a conventional loan or MIP (mortgage insurance premium) on an FHA loan. Equity- Fair Market Value - Debt Owed= Equity Equity increases with payments made, capital improvements that increase value, and market appreciation. Down payment is the buyer’s initial equity. LENDING PROCEDURES- Credit score Debt to income ratios Recurring debt as a percentage of gross income (e.g., student loan debt, car loans, credit cards) Borrowers may get a rate lock which locks in their rate for a specific period. Interest rates can change daily, which creates risks for buyers PRO TIP- Remember that HOA fees can make an otherwise affordable home out of reach for a buyer. If you know your buyer is at the top of their price range with the purchase price of a home and you see that there is also one or more HOAs in that neighborhood, advise your buyers of this before they fall in love with a property they may not qualify for. The loan process- 1.​ Preparing (gather documents like pay stubs, W-2s, bank statements, tax returns, employment info, debt information, etc.) 2.​ Applying 3.​ Underwriting (reviewing of documents, appraisals, etc.) 4.​ Processing 5.​ Closing The lender will issue a loan estimate that gives you a rough idea of what the costs are going to be to buy. Lender Fees- Origination fees- Percentage of a loan or a flat fee. Covers the costs of the lender making the loan. Discount points- Prepaid interest. The borrower gets a reduced interest rate on the note and a lower monthly payment, while increasing the lender’s yield. ​ For every 1% of the loan amount paid in discount points, the borrower gets ⅛ of a percentage point in the interest rate on the note. Loan origination and discount points are based on the loan amount and not the sales price. They are paid up front to reduce monthly payments. ​ WHY? It may be the only way for the buyer to qualify for the loan. The buyer might have a more risky credit score. The buyer may plan on staying in the property for a long time and want a lower interest rate. Most Common Loan Programs- Conventional- 1. 20% down 2. 80% LTV 3. Strict credit guidelines 4. Not government insured or guaranteed 5. PMI- Private mortgage insurance if you put less than 20% down 6. 28% housing, 36% total debt FHA (203b loan)- 1. 3.5% down 2. 96.5% LTV 3. Less strict credit guidelines 4. Government insured 5. Assumable 7. MIP- Mortgage insurance premium is paid by borrower, never goes away, paid by upfront fee and then monthly fee 8. 31% housing, 43% total debt 9. Originated by the lender, not the government VA- 1. 0% down 2. 100% LTV 3. Veterans and qualifying widows 4. Government guaranteed 5. Assumable 6. Originated by the lender, not the government HELOC- Home Equity Line of Credit HEL- Home Equity Loan NOTE: Take a look at the difference and memorize... FHA is insured, VA is guaranteed. USDA Loan- The property must be located in USDA designated area (typically not in city limits). There are income limits that you may run into in practice. They vary by county, so you won't see that on the exam. Adjustable mortgage- Escalation Clause allows rate to go up or down. Tied to LIBOR or treasury rate. Also called a variable rate mortgage. VA appraisal (CRV)- A safety inspection for things like broken windows, loose handrails, peeling paint, etc. Know your B's - Budget, Blanket, Bridge- 1.​ Budget- A loan with an escrow account 2.​ Blanket- Multiple properties financed with one loan 3.​ Bridge- Temporary financing (about 9 months) Hard money- Alternative financing. High risk...so high interest rates. Reverse Mortgage- Bank sends money in installments to the borrower. Debt builds up. 62 or older. Loan repayment terms- 1.​ 30 year fixed 2.​ Variable rate/adjustable rate 3.​ Balloon mortgage (partially amortized) 4.​ Term loan (interest only) 5.​ Specialty: - Purchase money - Construction (short term and higher risk for a lender; permanent financing is known as a take-out commitment; builders receive draws as progress is made on construction) - Blanket (to buy more than one property) - Bridge (to get you from one home to another) - Package-- Fully furnished, usually a vacation home loan - Reverse mortgage PITI- Principal, Interest, Taxes, Insurance. Taxes and Insurance go to an escrow account and the bank pays the bills for the borrower because they trust buyers about as far as they can sling a piano. The Dodd-Frank Act https://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm Regulation X- https://www.consumerfinance.gov/rules-policy/regulations/1024/ Truth in Lending/Reg Z- Requires full disclosure of the cost of credit. 1.​ Advertising that mentions monthly payments, down payments, the dollar amount of finance charges, the number of payments, or repayment periods prompts full disclosure. If you mention one, you have to mention them all. 2.​ General statements such as low down payment, great financing, great interest rates, etc. do not trigger Reg Z. Equal Credit Opportunity Act- Prohibits discrimination by lenders when making credit available. Fair Credit Reporting Act- Sets standards for how credit bureaus must handle consumer credit information. Usury- Lender charges interest above the maximum legal rate allowed by law. Finances Charges- Anything required for the buyer to pay to qualify for the loan. TILA- Truth in Lending Act RESPA- Real Estate Settlement Procedures Act (RESPA) TRID- TILA RESPA Integrated Disclosure. Alternatives to foreclosure- 1.