Pennsylvania Pre-Licensing Study Guide PDF

Pennsylvania Pre-Licensing Study Guide Table of Contents Real Estate Foundations 3 Real Property Ownership 7 Types of Real Estate 11 Legal Land Descriptions and Land Measurement 13 Private Restrictions On Real Property / Land Use 16 Government Powers and Control of La...

Pennsylvania Pre-Licensing Study Guide Table of Contents Real Estate Foundations 3 Real Property Ownership 7 Types of Real Estate 11 Legal Land Descriptions and Land Measurement 13 Private Restrictions On Real Property / Land Use 16 Government Powers and Control of Land use 20 Contract Law Principles 23 Purchase Contracts 26 Agency Principles 29 Role of an Agent in a Real Estate Transaction 32 Service/Listing Contracts (Rep Agreements) 34 Property Condition and Disclosures 36 Finance 40 Methods of Financing 43 Instruments of Finance 46 The Lending Process 48 Property Management 51 Leasehold Interests 53 Property Valuation 56 Calculating Value 59 Transfer of Title 62 Finance and Closing in Pennsylvania 66 Government Oversight of the Real Estate Industry 68 Ethical Real Estate Practice 70 Fair Housing Law 72 State Rules and Laws 75 Real Estate Practice in Pennsylvania 77 Key Terms 79 Math 111 2 LEVEL 1 Real Estate Foundations Objectives ►► Describe the physical and legal features of real property ►► Identify the differences between real and personal property and how one may be converted to the other Level Main Ideas ►► When it comes to land, real estate, and real property, there are some important differences when it comes to ownership. For instance, real property includes the bundle of rights many people associate with owning a home. ►► It’s important to know the difference between real property and personal property and how they can switch from one category to the other. It’s especially important to clarify what is personal and real property during a sale. ►► Land is a unique commodity to own and has unique characteristics, such as scarcity and modification. It even has a set of rights, like riparian and littoral rights. There are also several factors that only affect land, like accession and accretion. 3 LEVEL 1 Key Terms Chapter 2: What is Real Estate? land the surface of the earth, including all permanently attached natural features, extending downwards to the center of the earth and upwards to infinity real estate the land plus all improvements made by man or nature real property land from the surface to the center of earth and upward into space, including everything attached by man or nature as well as the bundle of legal rights of ownership improvement any nonnatural structure built on or affixed to land bundle of rights ownership of land with all of the legal rights of possession, control, quiet enjoyment, exclusion, transfer, and encumber property any item which may be owned, including the rights associated with ownership Chapter 3: Real Property vs. Personal Property personal property an unattached, moveable asset not considered real estate, a.k.a. personalty chattel A commonly used term for personal property in the world of real estate fructus industriales plants or crops intended for harvest and treated as personal property, a.k.a. emblements trade fixture personal property that is owned by and needed for a tenant’s business fixture an object that was once personal property but is now firmly attached to the land in such a way that it is considered to be real property fructus naturales trees, perennial plants, and uncultivated plants usually treated as real property because of their permanence severance 4 the act of converting real property into personal property LEVEL 1 Key Terms Chapter 4: The Characteristics of Land accretion the process that results in the gradual increase in land area through deposits of soil by natural forces accession is the right to all that one’s own property produces, including that which is added, either naturally or by human action, to the property already owned erosion the gradual loss of land over time reliction a gradual increase in land area when water gradually withdraws avulsion the sudden loss of land by flood or when a stream or river changes course scarcity the economic characteristic that informs the economic principle of supply and demand situs the economic significance of a property’s location fixity refers to the fact that real estate exists in a fixed location and cannot be moved; describes this truth about land from an economic viewpoint illiquidity the relative difficulty of converting an asset to cash without loss of value Chapter 5: Land Rights surface rights the rights to access the surface area of a parcel of real property subsurface rights (a.k.a. mineral rights) ownership rights to all that is found beneath the surface of the tract of land owned, extending downward to the center of the earth air space the area above ground that is owned along with a property. could include space above a piece of land, or the space owned inside a condominium unit air rights the right to use the air space above the surface of land 5 LEVEL 1 Key Terms Chapter 5: Land Rights (continued) littoral rights rights that govern lakefront or oceanfront property and usually allow the property owner to use the water bordering their property water rights the right of a property owner on a waterfront to access and use that water riparian rights rights that govern the use of flowing water, such as rivers and streams that pass through or border a property doctrine of prior appropriation the legal doctrine which grants states the power to control and regulate all water resources within their borders 6 LEVEL 2 Real Property Ownership Objectives ►► Describe the difference between individual and co-ownership, and identify the basic rights and qualities of the forms of co-ownership, including as a business ►► Describe freehold estates, and identify the different specific estate types and their qualifying features Level Main Ideas ►► Remember that sole ownership is ownership in severalty. There are several types of co- ownership: joint tenants, tenants in common, and tenancy by the entirety. ►► Businesses can take many forms, including: sole proprietorship, partnership (general and limited), LLC, LLP, and corporation (including S corp and C corp). ►► Freehold estates describe the way owners hold property and the rights they have in that property. They include fee simple absolute (the most common and complete kind of ownership), the fee simple defeasible estates (where ownership is dependent on meeting a qualification) and the life estates. ►► Trusts allow a trustor to put a property in the care of a third party (the trustee) for a beneficiary. They can be used as estate planning tools or as part of a business strategy. 7 LEVEL 2 Key Terms Chapter 1: Freehold Estates estate a possessory interest in real property fee simple estate maximum ownership of real property; also called a fee or a fee simple absolute and is of indefinite duration, freely transferable, and freely inheritable fee simple determinable a type of fee simple defeasible estate which causes the title to automatically revert to the original owner if the deed requirements regarding property use are violated remainder interest the interest in an estate that will pass to another party (other than the grantor) at the death of the person upon whom the life estate is base legal life estate any life estate created by a function of law as opposed to the actions or desires of a property owner dower the right of a spouse to inherit property held in their spouse’s name after that spouse dies; dower is the word used for women, curtesy for men encumbrance non-possessory interest in a property that burdens the title freehold estate a form of ownership with an indeterminate length periodic estate a leasehold estate which automatically renews until canceled by either party, a.k.a. estate from period- to-period, periodic tenancy, estate from year to year fee simple condition subsequent a defeasible fee estate that comes with specific requirements (or conditions) reversionary interest the interest in an estate wherein, upon the death of the life estate owner, full ownership reverts back to the original fee simple owner (grantor) pur autre vie a life estate characterized by ownership lasting only for the duration of a designated party’s lifetime 8 LEVEL 2 Key Terms Chapter 1: Freehold Estates (continued) curtesy the right of a spouse to inherit property held in their spouse’s name after that spouse dies; dower is the word used for women, curtesy for men fee simple defeasible a property interest characterized by perpetual ownership on the condition that the property is used for a certain purpose or under specific conditions; ownership reverts back to the original owner if these stipulations are violated life estate a type of estate limited to a the duration of a measuring life leasehold estate an interest in the occupation of a property, established through a lease, a.k.a. non-freehold or less-than-freehold homestead laws laws which protect a homeowner from loss of their principal residence from the claims of most creditors and require both spouses to execute any instruments of conveyance elective share a statutory right in some states which allows the surviving spouse to claim an interest in a decedent’s real and personal property regardless of the provisions established by a will Chapter 2: Forms of Ownership severalty undivided ownership of an estate, with an interest that is exclusive from other owners; often referred to as ownership in severalty or tenancy in severalty joint tenancy co-ownership in which the parties have an equal and undivided interest in the property; includes the right of survivorship rather than inheritance right of survivorship the statutory principle of survivorship tenancy that provides that when one co-owner dies, their ownership interest reverts to the surviving co-owners community property a system of property co-ownership, most commonly applied to married couples, which describes what is joint property and what is individual property 9 LEVEL 2 Key Terms Chapter 2: Forms of Ownership (continued) tenancy in common co-ownership with individual, undivided interest in the property; includes rights of inheritance rather than survivorship partition suit legal action brought with the purpose of terminating the ownership interest of a co-owner to real property Chapter 3: Ownership as a Business limited partnership a business entity composed of both general and limited partners. the general partners manage the business and limited partners are passive investors. sole proprietorship ownership of a business by a lone individual general partnership a business entity in which all co-owners actively share power, responsibilities, and profit Chapter 4: Trusts as Ownership Vehicles trust a legal entity where control of some asset or property is transferred by a grantor (trustor) to a third party (trustee) to be held for the benefit of another (beneficiary) beneficiary the recipient of advantage or gain from an act or instrument such as a trust, will, or insurance policy living trust a trust established by a living trustor in order to convey legal title of property to a trustee for the benefit of a named beneficiary 10 LEVEL 3 Types of Real Estate Objectives ►► Describe the different types of real estate and identify characteristics of each Level Main Ideas ►► Real estate can be divided into many different groups but generally fits into three categories: use-based real estate, real estate with a common interest in ownership, and investment real estate. Use-based real estate includes property like industrial property and commercial property. ►► Common interest in ownership properties include condos and co-ops. Remember that they both have their own unique methods of ownership. ►► Investment properties cover real estate like REITs and joint ventures. They’re kind of like the expensive group projects of real estate. 