California Real Estate Practice Exam

Control over real estate and land use by a government entity is called "public control." There are four basic governmental powers over real estate ownership and land use: Police Power, Eminent Domain, Taxation, and Escheat (Your memory aid is "PETE"). The government's police power over real estate includes things like: zoning, building codes, city planning, public health, public safety, and general welfare. Answer Choice "B" is a classic example of Police Power. Here, the city exercised its Police Power to enhance public health and safety--by separating the new residential area from industrial activity. Escheat, Eminent Domain, and Taxation are not part of the government's Police Power. The state examiners frequently write questions trying to trick examinees into incorrectly lumping one of these other three powers into Police Power.

A is incorrect. A Special Weapons and Tactics (SWAT) team uses specialized equipment and tactics to respond to criminal activity posing an elevated risk to the public or to law enforcement personnel. That's an entirely different type of "police power." C is incorrect. Under the power of Eminent Domain, the government can take private property for public purposes (e.g., widening a highway), but must pay the owner of the property just or fair compensation. In contrast, the government would not typically have to pay owners if there is a decline in value due to a zoning change. D is incorrect. The state can exercise its power of Escheat when a parcel of real estate has been abandoned, or if the owner dies without a will and no heir can be found. After 5 years, the real estate permanently escheats and belongs to the State of California. Test-Taking Tip: The state examiners may try to trick you into lumping one or more of these four, separate powers together.

Private control is exercised by a non-governmental entity. This type of non-governmental control is typically found in deed restrictions or Covenants, Conditions, and Restrictions (CC&Rs). Private control usually "runs with the land." That means the restriction binds both current and future owners. The restrictions may be limited to a single parcel of land or they might cover an entire subdivision. In 1948, in the landmark case of Shelley vs. Kraemer, the U.S. Supreme Court held that the Federal Constitution prohibits racially-restrictive housing covenants in the United States. Therefore, limiting the sale of real estate to certain races, even with the goal of promoting diversity, is an example of illegal private control. Test-Taking Tip: Restricting the sale or rental of real estate on the basis of race is never legally permitted in the United States.
A, B, and D are all common examples of lawful private controls.
 

In CA, disclosure is a fiduciary duty owed by an agent to a principal. Here, the agent is the listing broker and the principal is the seller. The listing broker owes the seller the disclosure of relevant and pertinent information pertaining to the listing broker's duties. One of the listing broker's duties is to counsel the seller as to a prospective buyer's ability to complete a sale. Information related to the delinquent child support must be disclosed by the listing broker to Jon Brown as it pertains to Samantha Southerland's financial ability to buy the condominium.

A, B, and D are incorrect. Real estate licensees owe both parties to a transaction the duties of honesty, good faith, fair dealing, and a full disclosure of all material facts related to the desirability or value of the property. Test-Taking Tip: Be careful to distinguish "the fiduciary duty of disclosure" from the "disclosure of all material facts related to the property." The "fiduciary duty of disclosure" is owed by an agent to his or her principal. The fiduciary duty of disclosure is not owed to an unrepresented member of the public. In contrast, the "disclosure of all material facts related to the property" is owed by a real estate licensee to both parties in a transaction, and does not depend on an agency relationship.

In CA, the listing broker is a special agent, employed by the seller for a particular transaction or act (i.e., to sell the property). A special agent is typically only an advisory position. So, for example, while the listing broker can solicit offers and advise the seller as to the merits of each offer, the listing broker cannot accept an offer and bind the seller. In contrast, the real estate broker working as a property manager is a general agent. As a general agent, the broker/property manager would have a limited capacity to bind the property owner (e.g., hiring repair and maintenance technicians, finding and renting units to qualified tenants, collecting rent, etc.). General agents are typically employed for ongoing businesses.

A, B, and D are correct statements.

Test-Taking Tip: The salesperson or broker associate acts as a general agent to the broker of record.
 

None of the statements are correct. A is incorrect. Per the principle of contribution, the value of an improvement (aka a "component") is not what it cost, but what it adds to the subject property's value. The granny flat is an example of decreasing returns because it cost $20,000 more than it added in value. Answer Choice "A" is incorrect because the remodeled kitchen added $5,000 more in value than it cost, making it an example of increasing returns. B and C are incorrect. These answer choices incorrectly use terminology from a different principle of appraisal, the principle of conformity. Per the principle of conformity, property values tend to stabilize when homes in a neighborhood are similar to each other. This principle theorizes that the value of a mansion in a neighborhood of small houses will fall, and this is called "regression." By contrast, the value of a small home in a neighborhood of mansions will rise, and this is called "progression."
 