​ Deed in lieu (give the property to the bank, friendly foreclosure) 2.​ Short sale 3.​ Bankruptcy Rights and obligations of the mortgagor- 1.​ Entitled to reconveyance 2.​ Equitable right of redemption when the lender seeks foreclosure (buyer pays full balance owed and keeps the property) 3.​ Statutory right of redemption allows buyers to pay full balance owed within 10 days of foreclosure sale; borrower has an Upset Bid period of 10 days that resets with each one bid  4.​ Lenders can sue for deficiency judgement when the proceeds from auction don't cover the money lent; exception is seller financing in NC Foreclosure is by advertisement in a title theory state. The property is transferred to the highest bidder by a Trustee's Deed. The foreclosure is non-judicial and no court order is needed. Sometimes referred to as a Foreclosure by Advertisement. Foreclosure is by lawsuit/judgment in a lien theory state. It may take months, perhaps years, in a judicial foreclosure. Note: Foreclosure notices and short sales are material facts. Equitable Right of Redemption- Allows a buyer to pay the full balance owed and keep the property. Statutory Right of Redemption- Allows the borrower to pay the full balance owed 10 days past the foreclosure sale. Deficiency Judgment- If proceeds from an auction are not enough to cover the debt, the lender may pursue a deficiency judgment OR they may write off the debt... and let you pay tax on it like it is income. This is a general lien. The Federal Reserve controls the supply of money and the amount that banks may lend by requiring reserves. The Fed makes loans to banks at discounted rates which can raise or lower the consumer interest rates. Primary Mortgage Market- Originates first and second mortgages, and lines of credit on deposits and lender reserves. This includes banks, mortgage companies, and mortgage brokers. NOTE: Mortgage brokers can act as arrangers of credit by bringing borrowers and lenders together. They do not make the loans or service the loans. Secondary Mortgage Market- Buys mortgages from the primary mortgage market to keep liquidity in the lending market. 1.​ Fannie Mae (FNMA)- Federal National Mortgage Association a.​ Quasi-government organization b.​ The oldest and largest buyer in the secondary market c.​ Handles all types of loans.  2.​ Freddie Mac (FHLMC)- Federal Home Loan Mortgage Company a.​ Private for-profit corporation b.​ Typically handles conventional loans 3.​ Ginnie Mae (GNMA)- Government National Mortgage Association a.​ Government owned b.​ Primarily handles government-insured and guaranteed loans c.​ Acts as a pass-through GNMA to investors Wall Street and investors purchase mortgage loans packaged and sold as mortgage-backed securities. Unit 7- Valuation 1. Appraisal 2. CMA (Comparative Market Analysis) 3. Market Price, Market Value, Probably Sales Price 4. Sales Comparison 5. Income Approach 6. Cost Approach An appraiser determines the most appropriate way to decide value through sales comparison, cost comparison, or income comparison to get estimated market value. The appraiser will determine the best method to carry the most weight in valuing the project. Residential appraisals are required for federal loans. ​ An appraisal is an appraiser’s decision on the value of the property on that one day. Methods of valuation- 1. Sales Comparison (sometimes called Market Data Approach)- Commonly used to value residential property and vacant land. Comps should be recently sold, similar in size, area, age, and physical characteristics. 2. Cost Approach- Used for a property that isn't commonly sold, like a school. 3. Income Capitalization Approach- In short, how much money does the property make for the owner. What affects value or probable sales price? Supply and demand, location, improvements, the seller's timeline, condition of property, market conditions, neighborhood, economic forces, zoning, environmental factors. Licensees must never refer to their work as an appraisal. Licensees perform comparative market analysis (CMA) to determine a probable sales price. Provisional brokers cannot perform a CMA for compensation. BPO- Broker Price Opinions are typically performed by non-provisional brokers for lenders who are in the process of weighing a foreclosure against a borrower. Provisional brokers cannot perform a BPO. Law of Substitution- All factors being constant in a property, the cheaper property will sell faster. Law of Conformity- When homes are similar in size and style, the highest price for properties will be realized. Law of Contribution- The value of any part of a property is directly dependent on the degree to which it adds to the value of the entire property. Anticipation- The expectation of a price change in a particular neighborhood or area. Highest and best use- Whatever use produces the highest return to a property owner. The best comp is the one that needs the fewest adjustments. Brokers should not use active listings or pending listings as comps. FSBOs are also not good comps because of the limited exposure to a competitive market. DO NOT