California Real Estate Practice Exam

A fixture is an item of personal property that is so firmly attached to the land or the building that it is considered part of the real estate and transfers with the deed. An important exception to this rule is the "trade fixture." A trade fixture is something a tenant uses regularly in the course of the tenant's trade or business. Here, the commercial restaurant equipment that Dubois purchased and installed for her business is an example of a trade fixture that she will be able to remove--legally--prior to the end of the lease.

B is incorrect. Typically, the tenant would need to remove a trade fixture prior to the end of the lease. After the end of the lease, the tenant would not have even have a legal right to be on the landlord's property. C is incorrect. Answer Choice "C" states the general rule for fixtures. But, because this restaurant equipment is used in the tenant's business, it will be considered a "trade fixture" that the tenant can remove before the end of the lease. D is incorrect. The lessor is the landlord. The rule related to trade fixtures is not dependent upon a decision by the landlord.

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, an "implied agency" can be created unintentionally or by accident, and without any written formalities. By guiding the prospective buyer on the negotiation tactics needed to purchase the Woodriver Drive property, the listing broker was engaging in the advisory conduct that should be reserved for clients, thus accidentally creating an implied agency relationship.

B is incorrect. An express agency is created by the oral or written agreement of both parties. Here, the test question states that the subject of agency representation was never discussed. C is incorrect. An unintended or implied agency can be created during a casual conversation where names have not been exchanged. D is incorrect. An agency relationship can be created without compensation being discussed, or without even the expectation of compensation. This is one reason why real estate licensees do everything possible to prevent an implied agency: An implied agency can create fiduciary duties owed by the real estate professional before there is any type of agreement related to compensation.

Note: The listing broker was already the agent of the seller. By advising the prospective buyer and establishing an implied agency, the listing broker created an undisclosed dual agency with the seller and the prospective buyer. An undisclosed dual agency is illegal, and will subject the listing broker to DRE discipline and the loss of any earned commission.

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.
 

The Summary Report is an appraisal with a level of detail sufficient for lenders financing either the purchase or the refinance of residential property. The appraiser "summarizes" the information included in the work file of the subject property, and reports an estimate of the subject property's market value.

A is incorrect. The self-contained report (aka the "narrative report") is the most detailed and comprehensive type of appraisal. The appraiser would report and explain--rather than merely summarize--the information in the work file of the subject property. C is incorrect. The Public Report for new subdivisions is not a type of appraisal. It is a disclosure statement issued by the DRE to inform the public about the new subdivision. With some exceptions, developers of new subdivisions of 5 or more units must apply to the DRE for the Public Report. Without a Final Public Report from the DRE, developers are not allowed to close escrow on any real estate parcels in the new subdivision. D is incorrect. A home inspection report is not a type of appraisal. A home inspector reports on the condition of a property's major systems and components (e.g., heating, air conditioning, electrical, plumbing, foundation, walls, insulation, etc.).
 

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.
 

A Mortgage is a security instrument, legal but infrequently used in California. There are two parties: The borrower is called the "mortgagor" and the lender is called the "mortgagee." Test-Taking Tip: The words mortgagor and mortgagee are tested on nearly everybody's state exam. The vowels in the words can serve as your memory aid. There are two "E"s in mortgagee and lender, and two "O"s in mortgagor and borrower.

A is incorrect. The Deed of Trust has three parties: the trustor (borrower), the beneficiary (lender), and the trustee (third party, acting on behalf of the lender). B is incorrect. A promissory note is not a security instrument, but an instrument that documents the terms of a contract to pay back money lent at a specified time or on demand in a financial transaction. D is incorrect. The option contract is not used for loans. An option contract is typically between the owner (optionor) of a parcel of real estate and a prospective buyer (optionee) considering whether or not to buy the property. The owner promises not to sell the property to anyone else during the option term, and makes this promise for the nonrefundable "option fee."

Test-Taking Tip: In the Deed of Trust, the borrower conveys bare legal title to the trustee. Why is this important? The Deed of Trust nearly always contains a "Power of Sale" clause. This clause gives the trustee the authority, on behalf of the lender, to sell the property if the borrower defaults on the terms of the loan (e.g., not making loan payments, letting the property fall into ruin, etc.). However, if the loan is paid in full, the trustee must "reconvey" bare legal title back to the former borrower. 

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." 

The Cal-Vet residential loan program is a program available to veterans living in California to help them finance the purchase of their homes. Here is how this government program works: After the veteran has found a home he or she wants to purchase, Cal-Vet will buy the property outright from the former owner and then sell it to the veteran using a financing instrument called an installment sales contract. In this government loan program, Cal-Vet is the seller/vendor, and the veteran is the buyer/vendee. The installment sales contract is a form of seller financing where the seller will only give a deed to the buyer after the last payment has been made. Test-Taking Tip: For the state exam, make sure you remember that, under an installment sales contract, the seller is the vendor and the buyer is the vendee. The vendor holds legal title--and the vendee holds equitable title--throughout the installment sales contract. The buyer only receives legal title and a deed to the property when the installment sales contract has been paid in full. An installment sales contract is also referred to as a "land contract" or a "contract for deed."

A is incorrect. When the last payment has been made under an installment sales contract, the vendor will give a deed to the vendee. Here, the vendor is Cal-Vet and the vendee is Juan Gonzales. C is incorrect. Under an installment sales contract, the buyer/vendee, Juan Gonzales, would not deed the property to himself. D is incorrect. Cal-Vet would have purchased the home from the former owner prior to entering into an installment sales contract with Juan Gonzales.
 

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. 

These practices are in violation of the federal Sherman Antitrust Act. This federal law prohibits the anticompetitive behavior shown by the brokers in the test question (e.g., collusion, price fixing, and dividing up territories). California has its own antitrust legislation, the Cartwright Act. Antitrust violations under federal and California state law can result in, among other things, monetary fines and/or imprisonment.

A is incorrect. The federal Equal Credit Opportunity Act (ECOA) prohibits unfair lending practices. It was enacted in 1974 to ensure that adult consumers had equal access to credit without regard to their membership in protected classes like race, religion, color, sex, national origin, marital status, or age. Under ECOA, creditors can not deny credit or a loan merely because all or a part of the consumer's income comes from public assistance. ECOA also requires the creditor explain why an application for credit was denied. There is nothing in the fact pattern to suggest an ECOA violation. C is incorrect. There is no California Attorney-Broker Professional Conduct Act. Test-Taking Tip: Be prepared for the state examiners to make up laws and terms occasionally. That is why it is critical to study a comprehensive, current real estate glossary. Typically, you can find them at the back of your licensing textbooks. D is incorrect. The California Fair Employment and Housing Act (fka the Rumford Act) is a state law that prohibits housing discrimination against protected classes. There is no indication of housing discrimination in the fact pattern. 

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. 

Smith's mental incapacity terminates the listing agreements at this brokerage firm. Test-Taking Tip: Remember that the listing agreement is a contract between two parties: The seller and the broker for the seller. Death, mental incapacity, or bankruptcy of either the seller or the seller's broker will terminate a listing agreement.

A and C are incorrect. No matter how much experience real estate salespeople have, California real estate law requires they be supervised by their designated broker for those activities requiring a real estate license. The licenses of all five associate licensees will be in "canceled" status until they are affiliated with a new broker. C is also incorrect because the DRE does not supervise the daily professional activities of real estate salespeople. D is incorrect. A real estate salesperson is not legally allowed to enter into a listing agreement with a member of the public. The two parties to the listing agreement are the seller and the broker for the seller.
 

In Californai, 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.