This method of valuation is called the Cost Approach. It involves the appraiser estimating the cost to build the improvements new, deducting for accrued depreciation, and, finally, adding the value of the land. The Replacement Cost Approach is used to estimate how much it would currently cost to build the improvements with the same utility, using today's materials and labor skills. The estimate would include a cure for any outdated design (i.e., a cure for "functional obsolescence").

B is incorrect. The Reproduction Cost Approach would estimate how much it would cost to build an exact replica of the existing improvements, and the estimation would include--not correct--any outdated design. C is incorrect. The Market Data Approach (aka the Sales Comparison Approach) uses adjusted, recently-sold comparable properties to arrive at an estimate of the market value of the subject property. If comparables or comps aren't available, the Cost Approach is an alternative method of valuation. D is incorrect. The income approach is used to appraise income-producing properties. The test question directs you to select a method of valuation for properties that do not produce income.
 

Since it was created in the 1930s, the Federal Housing Administration (FHA) loan program has helped millions of Americans become homeowners when they cannot afford the down payment on a 1-4 unit residence. When a loan is FHA-insured, lenders will agree to a loan-to-value ratio of up to 96.5%. The test question stating that Chen and Wang only put a 3.5% down payment on their newly-purchased residence was one clue that their loan was FHA-insured. This program of the federal government works by protecting lenders against loss in the event of borrower default. It does this through FHA mortgage default insurance. Borrowers must pay for FHA insurance, called "Mutual Mortgage Insurance" (MMI). The FHA is not a direct lender: Borrowers would get the loan from FHA-approved lenders.

A is incorrect. The test question states that Chen and Wang turned to a government program for assistance, but a conventional loan is not guaranteed or insured by the government. For conventional loans where the loan-to-value ratio is over 80%, the lender may require private mortgage default insurance called "Private Mortgage Insurance" (PMI). This insurance would protect the lender in the event of borrower default of the loan. Typically, it would not protect the lender for the entire outstanding balance of the loan. Instead, PMI covers at least a portion of the deficiency between what is still owed on the loan and what the property sells for at the foreclosure sale. B is incorrect. FHA is not a direct lender. D is incorrect. The test question states that Chen and Wang had to purchase mortgage default insurance. The VA loan program is guaranteed by the government: Veterans who qualify for this government program do not have to purchase mortgage default insurance.
 

A package loan is secured not only by real estate, but also by personal property being sold with the real estate. Two examples of personal property that might be "packaged" with the real estate are: 1) furniture sold with model homes or vacation properties, and; 2) kitchen equipment being sold with a property used as a restaurant. Note: The legal term for personal property is "chattel."
A is incorrect. A construction loan is interim financing typically advanced in installments and used for construction. Here, the test question states that the newly-built residence is "move-in ready," meaning it is suitable for immediate occupancy without further construction needed. B is incorrect. A term loan (aka a "straight" loan) is an interest-only loan with a balloon payment at the end of the term when the borrower must repay the entire principal. However, the test question states that Smith is financing the purchase with a fully-amortized loan. The fully-amortized loan is characterized by equal payments throughout the loan term until the balance reaches zero. C is incorrect. In order to qualify for a home equity conversion loan (aka a "reverse mortgage"), federal rules require that a borrower be at least 62-years-old. Dewayne Smith, a 25-year-old man, is too young to qualify for this type of loan. Test-Taking Tip: A reverse mortgage allows seniors to turn the equity in their homes into a liquid asset without having to sell. Seniors typically do not pay back the loan until they sell, die, or move into a nursing home permanently. The downside to this type of financing is that the interest accruing on the reverse mortgage is added to the loan balance: This growing debt is called "negative amortization." 