ADJUST THE SUBJECT PROPERTY. Only adjust the comps. If the comp is superior, subtract what makes it superior. (e.g., Comp has 4 bedrooms and Subject property has 3 bedrooms, subtract the value of the 4th bedroom.) If the comp is inferior, increase and give it the missing element. (e.g., Comp has no fireplace and the Subject property has a fireplace; add the value of a fireplace to the Comp.) COMPS OVER A YEAR OLD ARE TOO OLD TO USE. If the market is stagnant, go further out in radius or further back in time, perhaps both, but not more than a year. If a property is unique, call in an appraiser to help. You will find comps in the MLS. The best comp is the comp that needs the fewest adjustments. Appreciation and how to calculate it- Multiply the comp sales price by the yearly % Divide by 12 Multiply by the number months that passed since the sale of the property $480,000 x 6%= $28,800 $28,800 ÷ 12 x 5= $12,000 How to Calculate the capitalization rate- NOI/Value= Capitalization rate Income Producing Property- Net Operating Income is a GIVEN Income Capitalization Multiplier formula- Gross Income - Vacancy & Collections= Effective Gross Income Effective Gross Income - Operating Expenses= Net Operating Income Net Operating Income ÷ Cap Rate= Value NOTE: The mortgage is NOT included in operating expenses. Do not calculate depreciation, debt service, or capital improvements in NOI. The cap rate comes from the sales and rentals of other properties. Total Anticipated Revenue- Another term for Effective Gross Income. * Gross RENT Multiplier- Sales Price ÷ Monthly Rent SP $300,000 ÷ Rent $2,000= 150 SP $300,000 ÷ Rent $2,500= 120 * Gross INCOME Multiplier- Sales Price ÷ Yearly Income NOTE: Pay careful attention to the words. Rent is monthly, Income is yearly. Cost Approach- This is typically used for schools, hospitals, government buildings, and churches. Value of land + Cost to build new Usually given in price per square foot. Depreciation- Tax depreciation or real depreciation? Building New: SqFt x $ per sqft Depreciation: Cost New ÷ Useful Life x Effective Age Value: Cost New - Depreciation + Land + Improvements Straight line depreciation Cost new ÷ Useful Life Left - Depreciation per year Depreciation per year x Effective Age= Depreciation Actual vs. Effective Age- Cost New (SqFt x $ per SqFt) - Depreciation + Land and Improvements= Value REMINDER: You never ever never never never adjust the subject property. Functional Obsolescence- An issue with the property due to poor design or a feature that isn't popular anymore. Economic Obsolescence- Forces outside the property boundaries like zoning changes, traffic changes, travel sounds (airplanes or trains going over/by). Physical Deterioration- Normal wear and tear or deferred maintenance on a property. UNIT 8- Contracts Brokers CANNOT draft FOR a client. Send your client to an attorney. Contracts may be either implied (born from actions) or express (meeting of the minds, discussion had). Contracts may be either Bilateral (binding on 2 parties from beginning) or Unilateral (binding on only one party, other party has options) A contract can be:​ Valid (legally enforceable) Void (not legally enforceable, the person is adjudicated incompetent, or it's a contract for an illegal purpose) Voidable (one party can back out). A contract with a minor is voidable by the minor, as are contracts with intoxicated people, if the property is damaged/destroyed, or if the contract is breached. VOCAB- Execute (signed) Executory (in the process of being completed) Executed (completed). Essential Elements of a Contract- Offer & Acceptance – offer made, unconditional acceptance ​ Mutual Assent – voluntarily consent - agree to terms​ ​ Consideration – something of value – not necessarily money.​ ​ Capacity of Parties – legally competent​ ​ Lawful Objective – legal purpose Offers- Offeror is making the offer. Offeree is RECEIVING the offer. When an offer is accepted, it's a contract. Express vs. Implied -- all depends on action. Express- Discussions were had and terms agreed to. Implied- Actions How do offers end? Rejection Counter (changing at least one term of original offer) Expiration of offer Withdrawal Death/insanity of offeror or offeree NOTE: Acceptance turns an offer into a contract. Statute of Frauds- Real estate contracts for purchase must be in writing. Addendum to a contract is adding to the contract. Amending a contract is changing terms. "Party to the contract" is the legal way of saying the participant who is being bound in the transaction. A buyer, seller, tenant, landlord, or whoever is signing this contract. NOTE: Only a party to the contract or an attorney they have hired may draft/change the language of the contract. Brokers may not draft unless they are also a party to the contract. Example: When you sign your agreement to work with a brokerage, you are signing a contract. Can you draft/change language in that contract? Yes, because you are a party to it. Buyer agency agreements MAY begin oral, but must be reduced to writing prior to MAKING an offer. Listing agreement MUST be in writing from inception. Acceptance of offers- When the email was sent and received or the voicemail recorded, it's communicated. The North Carolina Real Estate Commission doesn't create forms, they just set the rules. RE Contracts Pt. 2- Conditions/contingencies, signing/submitting, contract formation, NCAR/OPC, other contracts. Conditions or contingencies- Short sale FHA/VA financing Back-up contract Spouse approval These are addenda, added to an offer or contract. NOTE: If there is conflicting language between the contract and addenda, the addenda controls. Things you cannot have in a sales contract- Compensation and disclaimers of liability. Financing contingency- NC doesn't have this, but it is on the National portion. NC instead has a due diligence period. 