11 LEVEL 3 Key Terms Chapter 2: Common Interest Ownership Properties condominium property where each owner has a separate interest in their own unit and undivided interest in the common areas common elements portions of a shared ownership property not controlled by any one owner or tenant. examples in- clude parking lots, lobbies, fitness centers, elevators, etc. planned unit development a subdivision that includes residential dwellings along with nonresidential real estate, departing from normal zoning and subdivision regulations; recreational facilities may be co-owned by pud lot owners as tenants in common timeshare a form of co-ownership where each owner has use of the property at a different prescribed period of time, also known as interval ownership Chapter 3: Group Real Estate Investment Forms real estate investment trust (reit) a trust that invests in, owns, or acquires real property and is owned by investors who share the trust’s profits according to shares 12 LEVEL 4 Legal Land Descriptions and Land Measurement Objectives ►► Explain the importance of legal property descriptions and understand the processes of different survey methods used to create legal property descriptions ►► Understand the various area measurements used in the real estate industry and demonstrate the ability to perform basic area calculations and conversions Level Main Ideas ►► Legal land descriptions are often required in real estate transactions because they define the exact size and location of properties. ►► Land is surveyed using these methods: metes and bounds, block and lot, and the rectangular survey system 13 LEVEL 4 Key Terms Chapter 1: Basic Legal Description Methods legal description a description of a property that is distinct and precise enough to distinguish it from all other properties metes and bounds a land survey process in which a licensed land surveyor starts at a readily identifiable point of beginning and defines the boundaries of a property in terms of distances and compass directions, finally returning to the point of beginning monument a fixed landmark, whether natural or human-made, used as a reference point in a metes and bounds legal description lot and block system a system of legal land description that identifies a piece of platted property by referring to the section, lot, and block numbers in a subdivision; a.k.a. the recorded plat method survey the process and physical product of finding and measuring the boundaries of a piece of real estate, including the location of improvements, encroachments, and easements point of beginning (pob) the starting point for a metes and bounds legal description benchmark permanent markers of known location and elevation above sea level as established by a government survey team (such as the usgs) plat a map indicating the locations and dimensions of lots in a lot and block system Chapter 2: Rectangular Survey System rectangular survey system a system of legal land description that uses the global lines of longitude and latitude to create a surveyed grid of meridians, base lines, townships, and ranges to describe a piece of land; a.k.a. the government survey system principal meridian a meridian used in reference to a baseline to identify ranges, tiers, and townships in the rectangular survey method of land description 14 LEVEL 4 Key Terms Chapter 2: Rectangular Survey System (continued) tier the area of land between two consecutive baselines acre a measurement of land equal to 43,560 square feet meridian an imaginary line of longitude used to identify a certain area of the earth’s surface along a north-south direction baseline a parallel used in reference to a meridian to identify ranges, tiers, and townships in the rectangular survey method of land description township a square area of land with sides of 6 miles each, consisting of 36 square-mile sections and identified in reference to a meridian and baseline in the rectangular survey system square mile a measurement of land equal to 640 acres parallel a line of latitude range the area of land between two consecutive range lines section one of 36 equal square miles in a township Chapter 3: Elevation and Vertical Land Description datum a designated base reference point to elevation used by surveyors to determine the elevations of land or property in an area 15 LEVEL 5 Private Restrictions On Real Property / Land Use Objectives ►► Describe private land use controls (CC&Rs) and explain the need to control land use ►► Explain the implications of an encumbrance on title and transactions ►► Describe the kinds of encumbrances to title possible, including liens and easements Level Main Ideas ►► Deed restrictions (or restrictive covenants) run with the land and restrict what property owners can do with their property, they are generally put in place by developers. When a deed restriction is in conflict with a local law or zoning regulation, the strictest rule is the one to follow. ►► Encumbrances are non-possessory interests in land, including liens and easements. Easements in gross are attached to a person, and easements appurtenant are attached to land. ►► A cloud on a title is something that prevents a buyer from taking clear ownership of a property. Often a quiet title suit or a quitclaim deed will resolve a cloud. ►► A lien is used when a property is used as collateral in a loan, or when a homeowner owes money to a taxing body or other creditor. Unpaid liens can result in foreclosure. A mortgage is a kind of lien. ►► In lien priority, tax liens come first, then first in time is first in line, unless there is a subordination clause. 16 LEVEL 5 Key Terms Chapter 1: Private Land-Use Controls deed restriction a provision in a deed that restricts the land use of a property land-use control regulations that specify how the owners of individual parcels of real estate in a given area may use property covenants, conditions and restrictions (ccrs) private restrictions similar to deed restrictions that dictate what homeowner may do with their property doctrine of laches a legal principle used to bar dated claims; used in conjunction with an unreasonable delay or negligence in asserting or defending one’s rights Chapter 2: Encumbrances cloud any claim to or encumbrance on the title to a property which affects transferability quiet title suit a lawsuit brought with the purpose of removing any outstanding ownership claim, title defect, or encumbrance on a property encumbrance non-possessory interest in a property that burdens the title encroachment physical property that crosses the boundary into a neighboring landowner’s property lien the claim made by a creditor against real or personal property pledged by a debtor as collateral conveyance an instrument that transfers a grantor’s interest in real property 17 LEVEL 5 Key Terms Chapter 3: Easements easement an interest in, or a right to use, another individual’s land or property, generally for a specific, limited purpose. easement by condemnation easement in which private property is taken for public use via eminent domain; declaration that a structure must be closed or demolished because it is unfit for occupants alienation the transfer of ownership (title) to real property; may be voluntary or involuntary landlocked a piece of land which is is not accessible by any public means appurtenances rights that run with real property ownership; most often transferred with the property, but possible to sell separately dominant tenement the parcel of land that benefits from an easement appurtenant by having the right to cross another owner’s adjacent land involuntary alienation transfer of title to property without the owner’s consent, usually carried out by operation of law adverse possession involuntary transfer of title from an owner who does not use or inspect their land for a number of years to another person who has some claim to the land and takes possession easement in gross an easement that applies to the person or entity, not the specific land servient tenement describes the parcel of land that must allow an adjacent owner to cross; an easement appurtenant exists at the expense of this party party wall a wall shared by two separate properties; the owners on each side share the right of use, often as an easement 18 LEVEL 5 Key Terms Chapter 4: Liens general lien a lien for which the real estate and personal property may be sold to satisfy the debt lis pendens a document recording at the courthouse giving notice that a lawsuit is pending on a particular piece of property lien priority the order in which liens against a property will be settled junior lien a lien that has another (senior) lien superceding it in priority; also called an inferior lien specific lien a lien that applies to a certain property only mechanic’s lien a type of involuntary, specific lien that a mechanic or materialman can impose upon a property if the property owner fails to pay for materials or work done on the property superior lien a higher priority lien subordination agreement a contract that gives a mortgage recorded at a later date priority over a previously recorded mortgage special assessment lien a lien placed against property to collect taxes for a specific improvement benefiting the property senior lien a lien that comes first on the priority of liens, often a tax lien; also called a superior lien 19 LEVEL 6 Government Powers and Control of Land use Objectives ►► Explain public land use controls, including, government’s police power: how it is created, the extent of power, and how it is used in practice at the national, state, and local levels ►► Recall crucial environmental legislation passed by the U.S. and the state of Pennsylvania, and explain how these laws control land use Level Main Ideas ►► Remember PETE? The public land-use controls are police power, eminent domain, taxation, and escheat. Police powers include zoning, building code, and subdivision regulations. ►► For eminent domain to be legal, the person whose property is taken must be fairly compensated. The process by which eminent domain happens is called condemnation. ►► Zoning laws are created by municipalities, while planning is generally dictated by the PA Municipalities Planning Code. ►► The three kinds of zoning variances are: area variances, use variances, and special exceptions. ►► Environmental regulation controls land use by dictating what may or may not be done to the air, water, and land. 20 LEVEL 6 Key Terms Chapter 1: Public Land-Use Controls police power the government right to regulate and restrict land use in order to