Answer Choices "B" and "C" both include what's called the "right of survivorship." If there is a right of survivorship and one co-owner dies, the survivor immediately--through operation of law--acquires the ownership interest of the deceased. Answer choice "B" is only available to married couples or registered domestic partners. Answer choice "C" is available to married couples and registered domestic partners, but is also available to unrelated and/or unmarried people. When title is held in a joint tenancy, there can be more than two joint tenants on title at the same time. Test-Taking Tip: Ownership "in severalty" is ownership with one, sole owner on title.

A is incorrect. If the Johnsons own the property as tenants in common, and one of them dies, the property would go through the probate court. Probate is a--frequently slow--legal process to distribute the assets and pay the debts of someone who dies. Test-Taking Tip: A person who dies after making a will is said to die "testate." In contrast, a person who dies before making a will is said to have died "intestate."
 

The escrow closing statement sets forth what each party must pay or will receive prior to the completion of the purchase transaction. A debit is what a party must pay to complete the purchase transaction successfully. A credit is what a party will receive prior to the transaction closing. The property's sale price is typically a credit the seller will receive before the close of escrow.

A is incorrect. A new mortgage--either from an institutional lender or through seller financing--is considered a credit to the buyer. For example: Buyer is purchasing a condominium for $1,000,000. ABC Mortgage Lending, Inc. lends buyer $800,000. Because of this new loan for $800,000 from ABC Mortgage Lending, Inc., the buyer must only come up with $200,000 to complete the purchase of the $1,000,000 condominium. B is incorrect. Prepaid property taxes are a credit to the seller. For example: If the seller has prepaid the property taxes for the entire tax year, and the buyer is moving in prior to the end of the tax year, the buyer must return a portion of those prepaid taxes to the seller. C is incorrect. A discount point is an upfront fee paid to the lender to decrease the interest rate on a new loan. If the buyer is paying one or more discount points to the lender, that would be a debit to the buyer, not a credit. Test-Taking Tip: One discount point is 1% of the new loan amount, not 1% of the purchase price. 

In CA, a death on a property being sold, leased, or rented must be disclosed if it occurred within the past three years. However, if the death was from AIDS or HIV-related, the cause of death should not be disclosed. Under California Civil Code Section 1710.2, it is not even considered a material fact that an occupant was HIV-positive or died from AIDS-related complications. Additional protection for those afflicted with AIDS or HIV-positive can be found in the federal Fair Housing Act Amendments of 1988. The 1988 amendments categorized being afflicted with AIDS (or being HIV-positive) as a handicap or disability. Because this affliction is considered a handicap or disability, the disclosure is considered discrimination against the handicapped/disabled, and is in violation of federal fair housing laws.

A is incorrect. Disclosure of a death on a property is legally required in California for both sales and rentals, provided that the death occurred within the last three years. C is incorrect. Disclosing other causes of death is legally permitted. D is incorrect. A death on a property offered for sale or lease must be disclosed if it occurred within the last three years, not within the past year. Note: Even when a death occurred more than three years ago, an owner and agent are not legally permitted to lie in response to a direct inquiry.
 

Under California real estate law, an associate licensee (i.e., a salesperson or a broker associate) is legally considered an employee of the hiring broker. Hiring an associate licensee as an independent contractor is relevant for tax and insurance purposes. But, it does not alter the level of supervision the broker of record must exercise over every associate licensee, whether they are hired as employees or as independent contractors.

A is incorrect. A brokerage firm can legally keep $200 of its own money in the client trust account, as a buffer between client funds and any bank fees or service charges. The extra $50 reflected in the test question would constitute illegal commingling of the brokerage firm's money and the clients' money. B is incorrect. Any commissions, income, or fees earned by the brokerage firm must be removed from the client trust account within 25 days. D is incorrect. Steering is illegal racial discrimination accomplished by guiding a client towards or away from a particular neighborhood (e.g., showing a Hispanic client only those homes in neighborhoods with a Hispanic majority). Steering is prohibited by federal and state fair housing laws. 

In California, the Statute of Frauds requires that certain contracts be in writing in order to be enforceable. A lease is a contract between the landlord and the tenant, and any lease with a term that is longer than one year must be in writing (e.g., one year and one day). However, a lease of real estate for a term of one year or less does not need to be in writing. Test-Taking Tip: Before the state exam, make sure to review the Statute of Frauds so that you know which contracts must be in writing to be enforceable.

B, C, and D must be in writing to satisfy the Statute of Frauds.