1. Buyer can terminate if not able to get financing. 2. Denial has to be in writing. 3. Seller is not obligated to extend the contingency date. 4. Buyer gets money back. Who can sign the offer? Buyer Seller A holder of a POA NOTE: The broker has no authority to sign for a party unless they have a POA for one party to the contract, or they are a party to the contract. Corporate Resolution- The document that states who within the company may sign on behalf of the company and form a contract. UETA- DotLoop and Docusign are allowed by law and as binding as a pen on paper signature. They track the electronic device, location and time-date of when the contract is signed. How long to furnish copies of the offer/contract? 3 CALENDAR days. Your BIC will also need a copy. Every person in the transaction should have a copy of the contract. Multiple offers must be presented and the seller decides which offer to entertain. Do not counter all offers. Counter 1 at a time. Reject all and send a memo of what you might entertain. If you counter too many at once, your seller could end up under contract to multiple buyers. Can a licensee disclose a higher offer? It depends. If the person making the offer says it is ok to tell the other buyers how much they are offering, it might be allowed. If the person making the offer does not say it is ok, it is not disclosed. NOTE: Be cautious when speaking to other brokers about offers. Do not say, “We have 11 offers and they are all over asking price.” Say, “We have some strong offers and expecting a few more.” If a property is leased, the buyer must honor the remainder of that lease. The buyer can still negotiate with a tenant to leave early, but if the tenant will not leave until their lease ends, the new owner must let them stay. Transfer the security deposits and rent proration at closing. This also applies to properties that are currently used as vacation rentals. Offers must be in writing. Acceptance must be in writing. How to communicate acceptance- Orally, fax, email, mail, text, phone. The Back-Up Contract is a second offer on property that will take over if the first accepted offer falls through. Earnest money must be deposited within 3 BANKING days. Cash should be deposited immediately. All monies go to your BIC or the closing attorney if your firm does not have a trust account. Pro Tip- DO NOT PHOTOCOPY CASH. It will break your printer and then everyone in your office will be mad at you. Deliver Due Diligence Fees to Seller within 3 CALENDAR days. Time is of the Essence is a drop dead date. If payment of fees is not made or bounces, the contract doesn't terminate automatically. The buyer has 1 banking day to fix the issue after the seller’s demand.. If the buyer doesn't pay, the contract is voidable and the seller can either give more time or terminate. NC Connor Act- A deed must be recorded to protect against third party transfers. Trust accounts can earn interest to cover costs and may have up to $100 of firm money to cover banking fees. A due diligence period can be any length of time. It is negotiable. NOTE: A buyer who backs out of the contract can get their earnest money back if they back out during the due diligence period. If they back out after the due diligence period ends, they do not get anything back. If it is not in the contract, it will not convey. NOTE: Be specific Remedies for breach- 1.​ If a buyer breaches, the seller retains all monies. 2.​ If the seller breaches, the buyer can sue in a suit for Specific Performance to force the seller to sell to them, or they are entitled to a full refund of earnest money, DDF, and anything they have paid in fees, inspections, etc. The party who wins will get their attorney fees paid. Pro Tip- Tell your buyer you will never ask them to wire anything. Ever. Due diligence fees and earnest money deposits are NOT a requirement of the contract. They are negotiable. The Delay in Settlement period is 7 days. At the end of the 7 days, the contract becomes voidable by the non-delaying party. If the property is damaged, the buyer can terminate and get their money back, or they can continue with the purchase and collect the insurance money. THIS IS TESTABLE: Buyer backs out before the due diligence period ends, they get their earnest money back. Buyer backs out after due diligence, they get nothing. If a seller cannot provide a clean title, they must give the buyer back their money. Example: The closing attorney discovers that the seller's ex-husband was never removed from the deed. The ex-husband refuses to sign unless he is paid half of the sales price, which the seller refuses to do. The buyer is entitled to get