protect the public; right includes the power to enforce zoning and building codes building code a set of regulations pertaining to building design, materials, safety, sanitation, and structure ad valorem taxes a tax calculated according to the assessed value of a piece of real estate laws of descent and distribution: a set of laws that sets out the process of passing an estate to heirs when the owner dies intestate zoning ordinance local laws that control how land is used and what structures can be built in a designated district certificate of occupancy (co) legal document from a local authority that authorizes a building to be occupied; issued after the building has passed all required inspections escheat the legal doctrine by which the decedent’s property will pass to the state without their consent if that individual dies without a will, a surviving spouse, lineal descendants, or other known heirs tax base the total taxable assets available in a specific area master plan a written document created by the local planning board to guide the future growth and development of a community eminent domain the power of government to seize private property for public use; government must pay property owner just compensation for exercising power probate a process by which courts determine and grant the appropriate ownership interest of an estate to creditors, taxing entities, and heirs of an owner who dies intestate 21 LEVEL 6 Key Terms Chapter 2: Zoning variance permission granted by the government so that property may be used in a manner not allowed by the current zoning density the measure of the proportion of a given area used for residential purposes non-conforming use any property use with is inconsistent with the land use controls for that area, regardless of legality special exception a variance that allows an out-of-zone use that benefits the community, and is included as a permitted special use in a zoning ordinance 22 LEVEL 7 Contract Law Principles Objectives ►► Describe general contract law, including contract classifications, components, conditions, and requirements of legal and valid contracts ►► Explain how contracts are properly prepared, performed, and discharged, and what remedies exist for breach of contract Level Main Ideas ►► The five essential elements of a contract are: offer & acceptance, consideration, legally competent parties, reality of consent, and lawful objective. ►► The legal status of contracts are: valid, void, voidable, and unenforceable. ►► Contracts can be classified as: implied vs. expressed, bilateral vs. unilateral, and executory vs. executed. ►► With respect to contract preparation and interpretation, the key to avoiding the unauthorized practice of law is to limit your modification of the contract to filling in blanks and realize that the courts use the “four corners” rule, giving most weight to what makes it into the final document. ►► Contracts are discharged as a result of either the “operation of law” or the “acts of the parties,” and a party who defaults on a contract without cause is said to be in breach of contract. 23 LEVEL 7 Key Terms Chapter 1: Valid Contracts contract a legally enforceable and binding agreement between parties wherein a promise to do or not do something is given in exchange for valuable consideration goodwill good consideration, such as love and affection, that can be exchanged for valuable consideration in a contract or agreement; the exchange of which is generally seen as a gift on the part of the party giving up the valuable consideration consideration something of value exchanged by the parties as evidence of agreement to the terms of a contract Chapter 2: Contract Legal Status validity possessing accuracy and, in context of contractual status, being legally binding and enforceable void lacking legal or binding force; used to describe a contract that is either illegal or impossible to complete null and void lacking legal or binding force; invalid statute of frauds a law which requires certain types of contracts, including those conveying interest in real property, to be in writing to be enforceable enforceability possessing the essential elements necessary to be legally binding and obligate performance; used to describe the compelling nature of a valid contract void contract a contract lacking legal or binding force; often used with phrase “null and void” statute of limitations a legal concept that establishes time limits for bringing certain kinds of legal actions voidable contract a contract wherein the wronged party has the option to perform, enforce, or void the contract parol contract an orally created contract or the oral modification of a written contract; enforceability depends on circumstances surrounding creation 24 LEVEL 7 Key Terms Chapter 3: Contract Classifications implied contract a contract created by the actions of the parties rather than by express agreement executory contract a contract that has not yet been fully performed (both sides have not yet completed their obligations) unilateral contract a contract wherein one party makes a promise and is obligated to perform if a second party chooses to accept the offer and perform in exchange for that which was promised bilateral contract a contract wherein both parties are obligated to perform in an exchange of promises Chapter 5: Discharge of Contracts (termination) assignment the transference of rights and obligations in a contract from one party to another specific performance a legal remedy that requires the party in breach of contract to perform in accordance with the terms of the contract (as opposed to paying damages) liquidated damages damages established by the contract to be paid as compensation in the event of default 25 LEVEL 8 Purchase Contracts Objectives ►► Describe how counteroffers and multiple offers should be handled in a real estate sale ►► Identify the components of a sales contract, including common provisions and contingencies and their effects on transactions ►► Demonstrate understanding of all parts of the sales contract by completing a contract with details from a scenario Level Main Ideas ►► It’s rare for a single, perfect offer to be made on a home. Most transactions involve counteroffers, and many transactions involve multiple offers. ►► Earnest money, while not required for an offer, shows the seller that the buyer is serious about the offer. Contingencies (like a mortgage contingency) can protect a buyer, but can also make their offer less attractive to the seller. ►► Agents can fill in the blanks of sales contracts, but should never write them. They can explain sales contracts to clients, but cannot give advice. ►► Sales contracts vary, but PA does require that all sales contracts include a handful of clauses (like zoning classification). ►► Other important real estate contracts include: lease-option agreements, lease-purchase agreements, and contracts for deeds. 26 LEVEL 8 Key Terms Chapter 1: Offers, Counteroffers, and Multiple Offers offer a proposition made by an offeror to an offeree to agree to the terms of a binding contract; becomes a contract upon acceptance offer and acceptance the mutual understanding and agreement of the parties of a contract to that contract’s terms; process that changes an offer into a contract when the offeree communicates acceptance to the offeror revocation the termination of an agreement by the person who granted it, such as when as when a principal terminates an agency relationship or withdraws an offer binder or letter of intent a preliminary agreement for the sale of a property secured by a valuable deposit from the potential buyer, which binds the seller to a good faith agreement to sell the subject property, provided that a sale contract meeting the conditions determined is executed within the prescribed period; also known as a letter of intent (loi) counteroffer a contract proposal submitted in response to a previous offer, modifying the terms of the original offer; considered a rejection of the original offer Chapter 2: The Sales Contract, Part I sales contract a contract used in the sale of real property that outlines the responsibilities of the parties and terms of the sale earnest money funds paid to confirm or commit to a contract option gives one party the right to perform a non-obligatory action within a time period (ex: terminating a contract or the right of first refusal) 27 LEVEL 8 Key Terms Chapter 3: The Sales Contract, Part II time is of the essence a phrase that communicates to parties of a contract that they must perform their contractual duties by a specific date and time in order to avoid a breach of contract contingency a provision within a contract that makes performance conditional upon the occurrence of a stated event subject to a provision in a sales contract which refers to the purchase of a property that is subject to the existing mortgage Chapter 4: Other Real Estate Contracts contract for deed a sales contract in which the buyer pays the seller for the property in multiple installments for a predetermined length of time, and the seller holds the title until the property has been fully paid for; also known as an *installment sales contract, installment contract, or land contract 28 LEVEL 9 Agency Principles Objectives ►► Define Agency and an agent’s relationship with the client, broker, and customer ►► Identify and describe the fiduciary duties agents owe to their clients, the lesser duties owed to third parties ►► Describe the ways in which agency may be created or terminated Level Main Ideas ►► An agent is an individual with authority to act on behalf of another and, in real estate, agents owe their clients higher, fiduciary “OLD CAR” duties as opposed to the lesser duties of honesty and fairness owed to customers and third parties. ►► The parties to a transaction are known as “principals,” and a client is YOUR principal as they are the one with whom you have an agency agreement. ►► The three classifications of agency, by scope of authority granted, are: special agency, general agency, and universal agency. ►► The Pennsylvania Consumer Notice is the state-mandated agency disclosure form that licensees should provide to consumers at the first substantive contact/discussion. ►► Agency can be created in the following ways: express agency, implied agency, ratification, ostensible agency, agency by estoppel, and gratuitous agency. ►► The two primary umbrella classifications for the causes of agency termination are “operation of law” and “acts of the parties,” but, regardless of how the agency relationship ends, the fiduciary duties of confidentiality and accounting survive. 29 LEVEL 9 Key Terms Chapter 1: Nature of Agency Relationships broker a person or business entity who is licensed to represent one of the parties in a real estate transaction in exchange for a commission or other valuable consideration agent an individual with authority to act on behalf of another; a state license is required to operate as an agent in real estate fiduciary an individual upon whom is placed the highest levels of trust and confidence when acting on behalf of another law of agency the body of laws affecting agency that have come about as result of custom and/or case law, as opposed to statutory law introduced at the state or federal level mutual consent agreement by all parties to either create, amend, or terminate a contract Chapter 2: The Roles People Play in Agency Relationships customer an individual with whom a license holder has no agency relationship nor fiduciary duties but to whom fairness and honesty are still required principal the client of a broker in an agency relationship; the parties to a contract in a real estate transaction (as opposed to license holders, lenders, escrow agents, etc.); also, the amount borrowed in a loan from which interest is accrued third party any person involved in a real estate transaction who is not your client; includes not only customers (the non-client principal in a transaction) but also all other non-client participants in a transaction such as title officers, lenders, appraisers, etc. ministerial acts an action performed for another according to established procedures or guidelines and without the need for discretion or individual judgment 30 LEVEL 9 Key Terms Chapter 3: Classifications of Agency power of attorney a legal instrument used to confer the right of one individual to act on behalf of another general agency a form of agency relationship that authorizes an agent to manage all of a principal’s affairs within certain specified areas; provides broader authority than that of special agency but less than that of universal agency special agency a form of agency relationship in which agents are limited in scope and are only authorized to perform acts permitted by their principal universal agency the most broad type of agency; gives agents the power to act and make decisions on behalf of the principal in all business matters of concern; often granted via a power of attorney Chapter 4: Responsibilities in the Relationships fiduciary duties the full sum of obligations owed to the client in an agency relationship that ensure that the agent always acts in the best interest of the client first substantive contact the critical point at which agency disclosure is required by a license holder; generally occurs at the first face-to-face meeting with the customer and prior to the sharing of any confidential information or initiation of any action in regards to a specific property informed consent the principle that a client or customer must understand and agree to certain actions or agency relationships prior to implementation Chapter 5: The Creation of Agency implied agency agency that is created by the actions, conduct, and words of either or both parties without ever being expressly requested ratification an unauthorized action taken on behalf of a principal which is accepted and legitimized after the fact by the principal estoppel the legal principle that prevents an individual from asserting something contrary to that 31 which was implied by previous words or deeds by that individual LEVEL 10 Role of an Agent in a Real Estate Transaction Objectives ►► Describe the various roles a license holder may assume, who is represented, and the scope of practice for each type. ►► Discuss agent duties and timing requirements as they relate to disclosure. ►► Explain the concept and rules of dual agency and best practices for protecting license holders and consumers. Level Main Ideas ►► The concepts of brokerage and agency cannot function without one another. Their close relationship means brokers assume vicarious liability for their agents’ actions. ►► The disclosure of important details, like agency relationships and offers made on a property, is incredibly important (and one of an agent’s primary responsibilities). ►► Clients can choose to be represented in several different ways: through single agency, subagency, dual agency, designated agency, or through a transaction coordinator. ►► Dual agency is a slippery slope of liability, so agents should take extra care if they practice as a dual agent. 32 LEVEL 10 Key Terms Chapter 2: Undivided Loyalty single agency an agency arrangement in which one agent represents one party in a real estate transaction; the party may be either a seller or a buyer subagency a form of agency that arises when an agent enlists the use of other agents to accomplish a client’s goal cooperating brokerage an agency arrangement in which two brokerages collaborate to achieve a real estate transaction for a specific piece of property Chapter 3: Limited Loyalty dual agency an agency relationship wherein both the buyer and the seller are represented by the same broker in an in-house real estate transaction; requires written consent from both parties designated agency an agency arrangement wherein both parties to the transaction are represented by their own agent, but both agents are employed by the same brokerage; by necessity each client enjoys an agency relationship exclusively with the named agent within the brokerage transaction coordinator an agent who facilitates a transaction absent of any agency relationship with either party to the contract; has no fiduciary duties for ministerial acts performed, a.k.a. transaction licensee, facilitator, or intermediary 33 LEVEL 11 Service/Listing Contracts (Rep Agreements) Objectives ►► Discuss the different agency contracts that are used, agent performance and compensation, and termination issues specific to agency contracts ►► Identify and describe the agency agreement clauses found in listing agreements, buyer representation agreements, and transaction brokerage agreements Level Main Ideas ►► Service contracts are written agreements between brokers and their clients. ►► Sellers enter listing agreements, of which there are a few different kinds: open listings, net listings, exclusive agency listings, and our favorite… exclusive right-to-sell listings. ►► Buyers enter buyer representation agreements, which can also range from exclusive to non- exclusive. ►► Transaction coordinator agreements are used when the licensee is facilitating paperwork rather than representing any party. 34 LEVEL 11 Key Terms Chapter 1: Service Contracts agency agreement a mutually binding understanding between two parties that authorizes another party to act on their behalf performance the fulfillment of an obligation, duty, or contract service contract the written form of an agency agreement between a client and a broker due diligence a legal term used to describe the reasonable steps a person must take in order to satisfy a legal requirement Chapter 3: Types of Listing Agreements marketing plan a plan created to secure the other party needed to carry out a real estate transaction that includes sales and advertising net listing an agreement in which the seller names a minimum sales price they will accept for a property, with any excess paid to the broker as commission procuring cause the defining action or actions that brought a buyer to purchase a property open listing: a nonexclusive listing agreement that gives multiple brokers (and owners themselves) the right to sell the property exclusive right-to-sell listing an agreement in which the seller guarantees the named broker receives a commission if the property is sold, even if the seller brings the buyer themselves exclusive agency listing an agreement in which the seller has an exclusive relationship with a broker but retains the right to sell the property to named prospects Chapter 4: Listing Agreements protection period a limited time frame after an agency agreement ends during which an agent can be owed compensation if certain situations occur 35 LEVEL 12 Property Condition and Disclosures Objectives ►► Explain the roles of the property owner and the license holder in disclosures of property condition ►► Identify property conditions considered to be material facts, which must be disclosed, and differentiate them from information that may or may not require disclosure. ►► Describe the need for obtaining property inspections and the follow up required to make the best use of this information ►► Explain the types, purposes, and scopes of home warranty programs Level Main Ideas ►► The law requires sellers of residential property to disclose all known material facts about the condition of their property, usually by filling out the Seller Property Disclosure Statement. ►► A material fact is any fact that could reasonably influence a buyer’s decision to purchase the property. This includes both the condition of the home itself and external environmental factors. ►► Sellers and their agents are not required to disclose information about protected classes or stigmatized property. ►► Seller disclosures do not serve the same function as property inspections and warranties, both of which can benefit the buyer in a transaction. ►► Licensees must practice due diligence and avoid misrepresentation to prevent legal consequences. 36 LEVEL 12 Key Terms Chapter 2: Need for Inspection property inspection an inspection conducted to discover material facts or defects that exist within a property utility the measure of the degree to which something performs a desired function; serves as a component of the thing’s value material fact a fact that, if known, could cause someone to take a different course of action or make a different decision regarding the property to be purchased Chapter 3: Material Facts Related to Property Condition latent defect any structural defects that cannot be detected by ordinary inspection patent defect any structural defects that are easily discoverable upon inspection Chapter 4: Material Facts Related to Environmental Issues I asbestos a naturally occurring mineral fiber that is commonly used in insulation but if airborne or inhaled, can cause severe respiratory health issues mold a type of fungus found in damp building materials that can release toxins into the environment chlordane a chemical compound formerly used in pesticides that is dangerous to human health electromagnetic field (emf) an invisible field of energy produced by electricity carbon monoxide: an odorless, colorless gas that occurs as a by-product due to incomplete combustion when burning such fuels as wood, oil, and natural gas 37 LEVEL 12 Key Terms Chapter 4: Material Facts Related to Environmental Issues I (continued) chlorofluorocarbons (cfcs) chemical compounds containing chlorine, fluorine, and carbon atoms that were once used in refrigerator coolant, air conditioners, and dehumidifiers urea-formaldehyde foam insulation (uffi) a human-made insulation material that becomes dangerous because of the gases released from the material after it hardens radon an odorless, radioactive gas produced by the decay of other radioactive materials in rocks under the surface of the earth; can cause lung cancer freon the trademarked name of a harmful chlorofluorocarbon found in older air conditioning units polychlorinated biphenyls (pcbs) a group of human-made organic chemicals made of carbon, hydrogen, and chlorine atoms that were used in hundreds of industrial and commercial applications prior to 1979 and can cause a variety of adverse health effects Chapter 5: Material Facts Related to Environmental Issues II underground storage tanks (usts) tanks located in the ground underneath properties that store chemicals, fuels, toxic wastes, and other potentially harmful substances environmental site assessment a report prepared