their money back. Assignment is generally allowed unless it is not in the contract. BREACH- If the buyer breaches in NC: Seller gets to keep the earnest money and due diligence fee. If the buyer breaches Nationally: Seller gets to keep the earnest money deposit. If the seller breaches: Buyer can seek Specific Performance to force a sale through the court. In other states the buyer can sue for monetary damages. In NC, the buyer gets the earnest money, due diligence, and compensatory damages (inspection fees, appraisal, etc.). Both parties can agree to terminate a contract without fees being refunded. REMEMBER: NCREC does not draft sales contracts or addenda. The forms are written by the NC Bar Association and the NC Association of Realtors. If you have a client with questions and a desire to hold the deed in an unusual way, refer them to an attorney. General warranty deed- The safest way to transfer property. Title insurance- Extends protection against things like encroachments and adverse possession. The title search is done by the attorney. The attorney has a trust account that pays off liens, loans, etc. Title insurance is for the life of a property ownership. How do agency relationships end? 1. Full performance (closing) 2. Death of client or the sole proprietor 3. Operation of law 4. Destruction of property 5. Mutual agreement 1031 Like-Kind Exchange- The assignor holds the rights and agrees to transfer the rights to the assignee. Unless released in the contract, the assignor is secondarily liable for contract performance. Statute of Frauds means some contracts have to be in writing. A contract for the sale or transfer of the real estate, a lease lasting more than 3 years, non-compete agreements, and option agreements. Parol Evidence Rule says the written contract is the final expression between the parties in a transaction. Oral agreements or previous negotiations are not binding unless they are in the written offer. Handwriting takes precedence over preprinted words. Liquidated damages are defined in advance of the contract: - If the builder doesn't finish by X date, they have to pay $Y. - Earnest money and due diligence are liquidated damages if the buyer breaches. Compensatory damages- Monetary damages based on actual loss, like appraisal fees, inspection fees, surveys. Punitive damages are not at all common in real estate. A court can treble the actual damages if a party knew of an issue and didn't correct it, which caused an injury. Treble damages can be ordered. Consequential damages include personal injury and property damage. Rescission terminates the contract if parties can't agree. REMEMBER: NCREC does not draft sales contracts or addenda. The forms are written by the NC Bar Association and the NC Association of Realtors. If you have a client with questions and a desire to hold the deed in an unusual way, refer them to an attorney. General warranty deed- The safest way to transfer property. Option Contract- A fee is paid to the owner for the option to purchase on terms that are already agreed upon. When the date arrives, the buyer can exercise their right to purchase based upon what they agreed to in the beginning. If the buyer opts not to buy, the option fee stays with the seller. Installment Land Contract- Pro- No lender will lend you money; undocumented person who cannot get a loan; personal relationship between parties (Mom sells Son her home and they opt not to go through a bank); buyer has too many mortgages; property cannot pass an inspection for the loan package the buyer needs. Less upfront money a buyer needs to bring to purchase a property. Con- Property can be reclaimed by the seller if a payment is missed. All money paid is lost. The contract is the contract. It's still binding. Equitable Title- The owner holds legal title, the buyer has equitable title until the last payment is made. Deed of Trust- Trustee is named and can repossess on behalf of a lender. Legally binding- Offer, unconditional acceptance, communication, in writing with signatures. UNIT 9- Insurance HO-3 Homeowner's policy- does not cover floods, but does cover basic things. May be referred to as a package insurance policy. HO-4 Renter's policy- Covers personal property and some third-party liability. HO-6- Condominium policy- Sometimes called a Walls In coverage. CLUE report- Comprehensive Loss Underwriting Exchange report details claims for the last 7 years against the property. Tell sellers to keep coverage on their home until after the closing and settlement. Instruct sellers or buyers who want to occupy a property after sale/before sale to speak to their insurance agent about their insurance coverage so they have the appropriate coverage. Risk of loss is on the seller until the deed is recorded. Do the walk through as close to closing as humanly possible. The buyer is buying the home as-is. Flood insurance is a separate insurance policy from a homeowner’s policy; the maps are made by FEMA, which looks at both historical flood maps and current trends in flooding to figure out what the overlay looks like. UNIT 10- Conveyance of Real Property Voluntary Alienation Essential Elements of Deeds Major Deed Types Transfer and Excise Taxes Title Assurance Title Insurance Voluntary alienation- Transfer