for a real estate holding that identifies potential or existing environmental contamination liabilities groundwater water held underground in the soil or in pores and crevices in rock lead a naturally occurring mineral that has been used in the manufacturing of paint and water pipes and is toxic to humans 38 LEVEL 12 Key Terms Chapter 6: Material Facts Related to Public Controls stigmatized property property with suppressed market value unrelated to its physical condition or features; frequently as result of death of an occupant, murder, suicide, or a belief the property is haunted Chapter 7: Liability for Property Disclosure misrepresentation a statement, written or spoken, that is false or misleading; can be actionable if also found to be fraudulent fraud wrongful or criminal deception intended to result in financial or personal gain 39 LEVEL 13 Finance Objectives ►► Explain the basic mechanics of a mortgage and the duties created when a mortgagor takes out a loan ►► Explain the secondary mortgage market and its impact on mortgage lending in America ►► Perform calculations associated with mortgage origination and amortization Level Main Ideas ►► Mortgages are secured loans. A borrower puts up their home as collateral in exchange for the funds to buy it. ►► The secondary mortgage market creates liquidity in the mortgage market. Lenders can originate loans and then sell them on the secondary market, giving them the funds to originate more loans. ►► Interest rates can be straight of amortized. Fixed-rate amortized loan payment amounts remain the same throughout the life of the loan, but the portion of the payment that goes towards interest decreases as the principal balance is reduced. 40 LEVEL 13 Key Terms Chapter 1: A Short History of Mortgages interest additional money paid to a lender for the use of their money FHA the federal housing administration; government agency charged with insuring mortgages federal deposit insurance corporation (fdic): independent agency that provides deposit insurance to depositors in u.s. banks Chapter 2: Mortgage Instruments mortgage a legal agreement between a creditor and borrower in which the creditor lends money with interest to the borrower for the purchase of property with the condition that the creditor takes ownership of the title if the borrower defaults in repayment of the loan equity the portion of a property’s total value owned outright by the holder to title arrears a payment that occurs at the end of a period to compensate for charges accrued during that time. deed of trust a right to real property being held by one party for the benefit of another leverage the use of a financial instrument or borrowed money to increase a return on investment annual percentage rate (apr) how much the borrower will pay in interest over the course of a year judicial foreclosure a foreclosure that is processed through the court mortgagor the borrower of the funds in a loan amortization the process of paying off a debt/mortgage in regular installments based on a fixed payment schedule collateral property liened by a lender in order to assure payment of the loan and protect the lender’s investment 41 LEVEL 13 Key Terms Chapter 2: Mortgage Instruments (continued) security the collateral for a loan foreclosure the legal process whereby a lender takes control of a property held by a borrower in default and sells it to recover the lender’s losses Chapter 3: The Primary Mortgage Market seller financing a loan provided by the seller to the purchaser of the property disintermediation the process of money flowing out of banks intermediation he facilitation by a third party of a financial transaction between two parties Chapter 4: The Secondary Mortgage Market Federal National Mortgage Association (Fannie Mae) a government-sponsored enterprise created to act as a secondary mortgage market facility that could purchase, hold, and sell fha-insured loans Government National Mortgage Association (Ginnie Mae) a government-owned entity that supports the secondary mortgage market by guaranteeing mortgage-backed securities (mbs) insured by the u.s. government Federal Home Loan Mortgage Corporation (Freddie Mac) a government-sponsored enterprise created in 1970 to further support the secondary mortgage market, and specifically, to support smaller thrift banks Chapter 8: More Mortgage Math origination points fees pay for the cost of issuing the loan discount points a loan fee used to decrease a loan’s interest rate buydown the paying of money upfront to reduce a loan’s interest rate and monthly payments 42 LEVEL 14 Methods of Financing Objectives ►► Contrast the different types of mortgages, both private and government backed, as well as their advantages and disadvantages Level Main Ideas ►► Conventional loans are not guaranteed by the government. Because they do not have government-backing, they will usually require a higher down payment amount or private mortgage insurance. ►► Fixed-rate loans have the same interest rate for the entire life of the loan. Adjustable-rate loans have interest rates that adjust based on market indexes. ►► An FHA loan is a popular conforming loan that is guaranteed by the Federal Housing Administration. The minimum down payment on an FHA loan is 3.5%. 43 LEVEL 14 Key Terms Chapter 1: Basic Categories of Mortgages conventional loan any loan that is neither insured by the government nor guaranteed by the government balloon payment a payment at the end of a loan period which includes the total outstanding balance of the loan negative amortization when a borrower’s payment is not large enough to cover the interest due on a loan, the unpaid interest is added to the principal balance Chapter 2: Fixed-Rate and Adjustable-Rate Mortgages adjustable-rate mortgage (arm) a mortgage with an interest rate that can be adjusted based on fluctuations in the cost of money Chapter 3: Other Types of Home Loans graduated-payment loan a fixed-rate mortgage that has a lower initial interest rate in its first years, but includes gradual increases each year construction mortgage a temporary mortgage used to finance a construction project wraparound mortgage an arrangement in which the seller of a property extends a mortgage to a buyer; the seller maintains their original loan and continues to pay it while also receiving mortgage payments from the buyer bridge loan short-term loan used to transition from one loan to another; can connect borrower from construction loan to eventual mortgage loan (or current home to their new home) subprime loan a mortgage with an interest rate higher than prime mortgages due to the higher risk associated with a less qualified borrower blanket loan a loan for which more than one collateral property acts as security purchase money mortgage: instrument given by the purchaser to a seller who “takes back” a note for part or all of the purchase price 44 LEVEL 14 Key Terms Chapter 4: Refinancing refinancing the process of obtaining a new mortgage in an effort to reduce monthly payments, lower interest rates, take cash out of a home for large purchases, or change mortgage companies Chapter 5: Equity Loans home equity loan a loan in which funds are borrowed using the homeowner’s equity for collateral; the funds can be used for any purpose reverse mortgage a financial arrangement where a homeowner pledges equity to a lender in exchange for periodic payments of the pledged equity; essentially selling off equity in their home in exchange for monthly payments Chapter 7: VA Loans VAentitlement the amount of money that is guaranteed in a va loan Chapter 9: Mortgage Insurance private mortgage insurance (pmi) insurance that protects the lender if a borrower defaults on a conventional loan; usually required when the borrower has less than 20% equity mortgage insurance premium (mip) a borrower-paid insurance required for fha loans, in order to insure lender in case of borrower default/foreclosure loan-to-value ratio the amount of money being loaned compared to the value of the property 45 LEVEL 15 Instruments of Finance Objectives ►► Describe the various legal documents used in financing property, and explain their common provisions ►► Describe the foreclosure process, the different ways it is handled and the alternatives to foreclosure ►► Describe the duties of a mortgagor and explain the considerations involved in selling mortgaged properties Level Main Ideas ►► A mortgage loan or mortgage agreement is comprised of two important documents: the promissory note (evidence of the debt) and the security instrument (which establishes the property as collateral for the loan). ►► Lien theory states typically use a mortgage security instrument wherein the title remains with the borrower during the life of the loan, whereas title theory states tend to use a trust deed which conveys the title to a third-party trustee until the loan is paid off; Pennsylvania’s intermediary theory is a mix of lien and title theory and favors the use of a mortgage. ►► Mortgage agreements contain contract provisions designed to identify the rights and responsibilities of both the lender and the borrower; most borrower obligations have to do with repayment of the loan and protection of the asset (the property). ►► Foreclosure is a result of borrower default and can take one of several paths, most falling under one of two categories: judicial and nonjudicial foreclosure. ►► Because lenders do not want to be in the business of owning properties, they are often open to alternatives to foreclosure, such as a deed in lieu of foreclosure or a short sale. 46 LEVEL 15 Key Terms Chapter 1: The ABCs of Mortgage Loans hypothecation the pledging of an asset as collateral to secure a loan without delivery of title, possession, or other ownership rights Chapter 2: Promissory Notes promissory note a negotiable financial instrument that is evidence of a debt and a promise to pay that debt; often referred to as “the note” negotiable instrument a note that is transferable and assignable Chapter 3: Security Instruments lien theory state states that employ security instruments allowing the borrower to retain title while the lender places a lien on the property to secure the loan title theory state states that convey the title to the lender or, more commonly, to a third-party trustee (operating on behalf of the lender) for the life of the loan Chapter 4: Mortgage Provisions acceleration clause a clause in a security instrument (mortgage/deed of trust) which makes the entire loan amount due immediately upon default due on sale/alienation clause a clause in the mortgage contract that triggers the right of the lender to demand payment in full of the loan upon the sale or conveyance of the property defeasance a clause in a security document that indicates that the loan has been satisfied and that either the title will be conveyed to the borrower or the lien on the borrower’s title will be removed 47 LEVEL 16 The Lending Process Objectives ►► Describe the lending process from pre-qualification to closing ►► Demonstrate and understanding of the underwriting process that lenders will use to qualify borrowers and properties ►► Explain the lender regulations around disclosures, application, and qualification Level Main Ideas ►► Loan origination is