of property through sale or gift by deed. Essential Elements of a Deed- IPGWED (I Get Paid With Every Deed) In writing Grantor is competent at time of conveyance Property is adequately described Words of conveyance Execution Delivery and acceptance Non-Essential Elements of a Deed- Acknowledgement Date Consideration Seal (extends the statute of limitations from 3 years to 10 years) Witnessing Recorded NC is a pure race state, meaning the first to record a lien has priority, though a Mechanic's Lien can jump in line. Deed must be acknowledged to record. Recording protects against third party transfers through constructive notice. NC Connor Act- A deed must be recorded to protect against third party transfers. Types of Deeds- 1. General warranty (best and most desirable) 2. Special Warranty deed (limited warranty deed) 3. Bargain and Sale deed (equivalent of a quitclaim) 4. Quitclaim 5. Trustee (after foreclosure) 6. Sheriff's deed (granted to satisfy a judgment) Special Purpose Deeds- Release (removes lien, clears title) Surrender (end life tenancy) Gift (recorded within 2 years to be enforceable) Excise tax must be paid when a deed is transferred BY THE SELLER (Seller pays commission, deed prep, and excise tax.) How to calculate the excise tax-- Purchase price / 500= Excise Tax $299,000/500= $598 $133,500/500= $267 Escheat- No will (intestate) AND no heirs can be found; state takes property. Title assurance- Opinion on the title of property based on recorded documents. Title insurance- Protects against past events Standard- Covers what should have been caught before closing, but were identified after. Extended- Protects against encroachments if a survey was done, parties in possession, adverse possession, and anything not public record. UNIT 11- Closing the Real Estate Transaction 1. Closing the Real Estate Transaction 2. Preclosing Process 3. Settlement vs. Escrow 4. Property Tax Proration 5. HOA, Interest, and Rent Proration 6. Buyer and Seller Net 7. Good Funds Settlement Act The closing attorney functions like the hub of all activity. Everyone revolves around that attorney to complete the transaction. It is more prudent to refer your client to the closing attorney to make sure that the information they have is accurate and complete. The closing attorney is hired by the buyer, to work for the buyer's best interest. The title search is done by the attorney. The attorney has a trust account that pays off liens, loans, etc. When a property goes under contract, ask the buyer for information and proof of their financing. If they are paying cash, ask for proof of funds. Interim interest notes: Will never be more than 30 days. Use the LOAN AMOUNT. Include the day of closing because the bank is greedy. When do I use "factor"? When I am calculating the Principle & Interest of the PITI payment. Explain to your clients what comes next in the buying process. Really walk them through it and explain the importance of not taking out more debt, not changing jobs, etc. Help them avoid being blindsided by costs (inspections, etc.) and things that can end in a loan denial. A prudent realtor will gather basic facts about a property before showing it to a potential buyer. Make sure you go over that again with the client. Verify HOA fees, zoning laws, get a copy of any building permits if a home has had recent renovations, and if you cannot find a building permit, take a look at the property tax records. If the addition is being taxed, it is most likely there was a permit. Some counties only keep building permits for a few years. Public restrictions and private restrictions. Do not assume when you see the word restrictions that it is an HOA. Some restrictions are public. Environmental concerns should be inspected by a qualified inspector. Fun fact: Radon is considered high at 4 picocuries. If a test comes in at 3.8, recommend it be tested again. Buyer costs and seller costs Tenants in a property must be shown respect. Contact the listing agent to schedule showings and knock before entering tenant-occupied properties. Tenants are allowed to stay through the end of their lease, but that doesn't mean you can't negotiate with them to get them to leave early. This is true even for homes that are being used as vacation rentals. Title insurance is for the life of a property ownership. The due diligence period is to allow buyers to thoroughly inspect a property before closing. Strongly encourage your buyers to invest in a proper inspection of the property, including well, septic, roof, HVAC, insect, etc.If a buyer refuses to get inspections done, put it in writing that you understand they have opted not to have the home inspected for , but you strongly urge them to reconsider the inspection because it's an investment in the home they are purchasing to know in advance about the. Cover yourself from future claims that the buyer didn't know to get the property inspected. DO NOT GIVE KEYS UNTIL THE DEED IS RECORDED. Settlement and Closing 1. Settlement- Signing of documents. 