another way of saying loan creation, and underwriting is the gathering of information to assess the risk in making a loan. ►► The three steps to loan approval are: pre-qualification (based on borrower’s word), pre- approval (involves underwriting of borrower’s credit), and final loan approval (involving the underwriting of both borrower creditworthiness and property value). ►► Borrower qualifying ratios either measure borrower income against the monthly payment (payment-to-income ratio) or borrower income against total debt, which would be the monthly payment plus all other debts and obligations (debt-to-income ratio). ►► The process for qualifying properties will differ, depending on whether they are residential or commercial properties, with residential qualification using appraisals and loan-to-value (LTV) ratios while commercial property qualification employs a debt service coverage ratio that measures net operating income (NOI) against debt obligations. ►► Creating a mortgage begins with the borrower completing a Uniform Residential Loan Application and wraps up with the lender’s issuance of a Loan Estimate and Closing Disclosure form, each delivered per mandatory deadlines. ►► Points and credits allow a borrower to make tradeoffs that affect how much they pay for their mortgage and closing costs, while cash to close is the entire amount the borrower will need to bring on closing day for the mortgage loan. 48 LEVEL 16 Key Terms Chapter 1: Loan Origination Basics loan origination the process through which a buyer obtains a mortgage loan from a lender underwriting the process of determining the level of risk a lender is willing to take in extending a loan to a borrower loan commitment a lender’s approval of a specific loan for a specific property; occurs upon completion of final loan approval step Chapter 2: Qualifying the Borrower debt-to-income ratio used to measure a borrower’s creditworthiness; calculated by dividing all debt (monthly payment + other debt) by monthly income credit report contains information regarding an individual’s credit history (loan payments, etc.) as well as the present credit status of all open credit accounts long-term debt financial obligations often paid as installments over a predetermined timeframe, which can extend for years payment-to-income ratio used to measure a borrower’s creditworthiness; calculated by dividing monthly payment by monthly income FICO score a credit scoring system created by the fair isaac corporation revolving debt an ongoing line of credit, as with a credit card, where the amount of debt can fluctuate as the borrower uses it to manage cash flow issues liquid assets assets that can be quickly converted to cash without losing their value 49 LEVEL 16 Key Terms Chapter 3: Qualifying Collateral debt service current debt obligations debt service coverage ratio used to evaluate income-producing properties; is calculated by dividing the net operating income (cash flow after all expenses and debts are paid) by total debt service (current debt obligations) Chapter 4: Creating a Mortgage loan estimate combines and replaces the Good Faith Estimate and the initial Truth-in-Lending (TIL) statement; highlights the most important elements of the transaction 50 LEVEL 17 Property Management Objectives ►► Explain the basic concepts of property management ►► Describe the specific responsibilities of a property manager, including fiduciary duties owed to property owners and maintaining compliance with all fair housing or landlord-tenant legislation ►► Explain the basic provisions of a property management agreement ►► Describe and contrast the required skill sets of property managers across different types of properties Level Main Ideas ►► Property managers owe it to their owner to get the largest return on their owner’s investment. One way to do this is to seek niche knowledge or a specialization in a certain type of property, like commercial property. ►► Property managers will typically need to market their property effectively so they can get tenants and collect the rent they need to make their property profitable. ►► Staying on top of finances, such as budgets and operating statements, is an important part of being an effective, organized property manager. As well as staying on top of maintenance (especially preventative) so small issues don’t become catastrophes. ►► And of course, the property management agreement is an important part of ensuring there are no crossed wires between managers and their owners. 51 LEVEL 17 Key Terms Chapter 1: The Basics of Property Management property management the vocation of renting or leasing someone else’s real property on their behalf in exchange for compensation and in accordance with a property management employee contract management proposal a plan that a property manager creates for managing the property that includes an analysis of the market along with the financial standing, operating budget, and other important factors of the property real estate owned (reo) property bank-owned properties that have been through the foreclosure process Chapter 3: Duties of Property Management: Maintenance and Finance routine maintenance monitoring, assessing, and attending to the needs of a facility’s most necessary features capital improvement upgrades or improvements to a property that fall outside the scope of normal repair and maintenance, usually with the intention of increasing value preventative maintenance conducting periodic inspections to catch minor issues before they become major failures capital expenditure an expense paid in order to improve a property corrective maintenance the repair of equipment after it has broken cash flow measures the amount of cash flowing in and out of a business 52 LEVEL 18 Leasehold Interests Objectives ►► Name the requirements for a valid lease and list common types of leases ►► Identify and explain the different types of lease agreements as well as their defining characteristics ►► Explain the purpose and provisions of options and lease-options Level Main Ideas ►► Leasehold interests are different than freehold interests. Leasehold interests do not include ownership and include a definite lease term. ►► A lease-option agreement gives the tenant the option to purchase the property at a later date. ►► Because a lease is a type of contract, the elements of a valid lease are the same as the elements of a valid contract. 53 LEVEL 18 Key Terms Chapter 1: Types of Leases leasehold interest an interest in the occupation of a property, established through a lease, a.k.a. non-freehold or less-than-freehold lessor the party granting the lease, also known as the landlord lease a contract in which one party conveys property to another for a specific predetermined period of time, generally in return for periodic payment lessee the party to whom the lease is granted, also known as the tenant estate at sufferance a tenant’s occupancy of a property beyond their lease’s terms and without the landlord’s consent, also called tenancy at sufferance triple-net lease a type of lease requiring the tenant to pay a prorated portion of all the operating expenses for the property proprietary lease long-term and exclusive lease given to resident and stock owner of a cooperative escalation clause a clause in a lease allowing payments to increase in relation to a specified factor or index periodic estate a leasehold estate which automatically renews until canceled by either party, a.k.a. estate from period-to-period, periodic tenancy, estate from year to year estate for years a lease with a specific starting and ending date, also called a tenancy for years gross lease a lease in which the tenant will be responsible for the payment of a fixed monthly charge, while the landlord is responsible for paying all operating expenses, a.k.a. full service lease graduated lease a lease in which the rental rate increases over time in specific increments estate at will a tenant’s occupancy of a property with the landlord’s consent 54 LEVEL 18 Key Terms Chapter 1: Types of Leases (continued) net lease a lease in which the tenant pays a base rent rate plus all or part of the operating expenses ground lease also known as a land lease, it is the lease of bare, undeveloped land percentage lease type of (usually commercial) lease in which the tenant pays a base rent amount and a percentage of their business profits to the landlord Chapter 2: Elements of a Valid Lease sublease a tenant’s transfer of part of their right of possession in a leased property to another person for a period of the lease term Chapter 3: Rights, Responsibilities, and Termination eviction forced removal of a tenant due to a default under the terms of the lease actual eviction the legal process by which someone is expelled from a property and prevented from re-entry constructive eviction the termination of a lease in circumstances in which the landlord defaults and acts, or fails to act, in such a way that the premises become unusable 55 LEVEL 19 Property Valuation Objectives ►► Identify the characteristics and types of value that apply to real property ►► Explain the process of preparing a comparative market analysis and how it can be used to price a property ►► Find a suggested asking price based on adjusting comparable properties from a CMA Level Main Ideas ►► You can remember the principles of value by remembering DUST: demand, utility, scarcity, and transferability. ►► The value of a property depends on who is making the valuation and for what purpose. A CMA, or comparative market analysis, is a way that a salesperson can use comps to arrive at the market value of a home. It is often used to determine an asking price. ►► Remember how to do a CMA, including adjusting comps? If not, revisit the CMA workshop. ►► Supply is the amount of available property, demand is the number of qualified buyers. When price goes up, demand goes down. 56 LEVEL 19 Key Terms Chapter 1: The Value of Real Estate appreciation the increase in value of a property highest and best use the use of a property which is legal, physically possible, financially viable, and produces the greatest yield real estate appraiser an individual who is trained and licensed to perform appraisals, which estimate the value of real property taxable value the value placed on a property by a governmental unit for use in calculating property taxes, minus any exemptions value the price for which a property will theoretically sell under typical conditions assemblage the combining of multiple contiguous pieces of real property into a single tract of land, often resulting in an increase in value appraisal an official valuation given to a property by a licensed appraiser contribution the amount of market value added to a property by an addition or improvement to the property; not necessarily the same as the cost of the improvement market value the price for which a property will theoretically sell under typical conditions plottage an increase in overall value resulting from the successful assemblage of multiple plots assessed value the value placed on a property by a governmental unit for use in calculating property taxes substitution an economic principle stating that the value of a good or service is affected by the cost of