2. Closing- Cash and keys. Everything is paid and recorded. NC has the settlement method- Attorney coordinates everything. Escrow method- Title insurance company coordinates everything. The lender may send representation just in case the buyer has questions about the loan. IMPORTANT! When doing calculations remember that for testing purposes a year is 360 days and each month has 30 days. Seller owns the day of closing unless otherwise stated in the question. Before 1 September, taxes are unpaid for purposes of testing. Property tax proration means that the buyer pays for the days after the closing and the seller gets a credit if they have already paid the taxes. If the taxes have not been paid, the buyer gets a credit from the seller. It's like splitting a dinner bill. You're not paying for what you didn't eat. Property Taxes- Closing before Sep 1- Buyer pays taxes, seller pays buyer for their days (debit seller/credit buyer) Closing after Sep 1 (taxes paid)- Buyer pays seller for their days (debit buyer/credit seller) Closing after Sep 1 (taxes unpaid)- Attorney pays taxes (debit buyer/debit seller) Mortgages are paid in arrears. May pays April. June pays May. July pays June. You are not a CPA (unless you are a CPA). If your buyer has questions about tax implications and what they can write off on their taxes, refer them to a CPA. What can you deduct on your taxes? Mortgage loan interest, late fees on your mortgage, property taxes, prepayment penalties; if you purchased the property in that calendar year you can deduct discount points in that calendar year only. A seller who is selling their primary residence where they have lived for at least 2 of the last 5 years, will only pay capital gains tax on anything above $250,000 if single/$500,000 if married. Basis- The price you paid to purchase the property. How to calculate amount realized: Sales Price - Allowable Closing Costs= Amount Realized NOTE: Maintenance/Repairs are not deductible. How to calculate Adjusted Basis: Purchase Price + Closing Costs + Capital Improvements= Adjusted Basis 1031 Like-Kind Exchange- Not a primary residence. The owner sells the property by transferring the property to an attorney who transfers the property Equity- The difference between what you owe and what the value of the property is. Unit 12- Income Taxation and Basic Investing You are not a CPA (unless you are a CPA). If your buyer has questions about tax implications and what they can write off on their taxes, refer them to a CPA. What can you deduct on your taxes? Mortgage loan interest, late fees on your mortgage, property taxes, prepayment penalties; if you purchased the property in that calendar year you can deduct discount points in that calendar year only. MIP or PMI now too. A seller who is selling their primary residence where they have lived for at least 2 of the last 5 years, will only pay capital gains tax on anything above $250,000 if single/$500,000 if married. Basis- The price you paid to purchase the property. How to calculate amount realized: Sales Price - Allowable Closing Costs= Amount Realized NOTE: Maintenance/Repairs are not deductible. How to calculate Adjusted Basis: Purchase Price + Closing Costs + Capital Improvements= Adjusted Basis 1031 Like-Kind Exchange: Not a primary residence. The owner sells the property by transferring the property to an attorney who transfers the property Equity- The difference between what you owe and what the value of the property is. Appreciation- Increase in market value from market conditions. Unit 13- Property Management * Primary Objectives * Unlicensed Assistants * Property Management Duties * Landlord Tenant Laws * Lease Estates * Common Lease Types Leased fee interest- Landlord. Leasehold interest- Tenant. Property Management Agreement is a general agency agreement. This means the property management company (brokerage) has the ability to sign on behalf of the owner/landlord/lessor. Property manager responsibilities- Highest rate of return, compliance, policies, general agency, owes OLDCAR to property owner/landlord They may plan, advertise, negotiate leases if licensed, review insurance, collect rent, keep accurate records, deposit rent to trust or escrow accounts in 3 banking days, provide monthly statements to owners, enforce rules and legal evictions; Prevent, Detect, Contain, Counteract. They do not pay the taxes, determine capital improvements, or make unilateral decisions to reinvest in the property. All monies collected by a property manager are to be run through the trust or escrow account only. The property management fee is deducted from that. Unlicensed assistants may show rental property, fill out pre-printed leases, screen tenants, and do clerical work under the supervision of the licensed broker. The broker is responsible for what the unlicensed assistant does. This is what happens when the broker doesn't supervise properly: https://bulletins.ncrec.gov/disciplinary-actions-6/ The property management fee is in the agreement. Here is how you calculate it. Let's assume that this is a duplex which rents for $1,200 per unit. The Property Management agreement states the fee is 10%. Annual Rent: $1,200 x 2 x 12= $28,800 Vacancy & Collections: $28,800 x 6%= $1,728 EGI: $28,800- $1,728= $27,072 Management Fee: $27,072 x 10%= $2,707.20 You're going to need more clients. Budget planning- Forecast future rents, estimates of repairs and reserves, plan for future capital expenditures, and the goals of the owners, but debt service is NOT INCLUDED IN THIS. Send financial reports- Cash flow analysis, profit and loss. Screening tenants- Catch the problem before the problem tenant moves in. You can require tenants to have steady income, decent credit, and a good rental history. Other things like a criminal history can be problematic unless fairly applied across the board to all potential tenants. Landlords must maintain property to prevent costly major repairs. Tenant responsibilities- Pay rent, be responsible, take care of the property. Visit the property at least quarterly to view property and make sure things are kept up. Even if all you are doing is driving by to see if the lawn is mowed. Tenant Security Deposit Act- 1. Held in a trust 2. Bonded 3. Tenant informed of where the money is held 4. Limits on security deposits-- Week to week- 2 weeks of rent Monthly - 1.5 months of rent Longer- 2 months of rent Security deposit covers serious damage, not normal wear and tear. It can also be used to pay to clean up if a tenant leaves trash or personal property behind. Landlords must provide accounting to tenants for repairs within 30 days, with 60 days for extraordinary damages. Common Provisions- 1. Terms of lease and renewal 2. Default remedies 3. Option to purchase or first right of refusal 4. Landlord's right to enter property with appropriate advance notice 5. Covenant of quiet enjoyment 6. Tenant's use of premises 7. Environmental concerns 8. Fixtures 9. Upfit improvements 10. Assignment and subleases Residential leases Rental agreement: Exclusive possession, quiet enjoyment, ROFR Pet deposits are allowed. (Supernova disapproves of this and is quite firm on there being a human deposit.) Uniform policy of no pets is allowed, exception is service animals. Abrogation- Tenants cannot sign away rights in advance of signing a lease. Leased fee interest- Belongs to owner Leasehold interest- Belongs to tenant Estate- Your relationship to the property Tenancy for years- Definite end date Tenancy from period to period- Auto renews Tenancy at will- Either party can terminate Tenancy at sufferance- Overstayed Lease is a reversionary right TICAM: Taxes, Insurance, Common Area Maintenance Types of leases: 1. Residential 2. Apartment 3. Vacation home 4. Shopping Center 5. Office or warehouse 6. Land Types of leases: 1. Gross 2. Fixed 3. Level 4. Full Service 5. Percentage 6. Ground 7. Graduated 8. Index 9. Oil and mineral Essential Agreements of a Lease: 1. Mutual Agreement 2. Consideration 3. Capacity of Parties 4. Legal Objective 5. In Writing? It's a good idea if it's a long-term lease. 6. Under the Statute of Frauds, leases that last longer than 3 year need to be in writing in NC; nationally leases longer than 1 year need to be in writing. Unit 14- Construction https://www.youtube.com/watch?v=hAnFKdstTHE CO- Certificate of Occupancy A contractor license is needed when work is being performed for a homeowner that costs more than a certain dollar amount. Fun fact: The French drain is named for Henry Flagg French. A ranch-style home costs the most to build per square foot. The Basics- Frost line here is about 18 inches. Lowest Point of construction- Footing Lowest wooden framing member- Sill Plate Highest point of construction- Ridge (ridge board) R Value insulation- The higher the level, the more it insulates. R= resistance to the transfer of heat. Heating units- Baseboards, forced hot air, gas furnaces, solar, etc. Unit 15- License Law and Commission Rules Real Estate License and Exemptions Firm License Continuing Education and Post-licensing Prohibited Acts Disciplinary Actions And lots more... Who needs a license? Anyone who LLBEANS (lists, leases, buys, exchanges, auctions, negotiates, sells) for someone else for compensation. You cannot be paid by a family, accept a free week at the beach in exchange for selling their home, get a car from your mom if you sell her condo for her. Not a dime, not a donut. EXCEPTIONS: the crier of an auction, a W-2 employee, court-appointed trustee. A firm license is required for any brokerage other than a sole proprietor. Unlicensed assistants must be supervised by a licensed Broker. They may do administrative tasks like looking up deeds or filling out pre-printed lease forms, but they may not show homes, negotiate, etc. Applications for a real estate license have 180 days from acceptance of their application to sit for the state exam. 3 kinds of licenses: Broker, Firm, Limited Non-Resident Commercial License. License Status- Active: Affiliation and education Inactive: No affiliation and/or education Current: Paid renewal fee Expired: Didn't pay renewal fee Inactive license- Not affiliated with a brokerage. This is the license a newly licensed broker has until they affiliate with a brokerage. Active license- Affiliated with a BIC, 8 hours continuing education by 10 June, 4 hour GENUP/BICUP, and a 4 hour elective. License Renewal- June 10 is the last day to complete CE, GENUP, etc. every year. June 30 is the deadline for renewing your broker's license, no matter what. Every single license issued by NCREC. A broker who does not complete their Postlicensing education will have an inactive license. How do I remove provisional status? Take the 3 Postlicensing courses: 301 (Brokera