getting a similar (substitute) item elsewhere 57 LEVEL 19 Key Terms Chapter 2: Supply and Demand market a theoretical construct that isolates the selling and purchasing of any one particular commodity from the economy as a whole demand a measure of the general desire for an asset or commodity at a given time seller’s market a market condition in which the number of properties for sale does not meet the demand (number of people looking to buy) equilibrium a theoretical market condition in which levels of supply and demand are balanced buyer’s market any market that is experiencing an excess of sellers or supply, creating more favorable conditions for buyers supply in real estate, the amount of properties that are vacant or are available for sale or rent Chapter 3: Comparative Market Analysis comparative market analysis (cma) a report that compares the prices of recently sold or listed homes (“comparables”) in order to estimate the market value of a similar property (the “subject property”) located in the same area multiple listing service (mls) a database in which local member brokers share listings so that fellow member brokers can procure buyers for those properties and establish compensation for properties sold jointly comparable any property which has sold and is similar enough in features, location, and proximity in time to inform the value of a subject property price mechanism the manner in which a price is determined by a buyer and seller (a quantification of value) with respect to the forces of supply and demand 58 LEVEL 20 Calculating Value Objectives ►► Define what an appraisal is, including who performs appraisals and why and describe the appraisal process ►► Describe the three approaches to value and their best use cases; use each to find the value of a property Level Main Ideas ►► An appraisal is an appraiser’s qualified opinion of value of a specific property at a specific time using relevant market data. ►► The three approaches to appraising value are the sales comparison approach, the cost approach, and the income capitalization approach. ►► Assessed value is the amount of value on a property that is eligible to be taxed. 59 LEVEL 20 Key Terms Chapter 1: The Practice of Appraisal highest and best use the use of a property which is legal, physically possible, financially viable, and produces the greatest yield Chapter 2: Sales Comparison Approach sales comparison approach property appraisal method that estimates value by comparing the subject property to the sales prices of similar properties in the same market area Chapter 3: Cost Approach cost approach method of estimating the value of a property by determining how much it would cost to replace the building or other improvements, minus the cost of depreciation, plus the value of the land itself obsolescence a property’s loss of value due to economic or functional factors functional obsolescence loss of value because a property’s function or appearance has gone out of style or has been replaced by a more appealing or effective version replacement costs the actual cost of replacement without regard to depreciation of the property external obsolescence loss of property value caused by negative forces outside the property which are beyond the control of the owner straight-line cost recovery an accounting method in which depreciation expenses are deducted from a property’s income depreciation a reduction in value for any reason physical deterioration the loss of value caused by physical wear and tear over time economic life the length of time for which an improvement on property is expected to remain functional and useful 60 LEVEL 20 Key Terms Chapter 4: Income Approach income capitalization approach method of estimating the value of a property by applying a rate of return to the net income it produces potential gross income the total rental income a property would receive if the property was 100% leased investment the purchase of an asset with the intention of profiting from it in the future effective gross income the total annual income that a property produces; does not account for any expenses net operating income a property’s annual income that remains after paying its operating expenses operating expense an occasional or continuous expense required for the operation of an income-producing property capitalization rate a rate of return that calculates the percentage of expected annual income earned over a property’s value; the present value for expected future income earned gross rent multiplier the ratio of the price of investment property to its annual rental income before considering expenses like taxes and insurance, etc 61 LEVEL 21 Transfer of Title Objectives ►► Identify and explain the purpose and essential elements of a deed ►► Explain other issues around transfer of title including foreclosure, transfer taxes, and other special cases or considerations ►► Contrast the different forms of deeds as well as their advantages and cases in which they may be used ►► Describe the process by which deeds are used to convey real property in a transaction or after a death Level Main Ideas ►► Deeds and titles are necessary for real estate to be conveyed from one owner to the next. These conveyances can take the form of voluntary alienation, such as a typical real estate sale, or involuntary alienation, such as eminent domain. ►► There are many types of deeds available to owners, such as quitclaim deeds and general warranty deeds. There are also deeds used only in cases of foreclosure. ►► No one lives forever, which is why the rules governing the conveyance of property after an owner’s death are so important. These rules include the concept of wills and the laws of descent and distribution. ►► When transferring title, there are several factors that can make a title more or less marketable, such as a break in the chain of title. All of these issues should be recorded so owners can obtain accurate evidence of title. 62 LEVEL 21 Key Terms Chapter 1: Deeds and the Transfer of Property title the actual ownership of a real property that includes the bundle of rights in which a party may own a legal or equitable interest; not an actual document grantor the person who conveys real property in a real estate transaction instrument of conveyance a tool that transfers a grantor’s interest in real property grantee the person who receives a conveyance of real property in a transaction devise the transfer of real or personal property through a will Chapter 2: Elements of a Valid Deed habendum clause a clause within a deed that clarifies the type and extent of interest conveyed by the granting clause recording the act of documenting any transfer or claim of interest in the title to real property in public records per state law Chapter 3: Types of Deeds general warranty deed the act of documenting any transfer or claim of interest in the title to real property in public records per state law, a.k.a. full covenant and warranty deed special warranty deed a deed that only protects against defects that occurred while the grantor held title bargain and sale deed a deed without any covenants or warranties against encumbrances that only implies the grantor has possession of the property and holds the right to convey title quitclaim deed a type of deed that conveys any interest, title, or right to a parcel of land the grantor has at the time the deed is executed 63 LEVEL 21 Key Terms Chapter 3: Types of Deeds (continued) deed in lieu of foreclosure an alternative to foreclosure in which the defaulting borrower voluntarily transfers the property title to the lender and the borrower cancels the foreclosure tax deed a deed used to convey the title to a property sold in a tax foreclosure sale master deed a deed used to convey land to a condominium developer deed in trust a deed used to convey ownership interest to the trustee under a land trust covenant of seisin a protection in which the grantor states they hold the title conveyed in the deed, a.k.a. covenant of seizin tax sale the forced sale or auction of a property to cover outstanding debts deficiency judgement a court’s decision to attach a judgement (lien) against a debtor in the event that a property’s sale price does not cover outstanding debts Chapter 4: Conveyance After Death will a written or verbal legal statement by an owner (testator) prescribes the method of distribution of the owner’s estate to heirs testate the name for conditions in which the owner of a property dies having left a valid will intestate the name for conditions in which the owner of a property dies without having left a valid will holographic will a handwritten will created solely by the testator and not witnessed testato the party who makes a will 64 LEVEL 21 Key Terms Chapter 5: Title marketable title a title that is free from significant encumbrances or defects that might otherwise prevent a purchaser from enjoying or eventually selling the property chain of title the entire chronological record of a property’s ownership color of title a title transfer that is defective in a way that is unknown to the new owner opinion of title the official opinion of an attorney regarding the condition of a property’s title abstract of title an abbreviated history of a property, including information on any transfers, grants, wills, conveyances, liens, and encumbrances certificate of title a document prepared by a title attorney detailing the chain of title and offering an opinion on the marketability of the seller’s title Torrens System a recording system used in some states in which the state holds all records of land and title ownership, evidenced by a certificate of title title insurance a policy that protects homeowners (and likewise, lenders) from certain financial losses due to title issues, such as defects, encumbrances, and liens notice of title the duty of a real estate owner to make their claim or interest on a subject property publicly accessible evidence of title constructive or actual notice of real property ownership 65 LEVEL 22 Finance and Closing in Pennsylvania Objectives ►► Explain the significance of closing, and describe the roles of the parties involved ►► Describe the logistics of the closing process and the documentation required for a closing ►► Explain the ways in which RESPA affects the closing process, and identify violations and the associated penalties ►► Identify which closing costs a buyer or seller will bear and calculate closing debits, credits, and prorations Level Main Ideas ►► Closing is the consummation of a real estate transaction. It is when ownership of the property is transferred from the seller to the buyer. ►► Closing costs are the fees that are paid at closing by both the seller and the buyer. Who pays what is up to local custom, and most importantly, the sales contract. ►► At closing, costs are prorated so the parties only pay for an item or service for the amount of time they used it. For example, if closing happened in the middle of the month, the parties would split that month’s water bill down the middle. ►► Costs that are owed by a party are called debits. Costs that a party is owed are called credits. ►► The Closing Disclosure, which is given to the buyer three business days before the closing date, outlines all of the final details about the mortgage and the transaction—including closing costs. 66 LEVEL 22 Key Terms Chapter 1: The Closing Process escrow a process in which funds and/or financial documents are held by a disinterested third party on behalf of the other two parties in the real estate transaction until specific conditions are satisfied Chapter 2: Closing Costs proration the act of dividing or allocating expenses between buyers and sellers based on the actual period of usage of the item or service debits sum of money that is owed non-prorated expenses closing costs that are not split between the parties transfer tax one-time tax issued by the state that must be paid when a property is transferred from one owner to another credits sum of money that is received 67 LEVEL 23 Government Oversight of the Real Estate Industry Objectives ►► Identify and explain key provisions of important legislation regulating the real estate industry nationwide. ►► Describe fraudulent practices and red flags which may identify fraud in lending. Level Main Ideas ►► RESPA and TILA are laws that were passed to protect homebuyers and other consumers of credit. After the 2008 financial crisis, the Dodd-Frank Act combined the requirements of these two laws into TRID. ►► The two disclosures required by TRID are the Loan Estimate and the Closing Disclosure. ►► Predatory lending is when lenders take advantage of borrowers, mortgage fraud is when borrowers take advantage of lenders. Both have many red flags. Remember, subprime lending is not inherently predatory, though a lot of predatory lending happens in the subprime market. 68 LEVEL 23 Key Terms Chapter 1: TILA and RESPA RESPA the real estate settlement procedures act, passed to eliminate kickbacks in lending and disclose the costs of closing a loan. Regulation Z the part of the truth in lending act (tila) that seeks to protect consumers by requiring proper disclosures and fair lending practices Chapter 2: Dodd-Frank and TRID Dodd-Frank Act a law passed in response to the subprime mortgage crisis that created the consumer finance protection bureau. Chapter 3: Other Financing and Credit Laws Equal Credit Opportunity Act (ECOA) the equal credit opportunity act, a fair lending law that aims to bar discriminatory lending practices. Chapter 4: Predatory Lending and Mortgage Fraud predatory lending imposing unfair and abusive loan terms on borrowers. loan flipping a mortgage fraud scheme that involves an inflated appraisal and a straw buyer subprime mortgage a mortgage with an interest rate higher than prime mortgages due to the higher risk associated with a less qualified borrower usury illegally lending money at unfair interest rates 69 LEVEL 24 Ethical Real Estate Practice Objectives ►► Describe best practices for the handling of real estate transaction monies as it applies to trusts, escrow accounts, and earnest money transfers. ►► Explain the responsibility of brokers and salespersons in practice, and identify best practices to ensure compliance and reduce liability Level Main Ideas ►► Laws, ethics, and morals are all important parts of practicing agency with integrity. ►► Agents will need to practice effective risk management, deducing and mitigating risk through methods such as ACTOR and insurance policies. ►► Antitrust laws protect consumers and the open market, prohibiting activities like price fixing and group boycotts. ►► License holders will be handling their clients’ money and will need to deposit funds, such as earnest money, into the appropriate account within the appropriate time period. They will also need to take special care to avoid commingling and conversion. 70 LEVEL 24 Key Terms Chapter 1: Introduction to Ethics ethics standards of conduct agreed upon and recognized by a particular group or culture Chapter 2: Risk Management liability the state of being responsible for something Chapter 3: Antitrust collusion an unlawful agreement between competitors to monopolize a market, disadvantage other competitors, or otherwise undertake activities in violation of fair trade laws market or customer allocation a violation of antitrust laws in which competitors agree to divide markets amongst themselves price fixing any effort made by competitors to jointly establish a fixed rate, price, or commission; considered an antitrust violation Sherman Antitrust Act a landmark law passed in 1890 that prohibits the formation of trusts, or monopolies, in the marketplace; this law governs business by regulating anti-competitive conduct to promote fair competition on behalf of american consumers Chapter 4: Trust Accounts commingling the illegal act of mixing personal funds with a client’s funds conversion changing real property to personal property, and vice versa; also the illegal act of mixing a fiduciary’s funds with an agent’s personal funds 71 LEVEL 25 Fair Housing Law Objectives ►► Describe important federal legislation regulating fair housing and explain the impacts each decision has had on the real estate industry ►► Identify protected classes and discriminatory practices as well as the exemptions to fair housing laws ►► Explain the responsibility of brokers and salespersons in practice, and identify best practices to ensure compliance and reduce liability ►► Identify fair housing violations, describe the procedures for reporting, and the penalties associated with violations ►► Identify and describe the purpose and major provisions of state regulations relating to fair housing issues in Pennsylvania Level Main Ideas ►► The federal Fair Housing Act, passed in 1968, prohibited discrimination in real estate practices. Steering, blockbusting, and redlining are examples of its prohibitions. ►► The federal Fair Housing Act, which is enforced by HUD, protects on the basis of familial status, color, race, national origin, sex, disablity, and religion. Remember our memory trick? “Families crave resorts, not small damp rooms.” ►► Brown v. Board of Education (1954) overturned “separate but equal,” which paved the way for less discriminatory housing practices. ►► While the Fair Housing Act regulates accessibility in residential spaces, the Americans with Disabilities Act (1990) regulates accessibility in public and commercial spaces. ►► Pennsylvania’s fair housing law (the Pennsylvania Human Rights Act, or PHRA) is generally stricter than the federal Fair Housing Act. 72 LEVEL 25 Key Terms Chapter 1: Fair Housing Civil Rights Act of 1866 a federal law that prohibits discrimination in housing based on race Fair Housing Act of 1968 a federal law that prohibits discrimination in housing based upon race, color, religion, or national origin and was amended to include sex, disability, and familial status discrimination the unjust or prejudicial treatment of different categories of people, especially on the grounds of race, color, sex, national origin, religion, disability, or other classifications familial status under the fair housing act, a protected class composed of families who have children under 18, pregnant women, and people in the process of obtaining legal custody of a child Chapter 2: Fair Lending Acts marital status refers to whether a person is married, single, divorced, or widowed Chapter 5: Federal Disability Law disability or handicap a physical or mental impairment that substantially limits one or more major life activities, the record of such impairment, or being regarded as having such an impairment Americans with Disabilities Act a federal civil rights law passed in 1990 which prohibits discrimination against and create standards for people with disabilities 73 LEVEL 25 Key Terms Chapter 6: Steering, Blockbusting, and Redlining steering the illegal act of guiding prospective home buyers toward or away from certain neighborhoods because of their membership in a protected class redlining the illegal act of a lender refusing to issue mortgages in a specific area blockbusing the illegal act of causing owners to sell their homes by creating fear that members of a protected class are moving into the area tester an individual who, without any bona fide intent to rent or purchase a home, apartment, or other dwelling, poses as a prospective buyer or renter for the purpose of gathering information, which may indicate whether a housing provider is complying with fair housing laws Chapter 8: Complaints, Enforcement, and Penalties Department of Housing and Urban Development (HUD) a department in the federal government which is in charge of enforcing federal fair housing laws 74 LEVEL 26 State Rules and Laws Objectives ►► Explain the purpose of Pennsylvania real estate licensing law and demonstrate understanding of its basic provisions ►► Describe both the activities requiring a license, and exemptions to this requirement ►► Describe the types of licensure regulated by the state as well as requirements for obtaining and maintaining a license, including eligibility, education, renewal requirements, and a license change or transfer Level Main Ideas ►► RELRA is the law that created the State Real Estate Commission, this body creates regulations for license holders in PA. ►► There are 10 kinds of real estate licenses people can get in PA. In order to obtain a salesperson license, a person must complete 75 hours of pre-licensing education and pass the salesperson exam (among other qualifications). ►► Brokers must have three years of experience, do 240 hours of pre-licensing education, and pass the broker exam. ►► There are reciprocal licenses available for license holders in six states. ►► To renew a license, a salesperson or broker must do 14 hours of CE every two years and pay a renewal fee. Licenses in PA operate on a universal two-year cycle running from 6/1 to 5/31 of even-numbered years. 75 LEVEL 26 Key Terms Chapter 1: Pennsylvania Real Estate Licensing Law State Real Estate Commission the regulatory body responsible for regulating the brokerage industry and licensing real estate practitioners in pa Chapter 2: License Requirements and Exemptions broker a person or business entity who is licensed to represent one of the parties in a real estate transaction in exchange for a commission or other valuable consideration salesperson a real estate license holder who is associated with a licensed broker for the purpose of performing real estate brokerage acts on the broker’s behalf associate broker an individual who meets the licensure requirements to be a real estate broker but provides real estate brokerage services as an independent contractor to a real estate broker 76 LEVEL 27 Real Estate Practice in Pennsylvania Objectives ►► Describe and explain specific regulations and policies in Pennsylvania affecting the day-to- day operations of a real estate brokerage. ►► Summarize the rules, regulations, and proper procedures regarding payment and receipt of real estate commissions. ►► Identify core rules and regulations governing brokerage advertising across all markets. Level Main Ideas ►► Unlicensed sales assistants do important clerical tasks, but cannot do any task that requires a real estate license. ►► An independent contractor has more control over their work than an employee does. However, in PA, both are considered employees under the broker’s supervision, even though independent contractor